The Strata Building Bond Scheme, under the Strata Schemes Management Act 2015 (NSW) (the Act) provides a mechanism which increases accountability of Developers and Builders and provides security for Owners.
It is in the interests of the Developer and the Builder to ensure that the Scheme is complied with, not only for the purposes of avoiding infringement, but also to be aware of any potential risks associated with defective works. To reduce risk and exposure, it is important that the Builder and Developer know when engage experts in compliance with the scheme and what type of expert is required.
What is the building bond scheme and when does it apply? – A recap
Developers must lodge a Building Bond with the Department of Fair Trading (Secretary) for buildings developed for strata use, over 3 storeys high. Developments below this threshold will continue to be dealt with under the Home Building Compensation insurance schemes.
The bond is to be 2% of the contract price of the entire development and is to be held for a minimum of two years following the completion of the building, but not exceeding three years. The Building Bond is to be administered through the Fair Trading NSW Online Portal, which is used to track the documentation of the development and ensure that requirements of the legislation have been complied with.
The Building Bond acts as an insurance against the cost arising from inspection and rectification of building defects.
Whose responsibility is it to engage Building Inspectors?
The obligation is on the Developer to engage and retain a building inspector for the purposes of the Act. This obligation forces the Developer to play a more active role in the development of the building and become more accountable for the development. This attitude is reflected in the recent case of The Owners – Strata Plan No. 66375 -v- King  where Developers are now held accountable for defects arising from the design of buildings.
Further, a Developer is obligated to ensure that the appointed building inspector is a member of a ‘strata inspector panel’ established by any of the following bodies:
- the Housing Industry Association;
- the Master Builders Association of New South Wales;
- the Australian Institute of Building;
- the Australian Institute of Building Surveyors;
- the Australian Institute of Building Consultants;
- the Institute of Building Consultants Inc;
- Engineers Australia;
- the Australian Institute of Architects;
- the Association of Accredited Certifiers.
Should the Developer fail to appoint a building inspector, they will be liable for a substantial fine.
Regulated inspections – increase in costs
Part 11 of the act mandates that the Developer is to appoint a building inspector to inspect the building works. The inspector is to be retained for a period of two years.
During the appointment the inspector must produce:
- An interim report which must be produced no earlier than 15 months after completion and no later than 18 months; and
- A final report which must be produced no earlier that 21 months after completion and not later than 24 months. This final report must not address anything that was not addressed in the interim report. Any further defects will need to be addressed in a separate report.
This legislative requirement may result in a significant cost to the Developer in addition to the cost of the Building Bond. Inevitably the demand for building inspectors will increase as new strata developments commence, and thus it is likely that the price of these services will increase.
Where does the Builder fit in?
Although the Builder has no obligations under the Act, they are still exposed to the risk of costs arising from defective design and construction as, in the case of a dispute the Builder is almost always the first port of call for any disgruntled Owners Corporation.
Ensuring the Developer has engaged an inspector and lodged the Building Bond lessens the Builders time and money spent dealing with experts or recovering money from aggressively geared Developers.
In the case where the Builder is aware that the Developer has not lodged a Building Bond or has failed to engage a building inspector it would be prudent to advise the Developer to do so.
The importance of quantity surveyors?
A quantity surveyor may be required to assess the value of the works to obtain ‘contract price’ so that the Developer can calculate the amount to lodge for a Building Bond.
Because the Building Bond can be submitted any time before the occupation certificate, the calculation of the Building Bond can change with subsequent contract price changes over the course of the entire project. For example, variations to works may need to be assessed so the Building Bond can be topped up.
If the Owners Corporation and the Developer are associated with each other, a quantity surveyor is required to be appointed to ensure that the Building Bond submitted is an accurate reflection of the contract price of the entire development.
Should the building inspector discover defective designs or works, then both the Owners Corporation and the Developer are to agree to the costs of the rectification works, payable to the Owners Corporation. If there is a failure to agree on rectification costs a quantity surveyor will then be appointed by the Department of Fair Trading to determine a reasonable cost of rectification works.
If a quantity surveyor is appointed, the costs of the quantity surveyor will be shared by the Owners Corporation and the Developer.
It is important to note that any quantity surveyor appointed for the above purposes must be a member of the Australian Institute of Quantity Surveyors or the Royal Institute of Chartered Surveyors
Building inspectors and the like have become a necessity now that the Building Bond Scheme has added another layer of complexity and accountability to dynamic nature of Strata Developments.
Change is common throughout the life of a project and in the current climate compliance needs to managed well. Developers need to keep in mind expert opinions, such as quantity surveyors and building inspectors, are a compliance requirement. Unfortunately, this forces the Builder to be aware of the Developers compliance with the Building Bond Scheme in order to protect themselves from any overrun effects. These issues may be addressed at the contract negotiation stage.
Should you require advice in relation to engaging a building inspector, quantity surveyor or any other relevant expert in relation to a development, contact Nicholas Achurch, Marcus McCarthy or Kelvin Keane.
Lawyer, Nexus Law Group
+612 9016 0141
Group Principal, Nexus Law Group
+612 9016 0141
Principal, Nexus Law Group
+612 4961 0002
This publication is © Nexus Law Group and is for general guidance only. Legal advice should be sought before taking action in relation to any specific issues.
 Section 194, Strata Schemes Management Act