Security in Construction Contracts

# Chapter 15: Security in Construction Contracts  Construction security is essentially insurance against contractor default, and with Victorian construction insolvencies up 73% in recent years, you'll need to understand how to protect your clients without strangling contractor cash flow. ## **Understanding Security Mechanisms** Think of construction security as a safety net with two competing tensions. Your client wants maximum protection (ideally 10-15% of contract value), whilst contractors need working capital to actually build the project. The sweet spot? Usually 5% of contract sum, split between bank guarantees and retention money. Bank guarantees have become the preferred option because they don't tie up contractor cash, the bank provides the guarantee for a fee, leaving the contractor's capital free for materials and wages. Compare this to traditional cash retention where you're withholding 5-10% from each progress payment, effectively forcing the contractor to finance your client's project. Most contractors will accept lower margins to avoid cash retention, making bank guarantees surprisingly cost-neutral for clients. ## **Staged Release Strategy** Here's where many graduates stumble: security isn't a single lump sum sitting untouched until project completion. You'll typically manage a staged release reflecting actual risk exposure. At practical completion, when the building's substantially finished but minor defects remain, you'll release 50% of security (dropping from 5% to 2.5%). The remaining security covers the 12-month defects liability period, with final release after you've certified all defects are rectified. ## **Your Certification Responsibilities** As the architect administering the contract, you're the gatekeeper for security release. This puts you in a delicate position, your client expects protection whilst the contractor needs timely release to maintain cash flow. Before certifying practical completion and triggering that first security release, you'll need to verify that all works are substantially complete, commissioning tests have passed, and authority approvals are obtained. Document everything meticulously; premature security release can expose you to professional liability claims if defects emerge later. ## **Emerging Alternatives** The industry's moving beyond traditional securities. Project bank accounts, already mandatory for Queensland government projects over $1 million, quarantine progress payments from insolvency risks. Performance bonds from insurers offer contractors capital-efficient alternatives to bank guarantees. And from July 2026, Victorian developers of apartments over three storeys must provide mandatory bonds worth 3% of construction cost, a direct response to the Porter Davis collapse that left 1,700 homes in limbo. Smart contracts using blockchain technology promise automated security release based on verified milestones, though practical implementation remains 2-3 years away. For now, focus on mastering traditional mechanisms whilst staying informed about these emerging alternatives through AIA Victorian Chapter updates. **Key Terms:** - **Bank guarantee**: An unconditional promise by a bank to pay a specified amount on demand, typically 5-10% of contract value, without requiring proof of contractor default - **Retention money**: Cash withheld from progress payments (usually 5% total) as security, released in stages at practical completion and defects liability period end - **Practical completion**: The point when works are substantially complete with only minor defects not preventing occupation, triggers first security release - **Defects liability period**: Typically 12 months post-completion when contractors must rectify defects at their cost, covered by retained security - **Unconditional security**: Security that can be called upon without proving breach, placing the burden on contractors to recover funds through dispute resolution - **Developer bond**: New mandatory security from July 2026 requiring 3% of construction cost for residential apartments exceeding three storeys #