Supply Bonds

In such arrangements, the contractor, as the entity purchasing and receiving the supplies, is the obligee protected by the bond. The supplier required to purchase the bond is the principal.

A supply bond is the supplier’s guarantee to deliver all materials in accordance with the contract. That means delivering the exact materials specified, to the precise location specified, within the time frame specified. The contractor can recover any costs incurred due to a supplier’s failure to live up to its contractual obligations by filing a claim against the bond.

The surety company that underwrote and issued the bond will investigate each claim to determine its validity. If the claim is found to be valid, the surety will pay up to the full penal amount of the bond. The supplier, as the principal, is then obligated to reimburse the surety company for the full amount paid out.

There are two key factors that enter into determining the supply bond cost for the supplier. Chief among these is the required dollar amount of the bond, which is established by the contractor in the role of obligee.

The other main factor is the supplier’s creditworthiness and reliability, as indicated by the owner’s personal credit history, financial stability, and experience in the industry. All of these are good predictors of the risk of contract default and are taken into account in assigning a premium rate to the supplier. Suppliers who are considered creditworthy and reliable enough to qualify for a supply bond will pay anywhere from 0.3% to 2% of the bond amount. The exact cost in this range depends on the item being supplied, the circumstances (for example, freight on board), and the credit/financial history.