A performance bond is a financial tool used to provide a more expedient path of recourse for a party that is owed a contractual obligation by another party. Typically in the surety bonding industry, "performance bond" refers to a contract bond. The bond protects the obligee from potential losses caused by a principal's inability or unwillingness to complete the contractual obligation.
Some commercial bonds are referred to as performance bonds even though the bond is not bound to a contract. Contract performance bonds differ from normal commercial surety bonds. Most commercial surety bonds are annually renewable bonds where a performance bond remains in force until the contracted job is completed or a claim is made on the bond. Most commercial bonds are cancellable by the surety where contract performance bonds usually are not. Often times, a contract performance bond is required of a principal to secure a contract for a job or project; commercial bonds are typically required as part of a licensing, permitting or legal process.