Building bond and mandatory defect inspection reports

Building bond and mandatory defect inspection reports are essential for most multi-storey residential developments with a significant change occurring in the construction industry.

Developers, builders, and owners corporations need to understand the significant effect on projects and contracts started after January 1, 2018.

Building Defects Bonds Scheme

The strata building bonds and inspection scheme apply to developers and builders who entered the contracts after January 1, 2018, for building works to construct strata properties with more than four storeys.

Home warranty insurance scheme applies on building that is less than 4 storeys. The legislation will affect many participants in the construction industry. These include:

  • Developers
  • Strata scheme owners
  • Strata inspection
  • panel Builders
  • Building inspectors

How Does the Scheme Work?

The scheme includes the building bond and mandatory defect inspection reports. Moreover, developers must lodge the building bond with the NSW Fair Trading before issuing the occupation certificate. This is equal to 2% of the contract price. 

After the completion date (as defined by the Home Building Act 1989 NSW), the developers should hire an independent building inspector. He will be selected from the NSW Fair Trading Panel.

Once selected, the inspector will provide a defects report between 15-18 months after issuing an occupation certificate. Then he will report to the relevant parties (developer, builder, NSW Fair Trading, and Owners Corporation).

The builder is liable to fix all the issues detected. If the builder cannot do it, the Owners Corporation will use the bond money to rectify the defects.

After rectification and there are still some funds left, you will release them to the developer.

Short-Term Impacts

The building bond cost should be considered in negotiations between builders and developers on any project where the regime applies. The bonds requirement may impact the risk profile and approach to the building design, control of approvals and variations, defects liability, and security. 

The building bond may also impact how developers plan the project, including the financing, projects feasibility, and project costs and timelines.

The head contractors and developers should also consider the impact of the bond on the builders and subcontractors. For example, security is held for 12 months; many now be held for up to 2 years to cover the risks associated with the bonds.

Long Term Impacts

This scheme is created to overcome the increasing defects claims for multi-storey residential buildings. However, the operation of the building bond scheme will result in a significant increase in awareness of defects and an increase in control costs. 

Aside from resolving issues quickly, it can also highlight the problems that would have been unseen.

Under the Home Building Act, the scheme will not replace the developers, builders, or Owners Corporations’ existing rights. It’s essential to consider the impact of building defects bond on any project or contract from January 1.

This scheme has been designed to overcome the increasing defects claims being made for multi-storey residential buildings. However, the operation of this scheme will result in a marked increase in awareness of defects and a potential rise in control costs. While this can resolve issues quickly, it will also highlight issues that would have been undiscovered.

The scheme will not replace an owner’s corporations, developers, or builders existing rights under the Home Building Act. It is crucial to properly consider building defect bonds’ impact on any project or contract entered into from January 1.

If you are still confused and want to learn more about the building bond and mandatory defect inspection reports, contact Effective Building & Consultancy at 02 9613 3353, and we will be glad to assist you.