A performance bond is a financial guarantee that a contractor will complete a project according to contract terms. If the contractor defaults, the bonding company (surety) must either complete the work or compensate the municipality for costs to finish the project. Municipalities typically require performance bonds for significant construction contracts, protecting public funds from contractor failure. Bond amounts are usually a percentage of contract value (often 50-100%). Bonding requirements add project costs since contractors pay premiums, but provide essential protection for taxpayer investments. Bonding companies assess contractor financial strength before issuing bonds, providing additional screening of contractor capability.