Alternative Security Options When Surety Capacity is Limited
The UK construction landscape is shifting. Supply chain pressures, tougher underwriting standards and a more cautious financial climate mean that surety bond capacity is increasingly constrained.
Traditionally, Performance Bonds are the go-to security mechanism for ensuring contract completion and protecting employers against contractor default. But when surety markets tighten or a contractor’s credit profile limits bond availability, the industry must consider credible alternatives. Fortunately, several well-established security options exist, each with advantages depending on project size, risk appetite and commercial objectives.
In this blog, we will discuss the leading alternatives to Surety Bonds in the UK, including Parent Company Guarantees, Direct Payment Arrangements, and other forms of financial protection.
Parent Company Guarantee (PCG)
A Parent Company Guarantee is one of the most widely used alternatives. Instead of transferring risk to a third-party surety, the contractor’s parent company provides a legally binding promise to fulfil the contractor’s obligations should they fail to do so.
The parent company agrees to step in if the subsidiary defaults, either by completing the works or compensating the employer for losses.
Benefits of Parent Company Guarantees
No premium cost: unlike bonds, PCGs typically do not require an upfront fee.
Quicker arrangement: internal approvals are usually faster than external underwriting.
Flexible structure: guarantees can be tailored more easily than standard bond wordings.
Cash Retention or Retention Bonds
Retention is a traditional method of providing security in UK construction projects. Employers withhold a percentage (typically 2.5–5%) of the contract value to protect against defects or non-performance. Cash Retention is straightforward as there is no reliance on external underwriting to get it.
Where retention is impractical, some employers allow Retention Bonds as a substitute, however, these still require surety capacity, so they’re not always a workable option if the problem is underwriting availability.
Direct Payment Arrangements
A Direct Payment Arrangement (DPA) shifts financial risk by allowing the employer to pay subcontractors or suppliers directly if the main contractor fails to do so. In a DPA, the employer gains the contractual right to bypass the contractor and pay key supply chain partners directly, ensuring continuity of works.
Benefits of Direct Payment Arrangements
- Reduces project disruption if the contractor becomes insolvent.
- Protects critical suppliers, minimising delays.
- Requires no surety underwriting, making it accessible when bond markets are tight.
Subcontractor Bonds
If the challenge is securing a bond at main-contract level, employers sometimes request bonds from key subcontractors, ensuring that critical packages (such as M&E, roofing or cladding) are protected.
Some of the benefits of Subcontractor Bonds include:
- Reduces exposure to individual package failure.
- Lessens the amount of security required from the main contractor.
- Often easier to obtain because the subcontractor’s risk is more specific and measurable.
Choosing the Right Alternative Security Option
No alternative is universally superior, it depends on contractor financial strength, employer risk tolerance, project size and duration, and cash flow considerations. A knowledgeable bond and risk specialist can help evaluate which option offers the right balance of protection and commercial flexibility.
By approaching employers early, demonstrating transparency and offering well-considered alternatives, contractors can keep projects moving and build stronger commercial relationships, even when traditional bonding is unavailable.
Surety Bonds and More from CG Bonds
If you need help identifying the most suitable security option or securing capacity in a challenging market, the CG Bonds team can provide tailored guidance based on your specific project and financial profile.
