Parent company guarantees (PCGs)

Many funders and employers require that both a bond and a PCG are put in place. While a contractor will, generally, be amenable to providing either a performance bond or a PCG, they can be reluctant to provide both on the grounds, they argue, that to do so is to duplicate the security provided to the employer. While there is clearly some overlap, ultimately, a performance bond and a PCG provide the employer with different types of security. In practical terms, the 2 forms of guarantee serve different purposes and are complementary rather than mutually exclusive.

There can be clear differences between a PCG and a bond. For example, while a parent company may find itself liable for all the losses which a contractor would be liable, the bank or bondsman's liability under a bond is usually limited to 10% of the contract sum.

Furthermore, a PCG is not paid for by the employer as would a bond, the cost of which is usually passed to the employer by way of an increase to the contract sum. Finally, while a bond will usually expire at practical completion or the end of the defects liability period, a PCG can last for as long as the contractor is liable under the main contract (usually 12 years post practical completion).

It was argued, up until this credit crunch at least, that the primary benefit to an employer in having a performance bond in place (rather than a PCG) was that in the event of the contractor's insolvency, the employer had the benefit of a financial 'guarantee' from a secure third party institution such as a bank.