A completion bond is an insurance policy that protects a mortgagee (lender) from losses should a mortgager (borrower) be unable to complete a construction project with the funds that was borrowed.
Construction projects comes with a lot of risk. And a lot of projects are delayed drastically with one of the big reasons being the volatile prices of building materials.
Even high profile construction projects have faced such problems.
Typically, when everything goes according to plan, the property would serve as the security for the loan. And if there is no completion, there would be no asset to secure.
Sometimes also known as completion guarantees, completion bonds give the lender more assurance which minimizes the risks involved, thus approving and disbursing a mortgage.
If the project is not completed, then the insurer would cover the mortgagee for the losses.
It must be noted that completion bonds are not solely used to insure loans and credit facilities and operates in other industries as well.
In the film making industry for example, they can be available to protect investors from losses should a movie be unable to finish on schedule and within the specified budget.