North Carolina Building Contractor License Practice Exam

Which of the following is a common way to ensure compliance with contract terms?

1. Performance bond

2. Insurance policy

3. Lien waiver

4. Letter of intent

The correct answer is: Performance bond

A performance bond is a common way to ensure compliance with contract terms because it provides a financial guarantee that the contractor will fulfill their obligations as outlined in the contract. In essence, when a performance bond is secured, a third party—typically a surety company—agrees to cover the costs associated with completing the project or compensating the property owner if the contractor fails to meet the contractual obligations. This bond protects the client or project owner by ensuring that they will not incur a total loss if the contractor defaults. The use of performance bonds is particularly prevalent in construction projects, where the risks associated with non-completion or subpar performance can be significant. The presence of a performance bond can instill confidence in project owners, knowing they have recourse should the contractor fail to deliver. In contrast, other options such as insurance policies primarily provide coverage for potential liabilities or damages rather than guaranteeing the execution of the contract itself. A lien waiver protects against claims on a property but does not address the fulfillment of contract terms. A letter of intent may signal the start of negotiations or project work but does not offer any guarantees regarding performance or compliance.