Are you a contractor looking to expand your knowledge construction bonds? Today, we’re covering the differences between supply bonds and performance and payment bonds, when supply bonds are necessary, how much they cost, and more. We’ll also shed a little light on the Federal Miller Act, a crucial legislation concerning construction bonds.
Let’s start with the basics.
What is a supply bond?
A supply bond is a construction bond that guarantees a contractor will deliver the materials or equipment specified in a contract as agreed. The project owner typically requires the bond for protection against financial losses if the contractor fails to deliver the materials or equipment on time or if the quality isn’t up to par.
How is a supply bond different from a performance or payment bond?
A supply bond differs from performance and payment bonds in several ways.
- A supply bond guarantees that the contractor will supply the materials or equipment. In contrast, a performance bond ensures that the contractor will complete the project according to the terms of the contract. Payment bonds offers suppliers and subcontractors financial security if their prime contractor can’t pay them for work they complete.
- The amount of a supply bond is typically based on the cost of the materials or equipment that the contractor is required to supply, while the amount of a performance bond or payment bond is generally based on the total cost of the project.
- Unlike performance bonds, supply bonds don’t guarantee labor or cover labor costs.
- Performance and payment bonds are typically issued at the same time.
All three of these bonds work together to provide comprehensive protection for the parties involved in a contract.
When is a supply bond necessary?
The bond becomes necessary when a construction project involves purchasing, delivering, or installing materials or equipment. This type of bond may also be required for other kinds of projects, such as manufacturing or transportation projects.
Who requires this construction bond?
The project owner typically requires a supply bond. However, the lending institution financing the project may also require it.
The Federal Miller Act mandates the use of supply bonds on projects exceeding $100,000 for government contracts. Private project owners may also request supply bonds to protect their investments and ensure project completion.
How much do supply bonds cost for contractors?
The cost depends on several factors, including:
- The size of the project and your business
- The type of materials or equipment you’re required to supply
- Your credit and financial information and industry experience
Generally, the premiums range from 1% to 3% of the bond amount if you have good credit. Supply bonds can range in price from a few hundred to several thousand dollars.
The Federal Miller Act Explained
The Federal Miller Act, enacted in 1935, requires supply bonds (and performance and payment bonds) on many federal construction projects exceeding $100,000. Under this act, contractors must obtain supply bonds to protect the government’s interests and ensure timely delivery of materials. The Miller Act also provides subcontractors and suppliers with a means to recover payment if the contractor fails to fulfill its obligations.
As a reminder…
- A performance bond guarantees that the contractor will complete the project according to the terms of the contract.
- A payment bond guarantees that the contractor will pay its subcontractors and suppliers for their work on the project.
How to Apply for Your Construction Bonds
Understanding the differences between supply, performance, and payment bonds and the legal framework of the Federal Miller Act is essential for contractors. By complying with all your requirements, you can establish trust with project owners, enhance your credibility, and participate in government contracts.
To get your bond, simply apply and pay online. ZipBonds offers the fastest and most secure way to get the contract bonds you need. Our all-digital platform is intuitive and straightforward. If you’d rather apply over the phone, feel free to call us at 888-435-4191 to work with an agent. We’re always happy to help you out!