Parent Company Guarantee and Construction Bonds

Question 1

What is a parent company guarantee?

Answer 1

• A parent company guarantee is a guarantee given by a contractor’s parent company whereby in the event of breach of contract by the contractor, the parent company will be required to remedy the breach and meet all the contractor’s obligations under the contract.
• May be required if there are reservations over the financial security of the contractor.

Question 2

What is a bond?

Answer 2

• A bond is a guarantee by a bondsman, bank or insurance company to make payment to the client in the event of breach of contract by the contractor.
• Bonds can be on demand (meaning the bond is paid on request) or on default (meaning the client must provide evidence of the breach of contract by the contractor).

Question 3

What are the different types of construction bond?

Answer 3

• Performance bonds insure the employer against non-performance by the contractor and are typically set at 10% of the contract value.
• Defects liability bonds insure the employer against failure of the contractor to rectify defects, which are identified within a certain time period after practical completion.
• Retention bonds are an alternative to traditional retention and insure the employer (for a certain percentage of the contract sum) against failure of the contractor to rectify defects, which are identified within a certain time period after practical completion.
• Advance payment bonds insure the employer against default by the contractor where the client issues an advance payment to the contractor.
• Off-site materials bonds insure the employer against default by the contractor where the client issues payment for ‘off-site’ materials.

Question 4

Why might you use a retention bond instead of traditional retention?

Answer 4

• Contractors may request a retention bond instead of traditional retention as it (a) improves cash flow by releasing 100% of the money on practical completion and (b) means the contractor does not have to continually chase for retentions to be released on completion of rectification period.
• Those benefits often outweigh the premium paid by the contractor to provide the retention bond.

Question 5

Why might you request both performance bond and a parent company guarantee?

Answer 5

• Performance bond offers financial guarantee in the event of insolvency by both the contractor and the parent company.
• Parent company guarantee requires parent company to meet all obligations under the contract (for 6 or 12 years post practical completion) and ensures the client is not left with incomplete works.