• Insolvency: a performance bond will offer protection if the contractor becomes insolvent, which may not always be the case with a parent company guarantee (because if a contractor becomes insolvent, it is not unusual for any parent company to also get into financial difficulties). Accordingly, a performance bond is preferable.
• Length of cover: a performance bond usually expires on practical completion, or at the end of the rectification period (normally six or 12 months after practical completion). On the other hand, a parent company guarantee will usually last for as long as the contractor is liable under the building contract (usually 12 years from practical completion). Accordingly, a parent company guarantee will protect against the contractor’s failure to compensate for defects that arise after the work has been completed, whereas a performance bond will, in practice, only protect against a failure to complete the works. Thus, a parent company guarantee will usually be preferable.
• Extent of cover: a performance bond will usually be for a fixed sum of money (eg 10% of the contract sum), whereas a parent company guarantee will normally be unlimited. Thus, a guarantee is preferable.
• Cost: the premium charged for buying a performance bond will be passed onto the client developer by the contractor increasing the contract cost. On the other hand, a parent company guarantee will usually be cost-free.

Source: Olswang. © Practical Lawyer