Tennessee Business and Law Practice Exam 2025 - Free Business and Law License Practice Questions and Study Guide

A primary purpose of performance bonds in contracting contexts is to guarantee the completion of a project. Performance bonds are surety bonds issued by a financial institution or insurance company to ensure that a contractor fulfills their obligations as stated in the contract. If the contractor fails to complete the project or meet the terms outlined in the contract, the bond provides financial compensation to the project owner, enabling them to cover the costs associated with hiring another contractor to complete the work.

This mechanism acts as a safeguard for project owners, assuring them that there is financial security in place should the contractor not perform adequately. Since performance bonds are specifically designed to protect against non-performance, this distinguishes them from other financial instruments that may address aspects like profitability or payment schedules. Their main focus is on ensuring that the contracted work is completed according to terms agreed upon, which is why the correct choice highlights this essential role.