Choosing A Better Insurance Plan

Understanding Some Things About Supply Bonds

by Isabella Torres

If you are a contractor who has recently started taking on larger bids and projects, then you may need to secure certain types of bonds throughout the entire construction process. For example, you may need a bid bond before you are even able to bid on the job. Performance bonds and payment bonds may be something you need as well. In many cases, a supply contract bond may be needed too. Keep reading to learn about a supply bond and to also find out what federal laws have to do with them.

What Is A Supply Bond?

A supply bond is a type of surety bond. Surety bonds are a bit confusing if you have never had to secure one before. There are basically three different individuals or parties involved with the bond. The first individual is the principal who is looking to guarantee their work, supplies, or bid. This is the person who is trying to get the surety bond. The guarantor or surety agent is the individual who is putting up the money to secure the work, contractor, supplies, or investment. The obligee is the person who receives the guarantee and also the funds if the contractor does not meet their end of the bargain.

Basically, the bond is a monetary guarantee that someone will provide supplies or work that they are contracted for. If the contractor does not follow through, then the investor does not have to lose a great deal of money in the process.

A supply bond specifically ensures that the supplier will provide all of the necessary supplies and materials for the contracted project. The supplies must meet the needs of the contract in terms of cost, availability, and type. In some cases, contracts can be extremely specific, so the supplier will need to understand the specific construction needs. Keep in mind that the bond often only guarantees the supplies themselves and not any labor. This means that the materials need to be furnished and possibly shipped or delivered to the work site, but the bond may not guarantee much else. 

What Does The Law Say About Supply Bonds?

State laws dictate whether a surety bond is needed or not and under what circumstances the bond is required. The laws can differ from state to state, and this means that you need to look at your state's specific requirements when it comes to supply bonds. For example, in Texas, a supply bond is needed when a public or government contract is over $25,000. When it comes to private construction, the materials may fall under a labor and materials bond that guarantees both labor and supply costs. 

In Arkansas, bonds are required for supplies and other contractual obligations on contracts that exceed $20,000. In Colorado, bonds are needed for public works that exceed either $50,000 or $100,000. This depends on the type of project that is contracted and whether projects are completed for the state, county, or town. 

While laws dictate that bonds should be acquired for private construction projects, investors and financiers can set their own terms above and beyond the minimum bond requirements. You will need to speak with investors about this before you start contacting supply contractor bond services. When you do start speaking to insurance companies about bonds, you will need to provide paperwork that shows credit, positive business history, and some form of collateral for the bond itself.

Bonds can be a bit confusing, especially if you are just starting to work on some more expensive projects that require a great deal more money, work, and supplies. Make sure to investigate bonds carefully so you know you are getting the right one for your needs.