Inside the construction business: supply bonds revisited

Work on public construction projects is heavily regulated to prevent negligence and ensure the timely execution of the project. Pretty much everyone involved in such a project is required to have a surety bond as a guarantee that they will fulfill their part of the deal. Construction companies need performance and payment bonds, so they will do all the work as described in the contract and pay their laborers and suppliers. Suppliers, on the other hand, need a different surety bond, called a supply bond. If you are part of the business, there are some basics you need to be aware of. So what is understood by a supply bond, and what is the process of obtaining it?

Supply bonds 101

Similarly to performance and payment bonds, supply bonds fall under the category of contract bonds. Just like every other surety bond, supply bonds involve three parties. The first one is called the obligee (in public construction projects this is either the federal government or the state). Obligees are the ones surety bonds protect. The second party is the principal, or in other words – suppliers. They are the ones that need to post the supply bond. The third party, called the principal, is a surety bonds company. When they underwrite a supply bond, they are assuring the obligee that the supplier will furnish all the supply and materials exactly as they were described in the contract. A supply bond, however, does not concern labor or installation of the supplies.

In case of a claim against you, the surety will reimburse the obligee for all inflicted losses. You will then owe that money to the surety. Of course, it’s always better to avoid claims altogether because that will raise the cost of your surety bond and create other complications for your business.

Typically, supply bonds are required for all federal construction projects exceeding $100,000. Different states also have their own requirements when it comes to state construction projects.

How to get bonded

To get your supply bond you will need to provide certain information about your contracting business. Financial statements are among the most important part of that information – balance sheets and income statements of your company, as well as personal financial statement of the owner(s). You will also need copies of your contractor’s license and proof of all required insurance. That is not the sum total of all the paperwork, but don’t fret – it can all be done online, step by step. Once you provide all the necessary information, getting quotes as well as approval does not take long.

How much does a supply bond cost?

There’s no simple way of determining the cost of your supply bond. You pay a percentage of the total amount of the bond, but that percentage depends on the specifics of your business and your personal credit score. Your credit score is important because surety bonds companies always assume a zero percent loss ratio. Thus, they can be a bit conservative when underwriting a supply bond. This is all understandable in light of the losses a lot of companies suffered around the turn of the century when they were much more generous about providing contract bonds.

This means that if you are a small company, which is just beginning operations, you might not be able to get bonded on a large project. You will need to gradually increase the size of the projects you work on, which will show your business is a trustworthy one.

Showing a statement with a higher net profit is another way to ensure your application will be reviewed in a favorable manner. Keep in mind, though, that overdue payments that are not yet collected will not count towards your net profit. This also means that applicants with bad credit are currently prevented from getting a supply bond. High-risk applicants, however, can still get bonded for a slightly higher percentage of the total cost of the supply bonds.

If you still have some questions unanswered, fill out an application and go from there.