Parent company guarantees (PCGs)

A parent company guarantee (PCG) is a guarantee provided by the contractor's ultimate parent or holding company to answer for the debt, default or miscarriage of the contractor. It is subject to the same legal principles as those applied to default bonds discussed earlier. While a default bond will usually provide a financial guarantee only, a PCG may be a performance guarantee, a financial guarantee or a combination of both.

Why might a PCG be required?

An employer concerned about a contractor's financial viability may require a PCG as assurance that the contractor has the financial backing of the (potentially considerably larger) group of companies. This may be particularly important where the contractor is a new company, the financial viability of which has not been tested, or where there are concerns as to its solvency, or where the contractor does not have sufficient assets for the employer to feel secure that if the contractor breaches the contract they will be able to meet any damages to which the employer could be entitled.

To assess the actual value of a PCG, it is good practice to also investigate the financial position of the parent company. It may be that, on investigation, it turns out that the parent company is no more financially viable as a commercial entity than its subsidiary.