What Is the Difference between a Performance Bond and a Parent Company Guarantee

In this article, we look at two of the ways an employer will try to manage the risk of failure or insolvency of a construction project – performance guarantees (sometimes called performance guarantees or guarantee guarantees) and guarantees from the parent company. Performance guarantees are also used in commodity contracts where a seller is asked to pay a bond to assure the buyer that if the goods sold are not actually delivered, the buyer will receive at least compensation for lost costs. There is no industry standard form for parent company warranties, so parties must ensure that the wording chosen adequately reflects their specific requirements. Parent companies should ensure that they have the same rights, obligations and limitations under the collateral that the contractor has under the main contract. A guarantee from the parent company should be provided for the duration of the construction contract (i.e. 12 years if it is performed as an act, six years if it is performed as a simple contract). As a general rule, there is no upper limit of liability, but the guarantor does not have a greater liability than the contractor would have had under the construction contract. Therefore, the guarantor is liable to the employer in the same manner and for the same period as the contractor would have been under the construction contract. Changes to the Underlying Contract – It is important that changes to the construction contract do not affect or reduce the guarantor`s liability under the warranty. The most important point to consider when considering a PCG is the financial strength of the parent guarantor, without which the PCG is virtually worthless.

Demand obligations are primary obligations in which the debtor pays a sum of money specified in the bond immediately upon written request and without preconditions. The parent company`s guarantees are generally secondary instruments of obligation in which the guarantor is liable only in the event of a breach of contract. For more information, see Bonds vs. Collateral. A guarantee from the parent company extends over a longer period of time and is usually provided to the employer at no additional cost. However, if the entrepreneur becomes insolvent, the parent company may also be affected and the collateral may become worthless. One of the benefits of a performance guarantee is that it provides the employer with a sum of money from an independent third party that can help manage short-term losses incurred by finding a replacement contractor. However, the reality is that the guarantee (unless it is on demand) often includes a requirement (as is the case with the guarantee guarantee issued by the Association of British Insurers) that the damage must be determined and established in accordance with the construction contract.

This will likely require formal proceedings against the contractor before the amounts can be recovered from the guarantor. As a result, amounts may not be available until a much later date and the employer may be disbursed for a period of time. It is also important to ensure that the bond is transferable so that, when the construction contract is awarded, the bond follows it and that the amendments made to the construction contract do not cancel or reduce the liability of the bond. The guarantees of the parent company vary considerably, but generally include compliance with the contractor`s obligations, including the payment of amounts due to the employer. The guarantor is liable to the employer in the same manner and for the same period as the prime contractor. Unlike a surety, it is usually not limited or limited to a percentage of the contract amount, and its duration is longer because it is the duration of the construction contract (6 or 12 years). A deposit is valid for a shorter period, covers less and the employer can only receive payment after formal proceedings against the entrepreneur. Parent company guarantees can be particularly useful when a small entrepreneur is part of a large financially stable group of companies.

The guarantee is given by the parent company to the customer, and in the event that the entrepreneur does not fulfill its obligations, the parent company is obliged to remedy the breach by fulfilling all the obligations of the entrepreneur under the contract (and / or covering the losses and costs incurred by the customer). The answer to this question depends on whether it is considered from the employer`s or contractor`s point of view. From the entrepreneur`s perspective, the answer will likely depend on the willingness of its parent company to be exposed under warranty. From the employer`s point of view, PCGs and bonds have their weaknesses: a PCG is completely dependent on the strength of the parent company, and a defaulting performance bond is very rarely profitable. .