A contract bond is a type of surety bond that ensures a party will fulfill their contractual obligations. It involves three parties: the principal (the party required to perform), the obligee (the party receiving the benefit), and the surety (the bond provider). If the principal fails to meet the contract terms, the surety compensates the obligee for any financial loss. These bonds are commonly used in construction projects, where contractors must guarantee their work. By securing a contract bond, contractors demonstrate their reliability and financial stability, which helps build trust with clients and ensures project completion as agreed.