What does a contract bond guarantee?

A contract bond guarantees that the contractor will perform all terms of the contract and pay all labor and material bills. This type of bond serves as a financial assurance to the project owner—often referred to as the obligee—that the contractor, or principal, is obligated to meet the conditions laid out in the contract. If the contractor fails to fulfill these obligations, the surety company that issued the bond is responsible for covering the costs of hiring another contractor to complete the work or settling any unpaid labor or material bills up to the bond's limit.

In contrast, guarantees related to performance timelines, insurance coverage for employees, or restrictions on hiring subcontractors without permission do not fall under the typical scope of what a contract bond covers. The primary function of a contract bond is to ensure that the contractual duties are met comprehensively, providing peace of mind to all parties involved in the project.