Emerging contracting trends in response to Victoria’s developer bond scheme

Victoria’s new mandatory developer bond scheme for multi-storey apartment developments is set to commence on 1 July 2026.

Until recently, developers and contractors were operating in a period of uncertainty because the Building Legislation Amendment (Buyer Protections) Act 2025 (Vic) left several key aspects of the scheme unresolved. With the recent release of the exposure draft of the Building (Developer Bonds) Regulations 2025 (Vic), there is a strong indication that projects seeking a building permit before 1 July 2027 will be exempt.

During the period between the announcement of the scheme and release of the draft regulations, uncertainty around transitional relief meant developers and contractors had to pre‑emptively negotiate bond‑related risk allocation into their contracts. Certain trends emerged in these negotiations, offering an early indication of how the market is likely to respond once the scheme formally commences.

Developers are concerned that the developer bond scheme may leave them exposed to significant financial loss due to a contractor’s defective work, particularly after the expiry of the defects liability period (DLP) and contractor’s security has been returned, which typically occurs 12 months after practical completion.

The developer bond will be held for 24 months post practical completion, creating a 12 month period where the developer remains on risk for defective building works, but the contractor has no contractual obligation to rectify defects or provide security under the construction contract.

To address these concerns, one emerging trend is the revisiting of the traditional 12 month DLP so that a contractor’s defect rectification obligations align with the statutory inspection windows, particularly the inspections at 15-18 months and 21-24 months post‑occupancy permit. New models include a standard 12‑month DLP followed by a separate bond compliance period, whereby the contractor agrees to rectify defects identified post-DLP provided as they relate to workmanship, construction methods or builder-assumed design risk, but there is no broad obligation to rectify every defect like with a DLP. Another model is a 24-month DLP to align with the duration of the developer bond.  However, this potentially extends the contractor’s defect rectification obligations beyond those which are necessary to ensure the return of a developer bond and conflicts with well-established contractor insurance, subcontractor pricing and risk models.

A second emerging trend involves the use of indemnities. While the obligation to provide the statutory bond sits with the developer, developers are seeking to include indemnities requiring the contractor to reimburse the developer for any amounts drawn on the developer bond that result from defective work which is not rectified by the contractor. Ultimately this would require a developer to make a claim against the contractor to recover damages, so the value of the indemnity is dependent on the financial standing of the contractor entity unless some form of additional security is provided (e.g. a parent company guarantee or bank guarantee).

Security structures are also being revisited. The 2% developer bond is intended as a protection mechanism for owners, not as a performance security for the developer. We are seeing parties explore different commercial structuring options to balance the standard DLP performance security regime against the new 2% statutory developer bond. For example, the contractual security may be fully aligned with the developer bond duration (i.e. 2% contractual security is held until the developer bond is released), or gradually unwound as the risk of defects is reduced over time (e.g. at the expiry of the DLP, first and second independent assessor inspections and when the developer bond is returned).

Victoria’s developer bond scheme marks a significant shift in how post completion defect risk is managed, and the industry has already begun reshaping its contracting practices in anticipation. While the draft regulations have now clarified likely exemptions and transitional arrangements, developers and contractors are reconsidering their approach to security and defects management. Ongoing refinement is expected as projects progress through the first inspection cycles and the practical impacts of the developer bond scheme become known.  In the meantime, it is clear that the ‘standard’ approach to construction contracts is no longer appropriate and specific provisions are needed to appropriately manage risk in relation to the developer bond scheme.

Gadens’ Real Estate and Construction team are actively involved in drafting and negotiating construction contracts for significant residential development projects and are well placed to assist with drafting appropriate developer bond clauses for your project.

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Authored by:

Daniel Middleton, Partner
Sarah Zampaglione, Senior Associate