11.2.1 Performance bond during the construction period and defects liability period

(a) It is typical for government to require the private party to provide a performance bond for the construction term for a value equivalent to anywhere from 5 to 10% of the design and construction contract price to mitigate the government's risk in relation to late or insufficient completion of the facility. For value for money reasons, government may elect not to seek a direct performance bond of that value from the private party for the construction term (subject to section 11.3(c) below). Instead it may require the private party to:

(i) procure a performance bond (issued in the private party's favour) from the construction sub-contractor, guaranteeing the construction sub-contractor's construction obligations.44 This would generally, in any event, be a requirement of the private party's financiers who will have security over the bonds; and

(ii) provide a direct performance bond of a smaller value equivalent to the estimated cost to government to rectify defects in relation to Returned Works or the facility that were not required to be rectified prior to certification of Completion.45

(b) Government may also elect not to mandate the requirement for performance bonds but instead may 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, government must be satisfied that its interests are adequately addressed and protected by any such bond. 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) its entitlement to call upon the bond (including requirements in relation to any bond procured from the construction sub-contractor that government be notified when a call is made on the bond).46 47

(d) Any performance bond must be unconditional and irrevocable and provided (or backed) by a financial institution regulated by the Australian Prudential Regulation Authority and with a minimum specified credit rating.

(e) The required form of the bond will be set out in the project agreement and must not be amended without government's approval.48

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44 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.

45 See section 10.5.2 in Chapter 10 (Construction and Completion).

46 See section 10.5.2 in Chapter 10 (Construction and Completion).

47 In some jurisdictions there may be restrictions on security being provided by a sub-contractor. In such cases, government's minimum bonding requirements will include enforceability of the security. For example, the Subcontractors' Charges Act 1974 (Qld).

48 Government's strong preference is for bank bonds. However, in limited circumstances government may consider accepting insurance bonds subject to the creditworthiness of the insurance company and government being satisfied with the enforceability of its rights under the bond and with the process for recovering funds in the event that it makes a demand.