On bigger jobs, clients rarely rely just on your word and balance sheet. They want security: something they can hit if you go bust or walk away. The two big tools are performance bonds and parent company guarantees (PCGs).
They look similar from a distance -- extra paper with scary wording -- but they work differently and hit you in different ways on risk and cash.
1. Parent company guarantees -- what they actually do
A PCG is your parent company saying to the client: "If our subsidiary (you) doesn't perform, we will."
Key points:
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Given by a group company, usually the contractor's parent, sometimes the employer's parent to back payment.
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It normally guarantees performance of the building contract -- if you default or become insolvent, the client can demand that the parent:
- completes the works; or
- pays damages/losses up to the full contract liability.
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No separate premium is paid to the guarantor as with a bond -- but the risk sits inside your group.
From the client's side, a PCG is only as good as the parent's financial health. If the whole group is in trouble, the paper is worthless.
2. Performance bonds -- what they actually do
A performance bond is a promise from a bank or surety that if you default, they'll pay the client up to a stated cap, usually around 10% of the contract sum.
Key points:
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Issued by a bank/insurer surety in favour of the employer.
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You (the contractor) pay a premium and usually sign a counter-indemnity so if the surety pays out, they chase you for reimbursement. Those indemnities can be very onerous.
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The bond is normally capped -- common figure is 10% of the original contract value.
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Standard forms exist (e.g. ABI form), but they're often amended -- especially around insolvency triggers.
There are two main flavours:
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Conditional (default) bonds -- client must prove your breach/default and loss before they can collect. More common in UK building work.
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On-demand bonds -- client can call the bond on written demand, often without proving breach first (subject only to fraud-type challenges). These are common on international jobs and usually resisted in UK domestic work because they're brutal.
For you, the bond is an extra cost now and a risk later if the employer can pull 10% with minimal proof.
3. How they differ in practice (and what that means for you)
From your side:
Who pays / who's on the hook
- PCG: your group stands behind you; if you fail, your parent takes the hit.
- Bond: the surety pays the employer up to the cap, then chases you under the counter-indemnity.
Extent of cover
- PCG: often covers full performance and all losses, potentially up to full contract liability, sometimes including latent defects over many years.
- Bond: usually just a fixed % of the contract -- good for a chunk of the risk, not everything.
Ease of calling
- PCG: employer still generally has to show your default and the loss -- it's tied tightly to the main contract.
- Conditional bond: employer must evidence your breach and the conditions in the bond wording.
- On-demand bond: employer can often call without proving breach -- money goes out now, arguments later.
For a contractor, a well-drafted conditional bond is usually less scary than an on-demand bond, and a PCG is a group-level decision about how much exposure the parent is willing to give.
4. What to watch in the small print
When you see "provide a bond and PCG", don't just shrug and sign. The risk lives in the details.
Watch for:
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Type of bond -- is it clearly conditional/default, or edging towards on-demand language ("pay on first written demand", "without set-off or proof of default" etc.)?
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Triggers -- what has to happen before the employer can call? Just "contractor default", or specific conditions (termination, certified failure, adjudicator decision)?
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Cap and term -- percentage of contract sum, and how long the bond/PCG lasts (just to PC, to the end of defects period, or longer?).
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Scope of the PCG -- does it just guarantee performance of the contract, or does it also pick up wider liabilities, variations, settlements, interest, costs?
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Counter-indemnity (for bonds) -- what security do you have to give the surety? Are there any nasty clauses that let them raid accounts or call guarantees on first demand?
If in doubt, you push back now. It's much easier to soften an on-demand-ish bond at tender stage than to argue unconscionability after the client has called it.
5. How to use this in your favour
Even as a contractor, bonds and PCGs can be used for you, not just against you.
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Up the chain -- if the employer is a thin SPV, you may want a PCG from their parent so you're not relying on a shell for payments.
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Down the chain -- you can ask key subs to provide PCGs or small bonds if they're carrying critical design or programme risk.
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At tender stage -- if you're going to be asked for a bond or PCG, price it properly and clarify the form; a client who won't show you the draft bond form early is a red flag.
These are not bits of admin; they are real financial weapons. Treat them as such.
Performance security at a glance
| Feature | Parent company guarantee (PCG) | Conditional performance bond | On-demand performance bond |
|---|---|---|---|
| Who gives the security | Contractor's parent (or sometimes employer's parent) | Bank or surety (insurer) | Bank or surety (often international banks) |
| Who ultimately pays if it's called | The parent company (group balance sheet) | Surety pays employer up to cap, then chases contractor under counter-indemnity | Surety pays on demand up to cap, then chases contractor under counter-indemnity |
| Typical cover | Performance and losses under the main contract, often up to full liability | Usually around 10% of contract sum, covering loss from contractor default | Same % cap, but callable much more easily |
| What the employer must prove | That contractor is in default under the contract and losses have been/will be suffered | Contractor default and conditions in bond wording met (termination, certified failure, etc.) | Usually just a compliant written demand stating default -- little or no proof upfront |
| Risk level for contractor | Medium -- big exposure for the group if things go wrong, but no upfront premium | Medium -- you pay a premium, and risk paying back up to the cap if called | High -- employer can grab the bond quickly; you argue later while the cash is already gone |
| When clients like to use it | To back contractor performance where group has strength, or to secure SPV obligations | Standard security on mid-to-large projects where they want comfort but don't need on-demand power | High-risk or international projects, or where client insists on maximum leverage |
Bonds and guarantees ready-check
Before your commercial team agrees to any bond or PCG, answer these:
- What type of bond is it? Conditional (prove default first) or on-demand (pay now, argue later)?
- What are the exact triggers for calling it -- termination only, or any alleged default?
- What's the cap and how long does it last (to PC, end of defects, or beyond)?
- If it's a PCG, does the scope match the main contract or does it quietly extend to wider liabilities?
- Have you seen the counter-indemnity wording and understood what the surety can do to you if they pay out?
- Have you priced the bond premium into your tender and checked your surety/bank has capacity?
If you can't answer all of those clearly, don't sign until you can.
Disclaimer: SiteKiln gives you plain-English information, not legal advice. Talk to a solicitor before making big decisions on live disputes.
What to do next
- Check any bond or PCG requirement in your current tender or contract and find out whether the bond is conditional or on-demand.
- Read the counter-indemnity wording carefully before you sign -- understand what the surety can do to you if they pay out.
- Price the bond premium into your tender and check your surety or bank has capacity before committing.
- If the employer is a thin SPV, consider asking for a PCG from their parent to secure your payments.
- For key subcontractors carrying critical design or programme risk, consider requiring PCGs or small bonds from them too.
Sources
- Housing Grants, Construction and Regeneration Act 1996 -- https://www.legislation.gov.uk/ukpga/1996/53/contents
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