How does a 'contract performance bond' function?

A 'contract performance bond' serves as a financial assurance for contract fulfillment. This bond is a type of surety bond that ensures that the contractor will perform the obligations stipulated in the contract, such as completing the work to the standards and within the timeframe agreed upon. If the contractor fails to meet these obligations, the bond provides a financial payout to the project owner (or obligee) to compensate for the loss incurred as a result of the contractor's non-performance.

This mechanism protects the interests of the project owner and provides a level of financial security, enabling them to appoint another contractor if needed to complete the project. The bond assures that funds will be available to cover additional costs associated with completing the project in case of a contractor's default.