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What are Supply Bonds?

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  • Written By: Jim B.
  • Edited By: M. C. Hughes
  • Last Modified Date: 17 September 2016
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Supply bonds are bonds purchased by a company or individual to ensure that a contractor supplies the necessary goods for a project as stipulated by a contract. The delivery of goods as promised is insured by a third party known as a surety, which issues the bond. Different types of supply bonds are available which can ensure that a contractor makes his bid in good faith, performs services as warranted, and pays any bills related to subcontractors. If the contractor defaults on any part of the agreement, the bond will provide compensation for the entity that possesses it.

When two companies conduct business, they often do so by relying on a contract. Contracts generally stipulate the terms of agreements and the responsibilities of the two parties involved. If the relationship between two companies is based on one supplying products to the other, it can be very damaging to the intended receiver of the goods if delivery is not received in the stipulated time. One way that a company can avoid this is by purchasing supply bonds to protect against default from its suppliers.

Since supply bonds are surety bonds, the terms describing the parties are the same. The entity buying the bond is the obligee, which, in the case of the supply bond, is the company that paid for the supplies. Whatever contractor is scheduled to deliver the supplies is known as the principal, while the company issuing the bond is the surety.

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It is important to understand that supply bonds act as insurance but don't entail payments as high as typical insurance policies. This is because an insurance policy anticipates the need for coverage, while a surety bond expects that the legal and binding contract between the parties will be honored. Only if the supplier doesn't come through with what's expected will the surety step in and pay off the obligee for any losses suffered.

There are several types of supply bonds available to cover practically every aspect of the relationship between supplier and receiver. A performance bond is the basic bond which ensures that the contractor will perform all duties stipulated in the contract. On the other hand, a bid bond, useful in construction-based supply contracts, would protect the obligee from the contractor adding any fees to the fees stipulated in the initial contract. Finally, payment bonds will take care of any bills associated with any subcontractors that the original contractor deems necessary to hire.

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