What is a "Performance Bond"?

A performance bond is specifically designed to ensure that a contractor fulfills their obligations as outlined in a construction contract. It is a type of surety bond that provides a guarantee from the surety company (third party) to the project owner that the contractor will complete the project satisfactorily and in accordance with the agreed-upon terms. If the contractor fails to fulfill their duties, the surety company is responsible for compensating the owner, which may involve hiring another contractor to complete the job or providing financial restitution up to the bond's coverage amount.

This concept is crucial in the construction industry as it protects the project owner from financial loss due to contractor default, ensuring that the project will be completed on time and per the required standards. The other options do not accurately represent the nature of a performance bond, as they either describe different financial instruments or contractual provisions unrelated to the specific assurance of project completion provided by a performance bond.