During the course of a typical construction or renovation project, nearly every party will at some point have some involvement with surety bonds. Surety bonds serve diverse functions during such a project and it's not uncommon for a job to have several different surety bonds each serving different purposes. However, all surety bonds do share one goal, which is to protect the homeowner from financial crisis should a contractor fail to perform in accordance with an agreed upon contract.
All surety bonds are basically taken out as part of the contract negotiation process, before the job begins. The contractor pays for purchase of the bond. If there is an issue with the contractually agreed upon work and one party files a claim against the bond, the contractor must pay the claim. Alternatively, in some cases, the surety bond company who executed the bond steps in and finds another party to complete the work or provide compensation.
Supply bonds are one such construction surety bond, and guarantee that the supplier will provide all the contractually obligated supplies and materials. Like most other construction bonds, the supply bond is required by federal law for projects over $100,000 and by most states, though each state has varying thresholds. There are three types of supply bonds, each with its own purpose:
- Bid bonds ensure that any bid for the job has been submitted in good faith and that supplies and labor can be provided at the quoted rates.
- Performance bonds provide assurance that the contractor will perform the contract according to its terms and conditions and protects the owner from financial loss should there be a problem.
- Payment bonds are in place to make sure that the main contractor on the job will pay any subcontractors for time and material spent on the job.
Contractors purchase the supply bond before the work has begun (as part of the contract phase of the job) from a company who specializes in the sale of surety bonds. The company evaluates the contractor's financial fitness and credit score in order to determine if the contractor can cover the face value of the bond should there be a claim against it. Supply bonds are usually a bit easier to obtain than the standard construction bond and are slightly less expensive, but rates vary widely based on the size of the job and the contractor's financial status.