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Performance security and/or retention moneys

The following information applies to all major works contracts. However, an agency may choose to apply the same principles to minor works contracts at its discretion.

For all major works contracts, the Treasurer's Instruction 1228 requires an agency to ensure that a contractor either:

  • provides security in relation to the contract; or,
  • at the agency's discretion, provides retention moneys either instead of, or in addition to, security.

A decision on whether to allow retention monies should be made during the agency's risk assessment of the project.

SecurityBack to Top

"Security" is something given as a pledge that a person or entity will fulfil a promise or an undertaking.

The basic principle in connection with security is that it is held by the Principal (the Crown) for the purpose of ensuring the due and proper performance of the contract.  It is released by the Principal to the contractor at certain stages of the contract and if not released at a designated stage then the Principal is in breach of contract.

The Principal can only draw upon security if the contractor owes a debt to the Principal. Security is not forfeited by the contractor simply because the contract is cancelled or terminated at common law. The Principal can take only sufficient of the security to meet the debt.

Form of Security

Security for Government major works contracts shall be in the form of an unconditional bank guarantee given by an approved financial institution or an unconditional performance bond given by an approved insurance company. 

Unconditional Performance Bonds

Unconditional Performance Bonds (Demand Bonds) are approved by the Tasmanian Government as an acceptable form of security for Tasmanian Government works contracts. No other form of Bond is acceptable.

An Unconditional Performance Bond will only be acceptable where:

  • it is couched in terms that do not expose the Crown to any risk that it might be terminated for any reason (eg non-payment of premium) during their term;
  • it provides a direct recourse by the Crown to the underwriter in the event of contractual default; and
  • it is subject to the laws of and legal action in Tasmania.

The Tasmanian Government retains the discretion to approve or disapprove the form of an unconditional undertaking and the financial institution or insurance company giving it.

Treasury approved unconditional performance bond providers

Unconditional Performance Bonds may be accepted from the following companies whilst those companies maintain Standard and Poor's claims-paying ability rating of not less than A minus (A-), and agree to use the form of the Bond as set out in Unconditional Performance Bond.

The approved Bond providers are:

  • Chartis Australia Insurance Limited;
  • Chubb Insurance Company of Australia Limited;
  • Swiss RE International SE; and
  • Vero Insurance Limited.

The costs of the transfer and re-transfer of the security, and of any incidentals to the transfer and re-transfer, (including all stamp duty or other taxes) will be borne by the contractor.

Agency approved providers

Where an agency chooses to accept security from a provider not approved by Treasury, the agency must ensure the security meets the following:

  • the security is in the form of an unconditional and irrevocable undertaking to pay on demand (refer to acceptable terms under Unconditional Performance Bond); and
  • the security provider operates in Australia; has a credit rating threshold of A- or above as assessed by Standard and Poor's or equivalent; and either is regulated by the Australian Prudential Regulation Authority (APRA) or, if not regulated by APRA, limit the total value of its performance bonds held by the agency to a maximum value of 10 per cent of its net tangible assets.

When assessing a security provider's suitability, agencies should also consider other factors to avoid undue risks, such as the security provider's exposure across all agencies and whether the contractor's risk exposure is relative to the size of the security provider. Where an agency is considering accepting security from a provider which is not incorporated in Australia, it is crucial that the agency first seek advice from the Crown Solicitor to identify the risks and determine how these may be mitigated.

A list of security providers subject to APRA regulation and further information on APRA in general is available from the APRA website at www.apra.gov.au.

The costs of the transfer and re-transfer of the security, and of any incidentals to the transfer and re-transfer, (including all stamp duty or other taxes) will be borne by the contractor.

Time for Lodgement of Security

Security must be lodged within 28 days of the date of the acceptance of tender.  Failure to lodge security within 28 days is a substantial breach of contract within the meaning of AS 2124-1992 Clause 44. In situations where a contractor fails to lodge the required security within the period allowed by the contract, the situation must be dealt with immediately.

Call-up Security

If approval has been obtained to fully or partially call up a bank guarantee, the financial institution is to be directed by the agency to pay the Principal the agreed sum.

Retention moniesBack to Top

Retention moneys is a practice commonly used in the building and construction industry where a percentage from progress payments are withheld until the amount of retention held equals the total amount of security required.

Where an agency elects to allow a contractor to provide retention moneys either in full or in addition to security, the agency is to deduct retention moneys from progress payments at a rate of 10 per cent (10%) until the amount of retention held, plus any security held, equals the required security level.

When allowing retention moneys as an option, agencies should consider the risks associated with the project and whether a proportion of upfront security should be required (in addition to retention) to mitigate those risks. Agencies should also consider other factors to avoid undue risk, such as whether a potential contractor has sufficient cash flow to allow retention amounts to be deducted from progress payments without causing adverse financial pressure.

Agencies are able to retain retention moneys in their operating accounts for future payment in a later financial year, subject to following the normal review and approval process for carrying forward balances at the end of each financial year. If an agency has any queries in relation to these requirements, they should contact the Government Finance and Accounting Branch of Treasury.

Amount of Security/Retention MoneysBack to Top

The total amount of security and/or retention moneys required under any particular contract shall be five per cent (5%) of the contract sum up to a contract sum limit of $500 000 plus three per cent (3%) of the amount by which the contract sum exceeds $500 000.

However, the security amount may be managed and adjusted to reflect the value of all outstanding works to be provided by the contractor for that agency (where contracted to complete a number of projects over similar/overlapping periods with the agency).

Release of Security and Retention MoneysBack to Top

The Principal must release any security and retention moneys according to Clauses 5.7 and 5.8 of AS 2124-1992.

To release part of a bank guarantee, the relevant financial institution is to be directed by the agency to release part of the security. Copies of this direction are to be sent to the contractor and the superintendent.

 



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