What is a supply bond?
Supply bonds fall into the construction bond category. They aim to guarantee that suppliers deliver materials to clients as outlined in a contract. While supply bonds are common in the construction industry, they can also be used in other scenarios – whenever an agreement between two parties involves supplying products or materials.
Supply Bond Definition
Essentially, a supply bond provides financial protection for purchasers of materials. If they don’t receive their supplies as promised, they may be reimbursed up to the total bond amount or provided with the materials the bond guarantees.
Supply Bond vs. Performance Bond
Unlike service contract bonds or performance bonds, supply bonds don’t guarantee labor or cover labor costs. They simply ensure the proper delivery or supply of materials for the correct items and amounts and on-time delivery.
- Supply bonds guarantee that suppliers deliver materials to clients as promised.
- State and federal project owners frequently require supply bonds to hold their suppliers accountable, ensuring materials are delivered on time and according to the contract terms.
- If a supplier fails to deliver goods as agreed, the purchaser may file a claim on the supply bond to trigger an investigation.
How does a supply bond work?
State and federal projects often require suppliers to obtain supply bonds. These bonds act as incentives for suppliers – holding them accountable to the contract terms. Surety bonds can help purchasers bypass an inefficient court system and receive justice if their goods don’t arrive or are defective.
Like other surety bonds, a supply bond is an agreement between three parties:
- Obligee: The purchaser requiring the bond (government agency or other project owner)
- Principal: The supplier of materials who purchases the bond
- Surety: The surety bond company that backs the bond
If a supplier doesn’t deliver goods as promised in a contract and doesn’t make things right with the purchaser, the purchaser may file a claim on the supply bond. The surety company will investigate to determine if the claim is valid or not. If it is, the surety may settle the claim with the purchaser. The supplier will then be liable for the claim and must reimburse the surety for the settlement.
When would you need a supply bond?
The law may require you to purchase a supply bond, especially for larger jobs like a federal project that exceeds $100,000. Depending on the state, state and local governments and private project owners may or may not require them.
A purchaser (the obligee) may require you to obtain this bond to complete a purchase order and secure their finances against potential losses. The purchaser will set the requirements for your supply bond based on the order size and material value.
How much does a supply surety bond cost?
The cost of your supply bond will depend on several factors:
- The bond amount (required coverage based on the size and scope of the project)
- The size of your business
- Product being supplied
- Your industry experience
- Credit and financial information
As a rule of thumb, the larger the project, the more information you will need to provide to the surety company for the underwriting process. Your surety will determine your bond premium based on these factors. You may end up paying as low as 1-3% of the bond amount.
Tips for Keeping Bond Costs Low
- Avoid claims by carefully following contracts.
- Choose a surety bond provider with fair prices.
- Demonstrate positive financial history.
- Shoot for an excellent credit score.
Get a Supply Bond in Your State
ZipBonds offer thousands of bond options across the United States. Complete a simple online application, and we’ll provide you with a quote for your bond. Once you approve and sign the dotted line, you can print your bond!
Founders Ryan Swalve and Zach Mefferd formed the vision for ZipBonds.com when they realized how overly complicated it was to help clients place surety. The frustration of being unable to incorporate the technology they’d used in other insurance-focused projects left them thinking “there has to be a better way.”
Fast forward a couple of years, and that better way is the impetus of everything we do at ZipBonds. We constantly look for innovative ways to improve the bonding process for our clients and agents. Our team comprises individuals who understand all angles of surety – for companies, agencies, and individuals. Incorporating everyone’s point of view to improve the process while simultaneously integrating cutting-edge technology is what sets our business apart.