What is a performance bond?

A performance bond is fundamentally a surety bond that guarantees the completion of a project according to the terms stipulated in the construction contract. When a contractor is awarded a project, the owner may require a performance bond to ensure that the contractor will fulfill their obligations. This bond protects the owner by assuring that if the contractor defaults, the surety company that issued the bond will step in, either to complete the project or compensate the owner for losses incurred, up to the bond's value.

This mechanism is particularly important in construction projects where significant investment is made upfront. The performance bond mitigates risk by providing a financial safety net that helps ensure that the project will be completed per the agreed-upon specifications, schedule, and standards.

In contrast, other options focus on different aspects of construction finance and operations, such as insurance for equipment, which does not ensure project completion, or guarantees for material suppliers that pertain to payment obligations rather than performance on a project. Additionally, a contract between competing bidders does not relate to the concept of a performance bond at all, as such agreements do not serve to secure performance on a contracted job.