Florida Building Contractor Business/Finance Practice Exam

What type of bond is designed to protect against the risk of a contractor failing to start or complete a contract?

1. Performance bond

2. Bid bond

3. Surety bond

4. License bond

The correct answer is: Performance bond

A performance bond is specifically designed to protect the project owner from the risk of a contractor failing to start or complete a contract. This type of bond ensures that if the contractor does not fulfill their obligations as outlined in the contract, the surety company that issued the bond will cover the financial losses incurred by the project owner. This could include completing the project with another contractor or compensating for any damages. Performance bonds are essential in construction and contracting because they provide a safety net for project stakeholders and help maintain trust in the execution of construction projects. When a contractor secures a performance bond, it reflects their commitment to completing the project according to the agreed-upon specifications, timeline, and budget. In contrast, a bid bond guarantees that the contractor will enter into a contract if selected and ensures that the selected bidder will provide the required performance bond. A surety bond is a more general term that includes various types of bonds, including performance bonds, but it does not specifically address the issue of contract performance. A license bond is typically required to obtain a contractor's license and serves to protect against unethical or unprofessional conduct, which is not focused directly on the completion of a project.