Parent company guarantees, and what they are worth

A parent company guarantee is a promise by the contractor’s parent to step in and perform, or to pay damages, if the subsidiary fails. Unlike a bond it costs nothing to provide, which is why employers ask for one and contractors agree without much argument.

It is only as good as the parent

The entire value of a PCG sits in the financial standing of the company giving it. A guarantee from a substantial group with real assets is meaningful security. A guarantee from a holding company whose only asset is the shares in the subsidiary is a piece of paper that becomes worthless at the exact moment it is needed.

Checking takes twenty minutes at Companies House: the accounts, the net assets, whether the parent is itself a subsidiary of something else, and whether it has given guarantees on a dozen other projects.

Guarantee to perform, or to pay

The stronger form obliges the parent to step in and complete the works, or procure completion. The weaker form obliges it only to pay damages for the subsidiary’s breach.

Both are useful. The first keeps the job moving, which on a live site is worth more than money. The second is a claim to be quantified and pursued, which takes time the project does not have.

Where PCGs quietly fail

Some are drafted so the parent’s liability is no greater than the subsidiary’s, and expires when the subsidiary’s does. That is normal and reasonable. What is less reasonable, and appears more often than it should, is a cap or a time limit that makes the guarantee expire before the defects liability it was meant to stand behind.

The other quiet failure is execution. A guarantee agreed in the tender, drafted by solicitors and never actually signed is not a guarantee. It is correspondence.

PCG or bond

They do different things. A bond brings in a third party with money and no interest in the dispute. A PCG brings in a related company with money and every interest in the dispute.

Where the parent is strong, a PCG is often better value than a bond, because it is free and the obligation to perform is more useful than a capped payment. Where the parent is thin, a bond is the only real security and the PCG is decoration.

The practical test

Ask one question at contract stage: if this contractor failed tomorrow, would the company giving this guarantee be able to fund completion? If the answer is no, or if nobody has looked, the project has less security than the file suggests.