Performance bonds v parent company guarantees
Produced in partnership with Peter Jansen of Keystone Law
Performance bonds v parent company guarantees

The following Construction guidance note Produced in partnership with Peter Jansen of Keystone Law provides comprehensive and up to date legal information covering:

  • Performance bonds v parent company guarantees
  • Main distinctions between performance bonds and parent company guarantees
  • Which is more effective?
  • Independent surety

The purpose of this Practice Note is to compare performance bonds with parent company guarantees (PCGs). This is important because these are commonly sought in construction projects of all sizes but many construction professionals are confused by bonds and guarantees.

Performance bonds and PCGs serve different purposes:

  1. a PCG is a binding promise that a parent company will answer for the default of its subsidiary. It can provide some security against the risk that in the years following completion the contractor may be made non trading by its parent group or wound up in a subsequent company reorganisation, thereby leaving it without funds to meet a claim for damages if latent defects are found

  2. a performance bond is a financial security given by a bank or insurance company, and for this reason is the main security to the employer against the insolvency of the contractor

Because of the varying nature of performance bonds, for the purposes of this Practice Note, a performance bond simply means a construction performance security given by a financial institution independent of the contractor and the group of companies of which the contractor is a part.

A full discussion on performance bonds and the law related to them is beyond the scope of this Practice Note. In summary, two distinct forms of performance bond are used in the construction