What is a Supply Bond?
Supply bonds are commercial contract bonds involving the delivery of goods. They guarantee faithful performance of a contract to furnish supplies or materials and exclude any labor or installation. If a supplier defaults, the surety indemnifies the purchaser of the supplies for the loss. For instance, should a vendor fail to supply ordered windows, the supply bond would cover the builder’s losses. Unlike performance and payment bonds, supply bonds specifically guarantee the supply of materials, not the completion of the project or payment to workers.
Application and Maintenance
Vendors needing a supply bond should present one for each contract, as outlined in the supply agreement. The bond, provided by Alter Surety Group, should include all necessary details such as the legal names, bond amount, and effective dates. Supply bonds expire after the project’s completion and require no renewal, only a one-time premium.
Preventing Claims and Inflation Impact
To avoid claims, vendors must fulfill their contractual obligations, delivering all specified materials. They should also consider including an escalation clause in contracts to address potential cost increases due to inflation, protecting both themselves and the buyers.
Estimating the Cost of a Supply Bond
The price for supply bonds generally ranges from 1% to 3% of the total bond value, with the actual limit varying based on each individual contract, often reflecting the total material costs.
For larger projects, a tiered pricing structure is applied. For instance, the cost breakdown for a supply bond valued at $1 million could look like this: $2,500 for the first $100,000 (at a rate of 2.5%), $6,000 for the subsequent $400,000 (1.5% rate), and $5,000 for the remaining $500,000 (1% rate), totaling $13,500.
Example Estimated Bond Cost
| BOND AMOUNT | BOND RATE | BOND COST |
| First $100,000 | 2.5% | $2,500 |
| Next $400,000 | 1.5% | $6,000 |
| Next $500,000 | 1% | $5,000 |
In cases where the actual material costs surpass what was initially agreed upon in the contract (overrun), the surety company will levy an additional charge to cover this discrepancy. Conversely, if the total costs fall below the original estimates (underrun), the surety will refund the difference, aligning the premium cost with the project’s final cost.
Acquisition and Benefits for Agents
Alter Surety Group facilitates the easy acquisition of supply bonds, offering comprehensive support to material vendors. Providing supply bonds can lead to enhanced client relationships and opportunities for agents by meeting complex bonding requirements and aiding in cross-selling with other necessary insurance products.