Strata building bonds in NSW: the 2% bond and defect inspection scheme

What the strata building bond is

The Strata Building Bond and Inspections Scheme is the consumer protection regime that covers new residential strata developments in NSW that sit outside the Home Building Compensation Fund (HBCF). It plugs the gap left by the HBCF three-storey exemption: above three storeys, HBCF does not respond, so the scheme requires the developer to lodge a 2% building bond instead.

The scheme is set out in Part 11 of the Strata Schemes Management Act 2015 (NSW). It commenced on 1 January 2018 and is administered by NSW Fair Trading on behalf of the NSW Building Commissioner.

Which buildings the scheme applies to

The scheme applies to new residential strata buildings in NSW that are four or more storeys high. More precisely, it applies to building work for residential (or partly residential) strata developments that do not require HBCF cover under section 92 of the Home Building Act 1989. Because HBCF excludes buildings of three storeys or more (with limited car-park or storage exemptions), the practical threshold for the bond scheme is four storeys.

Commercial and government work is outside the scheme. Mixed-use buildings with a residential strata component fall inside it.

Bond amount and how it is lodged

The bond is 2% of the total contract price of all contracts for the building work. The "total contract price" includes the head construction contract and any associated contracts for the residential strata work. The 2% figure is the prescribed percentage set under the Strata Schemes Management Regulation 2016 and could be varied by regulation.

The developer lodges the bond with NSW Fair Trading before an application is made for the occupation certificate. The Secretary must approve the bond before the application is accepted. In practice this means the developer secures the bond (typically via a bank guarantee or a deposit) months before practical completion to avoid holding up the occupation certificate.

The two inspection stages

The scheme includes two scheduled inspections after the building work is finished.

The interim inspection happens between 15 and 18 months after the building work is finished. The building inspector reviews the building, identifies defective building work that has emerged since handover and reports to the owners corporation, the developer and the Secretary. The interim report flags items for the developer to rectify in the months that follow.

The final inspection happens between 21 and 24 months after the building work is finished. The building inspector reassesses the building, confirms which interim items have been rectified, identifies any defects that have emerged since the interim and produces a final defects report. The final report determines whether bond money is released back to the developer or applied to defect rectification.

The inspector must be appointed by the developer from the panel maintained under the scheme and must be a registered strata inspector independent of both the developer and the head contractor.

How the bond is used

If the final inspection report identifies no defective building work, the bond is released back to the developer.

If the report identifies defective building work, the owners corporation can claim against the bond up to the cost of rectifying the identified defects. The developer is given the first opportunity to rectify. If the developer fails to do so within the timeframe set in the report, the owners corporation can use the bond money to engage another contractor to fix the defects.

The bond is a cap on this particular remedy, not a ceiling on overall liability. Where defects exceed the 2% bond amount, the owners corporation retains separate claims under the statutory duty of care in section 37 of the Design and Building Practitioners Act 2020 and any contractual or warranty rights against the builder.

Building Commissioner oversight

The NSW Building Commissioner oversees the scheme alongside the Design and Building Practitioners Act 2020 regime. The Commissioner can issue prohibition orders preventing the issue of an occupation certificate where serious defects are identified before completion. The Commissioner can also audit compliance with the bond and inspection requirements after handover.

Practical implications

For developers, the scheme means the 2% bond is a non-negotiable line in the budget for any residential strata project above three storeys. The bond is typically secured via a bank guarantee, which means the developer carries the contingent liability but does not lose the cash until and unless defects are confirmed in the final report.

For head contractors, the inspection regime means defects emerging in the first 24 months after completion are systematically catalogued by an independent inspector. The interim inspection is a useful prompt to return to rectify work without the owners corporation drawing on the bond.

For owners corporations, the scheme provides a backstop within the first 24 months for defect rectification. Beyond 24 months, the statutory duty of care under the DBP Act 2020 and the Home Building Act 1989 warranties (where they apply) remain available.

Related entries

The scheme sits alongside the Design and Building Practitioners Act 2020 covered in the design-and-building-practitioners-act entry. Both apply to Class 2 work in NSW. The hbcf-insurance-requirements entry explains the three-storey exemption that makes the bond scheme necessary. Statutory warranties under the Home Building Act, where they apply, are in the statutory-warranties entry.