The term “contract bond” usually refers to bonds involving construction contracts, for either private or public entity owners. Most public works projects are required by law to have the performance of the contractor’s work guaranteed by a surety bond (commonly known as a “performance bond”). Since subcontractors and material suppliers have no lien rights on public works projects, the contractor is required to obtain a second bond guaranteeing the payment of all bills incurred on the work (commonly known as a “payment” or “labor & material payment bond”). For private work, the bonds are not legally required but might be part of the conditions set forth by the lender on the project or, as a matter of course, by the owner.

Another type of contract bond—bid bonds—are given by contractors as a response to certain requirements on invitations to bid, again normally by public entities. The bid bond guarantees that should the contractor be the successful bidder, he will enter into the contract and provide all the necessary documents as set forth by the contract.