Supply Bonds are a three-party guarantee between a Supplier (Principal), Obligee (Owner or Contractor Receiving the Bond) and the Surety (Bond Company). The bond guarantees that material, equipment or other supplies mandated in the contract will be supplied according to the contract. If the bonded materials cannot be provided, a claim can be made on the supply bond. A Supply Bond does not cover labor which is an important distinction from other construction surety bonds.
Supply bonds are frequently required when providing products to the Federal Government. The Miller Act requires surety bonds on all contracts over $150,000. Additionally, Owners and Contractors may ask for supply bonds when a specialty item is specified in a project or when they fear price escalations. For example, if the cost of steel is supposed to increase significantly, they may ask for a supply bond to guarantee that the steel will be provided at the specified price.