A performance bond is a type of contract construction bond that guarantees a contractor will complete a project ing to the terms outlined in a contract by the project owner, also called the obligee. The obligee can be a city, state, or local government, as well as the federal government or a private developer.

U.S. government agency bonds are debt obligations issued by government-sponsored enterprises (GSEs) or U.S. government agencies. GSEs are independent organizations sponsored by the federal government and established with a public purpose.

A letter of credit is a promise by a bank to advance up to a certain amount of money to one deal party if the other party defaults. A surety bond is a guarantee in which a third party — often an insurance company — agrees to assume a defaulting party's financial obligations.

Performance bonds are meant to protect the owner from the contractor defaulting on their obligations. Payment bonds are meant to guarantee to the subcontractors, suppliers and laborers who the general contractor hires that they will receive payment for services and materials.

Other common names for these include “construction”, and “labor and material”. In government contracting, these bonds are sometimes referred to as “Miller Act Bonds”.

A payment bond is a contract where the owner of an asset or property (the grantor) promises to pay someone else for work done on their behalf. A performance bond, by contrast, secures the contractor's promise to perform the contract in ance with its terms and conditions at agreed upon price within time allowed.

Payment bonds ensure that contractors pay their material suppliers and subcontractors ing to their contracts. Performance bonds provide a financial guarantee to project owners that their contractor will perform ing to contract terms.