A parent company guarantee (PCG) is a promise by a contractor's parent company to the Client that it will step in and meet the contractor's obligations if the contractor fails to perform. It is used when the contracting company is a newly formed or thinly capitalised subsidiary, so the client wants the credit strength of the group behind the contract.
Worked example
A client awards a £4m contract to a project company within a larger group. Because the project company has few assets, the client requires a PCG from the parent. Halfway through, the subsidiary becomes insolvent and the client has to appoint a replacement to finish the works at a higher cost.
| Item | Amount |
|---|---|
| Cost to complete under the original contract | £1,900,000 |
| Replacement contractor's price to complete | £2,350,000 |
| Loss the client may claim under the PCG | £450,000 |
The parent is liable for the loss the subsidiary would have owed, normally limited to what the guarantee covers.
PCG, bond or retention
A PCG is one of three common ways to secure performance. A Performance Bond is given by a bank or insurer and pays out on a default. Retention holds back a percentage of payments. A PCG relies on the parent's own balance sheet, so it costs the group little cash up front, but it is a contingent liability that lenders and auditors may look at.
A guarantee is a secondary obligation: the parent is liable only where the subsidiary is, and the guarantee must be in writing and signed. Some are executed as deeds. Get legal advice before signing one.
PCG in the money
For a contractor within a group, a PCG does not appear in project cost, but it can affect group borrowing capacity and bank covenants, so ask finance before giving one.
When you are the client or the Main Contractor asking a Subcontractor for one, the guarantee tells you whom to claim against, but it does not remove the need to track payments and committed cost on the project.
Check whether the guarantee is time-limited and what it says about variations, because a guarantee can be limited to the contract as originally agreed.
Related terms
Performance Bond, Retention, Retention Bond, Main Contractor, Client, Collateral Warranty.
Planyard's construction budgets and committed costs show how much of a contract is spent and still due, which is the figure you need if you ever have to call on a guarantee.
