Contract bonds are sometimes referred to as construction bonds. It is a guarantee of the performance of a contractor. In general, contract bonds are used to guarantee that the contractor will perform according to the specifications of the construction contract.
If the contractor fails to perform according to the contract, the insurance company is responsible to the insured for payment, up to the limit of the bond, which is usually for an amount equal to the cost of the construction project. The insurance company then has recourse against the contractor for reimbursement.