Supply Bonds vs. Performance Bonds—What’s the Difference?

Posted: April 16, 2019

Both supply bonds and performance bonds fall into the category of construction bonds and are both considered to be types of contract bonds. But there are some significant differences between supply bonds and performance bonds, primarily in the purposes they serve. Learn more below, and contact Contractor Surety Group today to get the bonds you need.

What Do Supply Bonds Do?

Supply bonds ensure that construction workers aren’t sitting around idly waiting for supplies to be delivered to a job site. These bonds guarantee that the supplier will deliver the right supplies in the right quantities to the right location and on the right schedule. The bond agreement involves three parties: the project owner (the obligee), the supplier (the principal), and the company that issues the bond (the surety). The contractor is not a party to the supply bond contract.

How Do Supply Bonds Work?

If the supplier fails to deliver as required by the terms of the supply contract and the supply bond, the project owner may file a claim against the bond. This claim can cover any costs resulting from the supplier’s noncompliance. While the surety may pay the claim initially, the supplier must reimburse the surety for the full amount paid out on a claim.

What Do Performance Bonds Do?

Under the federal Miller Act, performance bonds are required for all federally-funded public works projects valued in excess of $100,000. Most states have similar “Little Miller Acts” that apply to state-funded public works projects valued in excess of $50,000.

The three parties to a performance bond agreement are: the project owner (the obligee), the construction contractor (the principal), and the company issuing the bond (the surety). These bonds guarantee that contractors live up to the terms and conditions of their contract with the project owner or pay any costs resulting from the failure to do so.

How Do Performance Bonds Work?

The project owner may file a claim against the bond if the contractor fails to complete the project in accordance with its contract with the project owner. The terms and conditions of the performance bond contract are predicted on the terms and conditions of the construction contract between the project owner and the contractor.

If the contractor can’t meet the project deadline, uses different materials than specified in the contract, or becomes insolvent before completing the project, the project owner can file a claim against the bond. Once again, the surety may pay the claim initially, but the bond’s principal, the contractor, is legally obligated to reimburse the surety for the full amount paid to the project owner. 

What Do These Bonds Cost?

As with all construction surety bonds, the required bond amount is set by the obligee. The amount the principal will pay to purchase a bond, however, is only a percentage of that amount. That percentage, or premium rate, is determined by the surety based on the principal’s credit score and certain other underwriting factors. Generally, the better the principal’s credit, the lower the premium rate.

To get a quick quote on the bonds you need, contact Contractor Surety Group today!