Parent company guarantees and/or performance guarantee bonds

Parent company guarantee

One option could be for a parent company guarantee (PCG) to be provided from the contractor’s parent company.

The advantage of a PCG is that they are generally provided at no cost (although sometimes there may be inter-company charges) and the parent company under the PCG may be liable to the same extent as the contractor is liable to the employer.

That said, it is not always appropriate for a PCG to be provided as the contractor appointed may not in fact have a parent company. In addition, if the contractor becomes insolvent this may affect the whole of the group, including the parent company.  In these circumstances the PCG would have limited value. However, it is possible that the parent company will be able to provide a stronger financial covenant.

Performance guarantee bond

Another form of security could be a performance guarantee bond (PGB). Generally PGBs are procured from independent financial institutions for 10% of the contract sum and expire upon practical completion. However, it is possible to extend the expiry period to, say, the issue of the notice of completion of making good at an additional cost.

There are cost implications of a PGB which are added to the contract sum. PGBs are usually amended (if using an industry standard form) or drafted so that they protect the employer against default under the contract, in particular contractor insolvency.

PGBs are not usually payable on demand which would be the preference for employers, but tend to be conditional/on default bonds where the default must be proved.

It is not uncommon for both a PGB and PCG to be requested. However, it will depend on the nature of the project and the financial strength of the contractor, parent company and guarantor (under the PGB) which options are ultimately provided.

It will be interesting to see whether there will be a greater requirement for additional security when the position with zero retention moves further forward.

Contact Kate Woodhall on 0121 214 0105 for advice around any of these issues.

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