A contract bond is a type of surety bond that bonds a principal for a specific contract. Contract bonds are used in construction as well as other areas of industry such as service and maintenance contracts.
In a contract bond agreement, the surety is bonding the principal's ability to complete the contracted project or job. The surety will underwrite the bond by attempting to assess the principal's ability to complete the job or project in accordance with the terms of the contract. The bond typically remains in force until either the contract has been satisfied or a valid claim has been made on the bond.
Contract bond penalties are typically aligned with the amount of the contract. If a claim is made on a contract bond, the surety will be financially liable up to the penalty amount. A surety may resolve a claim by paying the claim amount up to the bond penalty or taking action to get the project back on track. The surety may even prevent a claim by working with the principal to keep the project on track.