A performance bond is issued to one party of a contract as a guarantee against the failure of the other party to meet obligations specified in the contract. It is also referred to as a contract bond. A performance bond is usually provided by a bank or an insurance company to make sure a contractor completes designated projects.

Performance bonds usually cover 100 percent of the contract price and replace the bid bonds on award of the contract. Unlike a fidelity bond, a performance bond is not an insurance policy and (if cashed by the principal) the payment amount is recovered by the guarantor from the contractor.

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