Supply Bonds are a three-party guarantee between a Supplier (Principal), Obligee (Owner or Contractor Receiving the Bond) and the Surety (Bond Company). The bond guarantees that material, equipment or other supplies mandated in the contract will be supplied according to the contract. If the bonded materials cannot be provided, a claim can be made on the bond. A Supply Bond does not cover labor which is an important distinction.
When Are Supply Bonds Used?
Supply bonds are frequently required when providing products to the Federal Government. The Miller Act requires bonds on all contracts over $150,000. Additionally, Owners and Contractors may ask for supply bonds when a specialty item is specified in a project or when they fear price escalations. For example, if the cost of steel is supposed to increase significantly, they may ask for a bond to guarantee that the steel will be provided at the specified price.
Underwriting Supply Bonds
In most cases, supply bonds are very easy to obtain as bond companies view them as less risky than other types of contract bonds. This is the case for most standard materials and equipment that are easily obtainable. The thinking is that if the bond company must find another supplier of a common item, they could do so at a reasonably similar price. There are exceptions, however. Unique items with limited manufacturers or distributors present more challenges. For most contractors however, the bond company will want to review the following underwriting items:
• The contract including the price and items to be supplied
• Current and previous Corporate financial statements
• A personal financial statement on any owner with 15% or more of the stock
• A bank line of credit if one is available
• An application with the supplier’s experience
In many cases, small supply contracts under $500,000 can be bonded with only a credit application.
What is the Cost of a Supply Bond?
Like most contract bonds, the cost of a supply bond will vary based on the strength of the supplier, the contract and the material or equipment being supplied. However, in general, supply bonds are significantly cheaper than performance and payment bonds. In many cases this cost is 0.5% or less but can go up to 3% for extremely unique items or those with credit challenges. MG Surety Bonds has access to the major bonds markets to get you the best rate for your circumstances.
Surety bonds are written on the principal of indemnity. This means that if the bond company suffers a loss, they will seek reimbursement from the indemnitors. Before getting a supply bond, the company and often the owners will be asked to sign a General Indemnity Agreement. You should read this agreement carefully before signing it as it spells out the terms and conditions of all indemnitors. This is one major difference between surety bonds and insurance. Suppliers can read more about indemnity here.
We are a company that supports our customers by providing them with the surety bonds they need to thrive. We are not just internet marketers or insurance agents. We are surety bond experts. Our team has over 100 years of combined experience and has access to all major bond companies.
Through creativity, experience and a commitment to the industry, we find a way to say YES and support our customers through bond placement, education and financial advice. MG Surety Bonds is affiliated with The Miller Group. The Miller Group is 60-year-old company that started with a focus on bonding contractors. Our people are dedicated to supporting our customers and giving back to the communities we serve. The Miller Group is committed to placing God, family and community first. We look forward to serving you.
Ben Williams is the President of MG Surety Bonds. He grew up working for a family owned business before eventually starting two of his own. He understands the risks and challenges that business owners face and the importance of surety credit in growing and maintaining a company’s revenue. Ben has held leadership positions, in surety, mergers and acquisitions and finance. He worked for one of the largest brokers in the country before joining The Miller Group and leading their surety practice. Ben holds a bachelor’s degree in Finance along with an Associate in Fidelity and Surety Bonding (AFSB). He also regularly speaks at construction industry associations on surety bonds and construction economics and has been published in multiple industry publications.
Ben leads a team of dedicated surety bond professionals who are the reason for the company’s great success. The team’s only role is to consult, support and serve our bond customers. We work large national accounts and accounts that need their first bond. We hope to have the opportunity to support you and your team. We want to be your surety partner for life!