11.2.1  Performance bond during the construction phase and defects liability period

(a)  For value for money reasons, government may elect not to seek a direct performance bond from the private party for the construction phase (subject to section 11.3(c)) following). Instead it may require the private party to procure a performance bond (issued in the private party's favour) from the construction sub-contractor, guaranteeing the construction sub-contractor's construction obligations.36 This would generally, in any event, be a requirement of the private party's financiers who will have security over the bonds.

(b)  Government may not even mandate the requirement for performance bonds from the construction sub-contractor, but will evaluate bidders on the basis of the overall security provided to support the private party's obligations under the project agreement.

(c)  Where government requires the private party to procure a performance bond from the construction sub-contractor, government must be satisfied that its interests are adequately addressed and protected by any such bond.  

(d)  As part of the Project Brief, government will identify its minimum bonding requirements including in respect of:

(i)  the quantum, credit rating and duration of the bond; and

(ii)  the bases upon which the bond can be drawn (including requirements that government be notified when a call is made on the bond).

(e)  Government's minimum requirements will seek to ensure that the interests of the private party, financiers and government are appropriately aligned.

(f)  The amount of any performance bond, and the length of the period for which any such bond is required, will need to be considered carefully for possible value for money implications. The quantum of the bond will reflect the project features but will generally be a percentage of the design and construction contract price. The amount of the bond may be reduced following Completion (by an amount which appropriately reflects the fact that the project has moved beyond the period with the greatest level of construction risk). However, the bond will remain on foot for a specified period after Completion (at a reduced amount) to secure the private party's performance of its defects rectification obligations.

(g)  Any performance bond must be unconditional and irrevocable and provided (or backed) by a financial institution regulated by the Australian Prudential Regulation Authority.

(h)  The required form of the bond will be set out in the project agreement and must not be amended without government's approval (such approval not to be unreasonably withheld).

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36  Where government relies on the sub-contractor's performance bond, government may require the financiers' direct agreement to enable government to claim under the bond to rectify any default by the construction sub-contractor, to the extent that the private party or the security trustee (on behalf of the financiers) fails to rectify the default.  Government's ability to claim will be subject to the financiers' right to access the bond.