Date published: 04/11/2016
From July 2017, property developers in NSW will be required to pay a bond of 2% of building costs. The direct purpose of the bond is to offer a new layer of protection to purchasers, by funding rectification of building defects discovered over the first two years after completion. An optimist could also hope to see a flow-on cultural change, as developers become incentivised to take a more long-term view in the balance between quality and cost savings.
The building bond will only be required on strata scheme developments, such as high-rise residential projects. According to the Act’s second reading speech, 25% of the population of greater Sydney lives in strata title. That statistic is set to rise to 50% by 2040.
Although the Strata Schemes Management Act 2015 (NSW) begins operation in November 2016, the building bond provisions have a delayed commencement date and will not come into force until 1 July 2017.
Form of the Building Bond
Before issuing of an occupation certificate, the developer of a strata scheme must give to the Secretary of the Department of Finance, Services and Innovation (“the Secretary”) a building bond.
The bond must be for 2% of the contract price for the building work, and may be given as a bank guarantee, a bond, or such other form prescribed by regulations.
Applying the Building Bond
The building bond may be spent on rectifying defects identified during the first two years after completion. Defects are identified as follows. At the developer’s cost, a building inspector must carry out inspections and provide an “interim report” (at 15-18 months after completion) and a “final report” (at 21-24 months after completion). Both reports must be in a form approved by the Secretary.
If the final report identifies defects, the Secretary may draw on all or part of the building bond and pay funds to the owners corporation to rectify the defects. This must happen within 60 days of the final report, otherwise
Building Inspectors
The building inspector must act impartially and must not be connected to the developer. Moreover, they must not have been involved in the design, construction or certification of the building prior to their report.
Who can be a building inspector? They must be a member of a “strata inspector panel” established by one of several industry bodies specified in the Regulations, including Engineers Australia, the Australian Institute of Architects, or the Australian Institute of Building Surveyors.
It remains to be seen what this means for consultants in NSW, and whether other states will introduce similar reforms.
At best, it could motivate developers to use their influence over project quality to guard against defects – for instance by rejecting low-priced tenders from contractors who are likely to make up their profit margins by cutting corners, or by paying for more detailed and diligent observations of the works during construction. The risk is, however, that developers might protect themselves against losses under building bonds by requiring even more certification from design consultants, and by seeking new ways to transfer the risk of building defects to professionals with an inspection or observation role.
The change also opens up a new area of specialisation for building inspectors, a role that would naturally draw on the experience of architects and engineers who, through superintending building contracts, are accustomed to the duty to make impartial assessments.
Fair Trading NSW has more information about building bonds and the other changes introduced by the Act here.
Wendy Poulton
Risk Manager