Simply put, a Surety Bond is a contract that binds (3) parties together and guarantees that one of the parties performance of an obligation to another party.  Each party has specific terms that they agree to.  

1. Principal (the bond holder)

2. Obligee - the person or whoever is requiring the bond

3. The Surety - the company writing the bond

The surety is responsible for financially guaranteeing to the obligee that the principal will abide by the terms of the bond.  An example of this may be having a project completed by a certain time frame.

Performance bonds are a guarantee that a contractor will complete a construction project according to the agreed upon contract.

What are performance bonds used for?

When a developer wants to protect the investment made in a venture, the contractor that won the bid is required to provide a performance bond before work can begin. If the contractor fails to complete the project based on the previously agreed upon contract, the project owner can file a claim on the performance bond. If the claim is found to be valid, the surety company that issued the performance bond will make sure the contractor compensates the harmed party.