Definition - What does Performance Bond mean?
A performance bond is a bond meant to ensure one party's completion of a project to the satisfaction of the contract terms. It is often a condition of the contract. In case the project does not fulfill the obligations of the contract, the obligee, the one who requests or receives a bond from the principal, has a right to make a claim for monetary compensation. In this way, it is like insurance for an investment.
Insuranceopedia explains Performance Bond
Performance bonds, often issued alongside payment bonds, are most common in the construction industry. They protect developers from losing money in their investments due to the carelessness or incompetency of the contractor as well as against the failure of the contractor to fulfill their contractual obligations.
For example, a contractor who wins the bid for a construction project for a developer would issue a performance, often in conjunction with a payment bond, to a client. In this way, it helps ensure the contractor fulfills their contractual obligations, and in case they do not, the developer has a means of recourse to recuperate their losses.