A bank guarantee is a bank’s written promise to pay a third party a fixed sum on demand if you fail to meet an obligation, and developers use one where a counterparty wants security but tying up cash would affect the deal. The same job, holding security so someone else can rely on you, is also done by performance bonds inside construction contracts and by deposit bonds when you are acquiring a site. Three instruments, one underlying idea, and a good deal of confusion about which applies where, what each costs, and how the exposure is released. Each carries a fee for as long as it remains on issue, and each ties up either cash or borrowing capacity well before anyone calls on it.
This guide is written for the developer working out which security instrument a situation calls for, what it costs to put in place, and when it is released. It covers what a bank guarantee is and how a bank secures it, where developers use them (council bonds, lease security, and construction security), how performance security and cash retention work inside a construction contract and how the retention-trust rules now differ by state, when the other side can call on a guarantee and when a court will intervene, what a deposit bond is and where it fits, the surety and insurance-bond alternative that generally does not consume bank limits, the New South Wales Pre-sale Finance Guarantee that is a different instrument again, how all of this flows through a feasibility, and what changes across the Tasman. Every figure is hedged, because bank fees, surety pricing, and council policy move with the provider and the specific deal. None of this is legal, credit, or financial advice: the instruments described here are contractual and regulated products, so confirm the position for your own project with your own lawyer, broker, or adviser.
What is a bank guarantee, and why do developers use one?
A bank guarantee is an unconditional undertaking from a bank, or another authorised deposit-taking institution (ADI), to pay a nominated beneficiary a set amount on demand if the customer does not perform an obligation. The beneficiary (often called the favouree) holds an instrument that, from their side, functions closely to cash: they present a demand, and the bank generally pays without first resolving the underlying dispute. Australian banks market them on that basis, as an alternative to providing a deposit or bond directly to a supplier, vendor or landlord, and as a way of retaining cash until the underlying contract is complete.
The function is consistent across a project. Counterparties want protection: a council wants assurance the subdivision works will be finished, a landlord wants cover if the tenant defaults on rent during a fit-out, a principal on a construction contract wants a buffer against the builder failing to complete. Each of those could be met with cash. But cash handed over as security is cash that is no longer funding land, consultants, or construction. A bank guarantee leaves the counterparty secured while the money stays available, which is why guarantees appear at several stages of a project rather than as a one-off finance product.
A bank guarantee is not free, and it is not invisible to your lender. The bank treats the guarantee as a contingent liability: a commitment it may have to fund at any moment. It therefore either takes security for the exposure or counts the guarantee against your facility limits, which means a guarantee on issue can reduce what you are able to borrow for the build. A guarantee that sits unused for two years still attracts a fee each year and still consumes that capacity throughout. That cost, and the capacity consumed, is what makes the choice between a guarantee, a bond, and cash a feasibility question as well as an administrative one.
Bank guarantee, performance bond, deposit bond: what actually differs?
They all provide security to a beneficiary, but they are issued by different parties, secured in different ways, and used at different points in a project. In short: a bank guarantee is issued by your bank and usually backed by your cash or property; a performance bond secures a contractor’s performance inside a construction contract and can be a bank guarantee or an insurer’s bond; and a deposit bond stands in for the cash deposit when you buy, and is issued by an insurer or surety rather than your bank.
The terms are often used loosely, so the table below sets out where each differs.
| Feature | Bank guarantee | Performance bond / performance security | Deposit bond (deposit guarantee) |
|---|---|---|---|
| Who issues it | Your bank or authorised deposit-taking institution (ADI) | A bank (as a guarantee) or an insurer/surety provider | An insurer or surety provider |
| What it secures | Almost any obligation: council works, lease, contract performance | A contractor’s performance under a construction contract | Payment of the deposit at exchange, until settlement |
| Who holds it | The beneficiary (council, landlord, principal) | The principal (often the developer) | The vendor |
| How you back it | Cash term deposit or property/other security | Cash, indemnity, or the surety’s underwriting | The surety’s underwriting; often unsecured |
| Typical cost | An annual fee, commonly around 1% to 3% of the face value, plus an establishment fee | Similar to a bank guarantee, or a surety premium | A one-off fee, often around 1.2% to 2%+ of the deposit per year of term |
| Ties up borrowing capacity? | Usually yes | Depends on issuer; a surety bond generally does not | Generally no |
| When it comes back | On completion of the obligation, or after a defects period | On practical completion and after the defects liability period | At settlement, or when the contract completes |
The “ties up borrowing capacity” row is where the instruments diverge most for a developer. A bank guarantee and a cash deposit both draw on your balance sheet or your bank limits. A surety bond and a deposit bond generally do not, which is one reason they are used as a project scales and borrowing capacity becomes constrained. The rest of this guide works through each instrument in the order you tend to meet them.
What does a bank guarantee cost, and how does the bank secure it?
A bank guarantee typically costs an annual fee in the order of 1% to 3% of the face value, plus a one-off establishment fee, and the bank secures it against either a cash term deposit or your property. The fee is charged for the whole time the guarantee is on issue, not only when it is called, so a guarantee left in place after the underlying obligation has ended continues to attract the fee.
Published rate cards from Australian banks have shown fees broadly in the range of 1.5% to 3.5% per annum, sometimes charged six-monthly in advance, often subject to a minimum charge, and typically higher where the facility has no expiry date. Those figures move with the provider and the deal, so treat any range as indicative and obtain a written quote rather than relying on published pricing. The rate offered may depend on the guarantee amount, the security provided, and how long the facility runs. As an illustration of scale only, a fee of 2% per annum on a $500,000 guarantee is $10,000 for each year the guarantee remains on issue, in addition to any establishment fee.
How the bank secures the exposure also affects the feasibility. Two broad options tend to apply. The bank can hold cash as a term deposit equal to the guarantee, which is clean and cheaper on fees but takes that cash out of the deal. Or it can secure the guarantee against property or against your existing facility, which leaves the cash available but counts the guarantee against your borrowing capacity and against the security the lender is relying on for the construction loan. On either approach the guarantee is not genuinely “off balance sheet”: it is either cash locked in a term deposit or a claim on the same headroom needed for the build. On that basis, guarantees form part of peak debt and funding exposure rather than sitting outside it.
Most guarantees used in development are unconditional, meaning the bank pays on a compliant demand without the beneficiary having to prove the underlying default first. That is what makes them valuable to the beneficiary and what creates the exposure for the customer, and the distinction between a conditional and an unconditional undertaking governs how readily the money can be taken.
Where do developers actually use bank guarantees?
Across a project, bank guarantees appear most often in three places: as security to a council for subdivision or development works, as security to a landlord under a lease, and as security inside a construction contract in place of, or alongside, cash retention. Each has its own release trigger.
Council bonds for subdivision and development works
Councils commonly take a bank guarantee as a “bond” to secure completion of works tied to a subdivision or development consent, and release it once the works are finished and any maintenance period has passed. The works might be roads, drainage, footpaths, landscaping, or the repair of council assets that construction traffic could damage. Rather than rely on the works being completed or made good, the council holds security it can call on if they are not.
Council policies set out the mechanics and vary between councils, so the policy attaching to the specific consent governs. Wollongong City Council, for example, publishes a policy on bank guarantees for subdivisions and development covering how guarantees are received, retained, and released. In Western Australia, the Shire of Esperance sets out when it will accept a development performance bond or bank guarantee to secure compliance with planning approvals. The common pattern is that a portion may be released on practical completion of the works, with a balance held through a maintenance or defects period (often six to twelve months) and released once the council is satisfied nothing has failed.
Two mechanical points follow. First, the guarantee amount is set by the council’s estimate of the works, so that estimate determines how much capacity is tied up. Second, release is generally not automatic: the applicant has to request it and provide evidence that the works are complete. A guarantee left open past the maintenance period continues to attract the fee and continues to consume capacity.
Security under a commercial or retail lease
Where a developer holds completed stock and leases it, or takes premises for a display suite or head office, the landlord will usually require security, and a bank guarantee is a common form because it is unaffected by the tenant’s insolvency in the way a cash bond can be. If the tenant goes into liquidation, a cash security deposit can become caught up in the administration, whereas the landlord can still call on a bank guarantee.
The amount and the rules around return depend on the lease and on state legislation. A guarantee equal to around three months’ rent (plus GST) is a common requirement, and in the Australian Capital Territory the Leases (Commercial and Retail) Act 2001 caps the security a landlord can require at three months’ rent. In New South Wales, the Retail Leases Act 1994 requires a landlord to return the bank guarantee within two months after the tenant completes its obligations under the lease, and makes the landlord liable for loss caused by failing to do so. Small Business NSW summarises the practical position on bank guarantees as lease security.
For a tenant, the guarantee does not lapse on handing back the keys. The obligations under the lease have to be completed (make good, any arrears) and the return then has to be pursued, and until it is, the fee continues and the guarantee continues to sit against the tenant’s limits. For a developer acting as landlord, the position is the reverse: the lease and the relevant Act set what may be held and when it must be returned, and in some jurisdictions late return carries a statutory liability.
Security inside a construction contract
Inside a construction contract, security protects the principal (often the developer) against the contractor failing to perform, and it can take the form of cash retention, a bank guarantee, an insurance bond, or a combination. This is where “performance bond”, “performance security”, and “retention” describe the same underlying function: giving the principal something to draw on if the builder does not finish, or leaves defects. The amounts and timing are set by the contract and by security-of-payment law rather than by a bank’s product terms.
How does performance security work in a construction contract?
Performance security gives the principal a pool it can call on if the contractor defaults. On many Australian contracts it is set at 5% of the contract sum, built up as the job runs and released in two steps around practical completion and the end of the defects period. The instrument might be cash withheld from progress claims (retention), bank guarantees the contractor lodges up front, or an insurer’s bond. The mechanics are usually driven by the standard-form contract, most often the Australian Standard AS 4000 General Conditions of Contract, which Standards Australia updated to AS 4000:2025 on 30 June 2025 in its first substantial revision in nearly three decades. Legal commentators have set out the key changes in AS 4000:2025, though the security regime remains familiar in shape.
For the developer sitting as principal, three questions determine the position: how much is held, in what form, and when it must be returned. Security set low leaves the principal less protected if the contractor fails. Security set high ties up the contractor’s own capacity, which can be reflected in the tender price.
How much security, and when does it come back?
A common commercial setting is retention of 10% of each progress claim until the total held reaches 5% of the contract sum, followed by a staged release: commonly around half at practical completion and the balance after the defects liability period. That pattern reflects market practice and the standard-form contracts rather than a statutory requirement, so the figures that apply to any given job are the ones in that contract.
The timing is what moves cash. Under AS 4000, the principal’s entitlement to security reduces on the issue of the certificate of practical completion, commonly by half, with that portion released within the period the contract specifies, and the remainder held through the defects liability period and released after the final certificate. On a $10,000,000 build, 5% security is $500,000, and releasing half at practical completion returns $250,000 to the builder months before the defects period ends. That timing affects the contractor’s working capital, and the cost of capital tied up in security can be reflected in tender pricing, so a contract that permits substitution of a bank guarantee for cash retention, or that releases security promptly, may affect the price tendered.
Standard contracts generally permit substitution. A party may swap a bank guarantee or insurance bond for cash retention, so a contractor can lodge guarantees at the start rather than have cash withheld, and can substitute a different form of security as the job progresses. From the principal’s side, holding bank guarantees rather than cash provides the security without withholding the contractor’s money.
Retention money now sits in trust, and the rules differ by state
Where a builder withholds cash retention from subcontractors, several states now require that cash to be held in a dedicated trust account rather than used as working capital, and the thresholds differ. This is primarily the head contractor’s obligation, but it affects a developer because it bears on the builder’s cashflow and therefore on their tender.
In New South Wales, the Building and Construction Industry Security of Payment Regulation 2020 requires a head contractor on a project of $20,000,000 or more to hold subcontractor retention money in a trust account with an authorised deposit-taking institution (ADI), and to pay it in within five business days. The New South Wales Government’s guidance on retention money held by head contractors sets out the practical duties.
In Queensland, retention money can sit in a retention trust account under the project trust framework in the Building Industry Fairness (Security of Payment) Act 2017. The Queensland Building and Construction Commission publishes the current trust account requirements, including which contracts are covered. The planned lowering of the thresholds to private contracts above $3,000,000 and then $1,000,000 was paused pending review, so the applicable threshold should be confirmed for the specific contract rather than assumed.
In Western Australia, the Building and Construction Industry (Security of Payment) Act 2021 introduced a Retention Trust Scheme which, from 1 February 2024, applies to eligible construction contracts with cash retention above a $20,000 threshold (including GST), materially lower than the eastern states, with retention money to be paid into trust within set timeframes and penalties for non-compliance. Western Australia also permits a party to substitute a compliant performance bond for cash retention, and regulates performance security through the same security of payment framework.
The remaining states and territories are less prescriptive on retention trusts, so the position tends to fall back on the contract and general security-of-payment law rather than a mandatory trust scheme. In each jurisdiction the same mechanical point applies: a builder’s retention obligations affect their working capital, and that can be reflected in the tender. Retention sits alongside the construction contingency as one of the buffers a build carries against things going wrong.
Can the other side just call on your bank guarantee?
Where the guarantee is unconditional, the beneficiary can generally call on it by presenting a compliant demand, and a court will only intervene where the call is fraudulent, unconscionable, or barred by the contract itself. This reflects the “autonomy principle”: an unconditional guarantee is treated as a promise by the bank that operates independently of the dispute between the customer and the beneficiary. The bank pays first, and the question of who was right is resolved afterwards. An unconditional guarantee is commonly described in legal commentary as operating in much the same way as cash, which is why beneficiaries seek that form.
Australian courts have been consistent that they will generally not restrain a call on an unconditional guarantee. As Clayton Utz has set out on the right to call an unconditional bank guarantee, a beneficiary may call unless the recourse is fraudulent, the recourse is unconscionable under the Australian Consumer Law (ACL), or the contract contains an express or implied restriction on when the security can be called. The threshold for fraud and unconscionability is high, reflecting that the security was agreed in order to allocate risk to the party providing it.
The position differs depending on which side of the instrument a developer sits. A principal holding security from a builder can generally call on an unconditional guarantee without first proving loss in court, and the drafting of the entitlement to call is what determines whether that is so, or whether the instrument operates as a conditional bond drawable only once a dispute is resolved. A developer providing a guarantee to a council or a landlord is exposed to a demand being made, and becomes liable to reimburse the bank for the amount paid, which means the substantive protection sits in the underlying contract rather than in the guarantee. Restraining a call by injunction is possible but, on the authorities above, difficult, so limits on recourse generally need to appear in the contract itself.
What is a deposit bond, and when does it suit a developer?
A deposit bond, also called a deposit guarantee, is a surety that stands in for the cash deposit at exchange, so a purchase can be secured without paying the deposit until settlement. The corporate regulator’s Moneysmart glossary defines a deposit bond as an instrument used in place of a deposit when a buyer exchanges contracts, guaranteeing that the buyer will pay the full deposit by settlement. It is issued by an insurer or surety, typically for any amount up to 10% of the purchase price, and it does not involve your bank or your cash at exchange.
The mechanics matter, because the bond is not a discount and not a way of paying less. At exchange, instead of transferring, say, $200,000 in cash as a 10% deposit, the buyer hands the vendor the deposit bond. At settlement the buyer pays the full purchase price, which includes the deposit amount not paid earlier. The bond bridges the gap between exchange and settlement. If the buyer defaults and the vendor becomes entitled to the deposit, the surety pays the vendor the deposit amount and then recovers it from the buyer. The deposit remains owed either way; the bond changes when and how the cash moves.
For a developer, the application is controlling a site without tying up cash between exchange and settlement, particularly on longer settlements. On land bought off the plan, on a delayed settlement, or under a structure with a long gap to completion, a deposit bond allows the purchase to be committed to while the cash that would have sat as a deposit remains available for due diligence, holding costs, or another transaction. It sits alongside instruments such as put and call options for controlling a site while a scheme is approved, in that both secure land without deploying full capital early.
What does a deposit bond cost?
A deposit bond is generally priced as a one-off fee rather than an ongoing charge, with short-term bonds priced as a percentage of the bond amount and long-term bonds (used for off-the-plan and extended settlements) priced by amount and term. Published issuer pricing for a long-term bond covering an off-the-plan purchase of up to around four years has commonly fallen in the order of 1.2% to 2% or more of the deposit amount for each year of the bond term. Pricing depends on the amount, the term, and the surety’s assessment, so treat any range as indicative and obtain a quote for the specific transaction.
The comparison against the alternative depends on the numbers. On a $200,000 deposit tied up for two years, a bank guarantee at roughly 2% per annum would cost around $4,000 a year and lock up either the cash or the borrowing capacity for the whole period. A deposit bond may cost a one-off fee in a broadly similar range but generally does not consume bank limits, which is the principal difference where capacity is constrained. Whether the bond costs less overall depends on the term and the rate, so the comparison turns on the specific deal rather than a general rule.
When a deposit bond is the wrong tool
A deposit bond does not fit where the vendor needs to receive cash, where the vendor will not accept a bond, or where the absence of an up-front payment leads a buyer to over-commit. Some vendors, particularly private ones, require the cash deposit in hand and will not take a bond. On a purchase where the deposit is released to the vendor early (a released deposit), a bond may not fit, because the vendor wants funds rather than a guarantee of funds.
Because a deposit bond does not require cash up front, the cost of tying up a site is deferred rather than removed, and the obligation behind it is unconditional. If the contract is not completed and the buyer is at fault, the surety pays the vendor and then recovers that amount from the buyer, together with costs, and the vendor’s other remedies under the contract remain available. A bond changes when the deposit is funded. It does not reduce the amount owed, and it does not alter the merits of the acquisition.
Surety and insurance bonds: an alternative that generally does not consume borrowing capacity
A surety bond (also called an insurance bond) performs the same function as a bank guarantee but is issued by an insurer rather than a bank, and generally does not tie up cash or consume bank limits. Australian surety providers issue unconditional, on-demand bonds as an alternative to bank guarantees and cash retention, with the capacity provided sitting alongside bank facilities rather than reducing them.
The reason this matters is the contingent-liability position described earlier. A bank counts guarantees it has issued against your overall limits, so a guarantee on issue is capacity unavailable for the build. A surety bond is backed by the insurer’s underwriting and an indemnity from the customer rather than by a bank facility, so it can leave borrowing capacity available for the construction loan. For a developer running several projects, where bank capacity is the binding constraint, moving lease and council security onto surety bonds can free up headroom. The security-of-payment reforms have moved in the same direction in construction, with Western Australia and New South Wales among the jurisdictions that expressly allow a contractor to substitute a compliant performance bond for cash retention.
The trade-offs vary by deal. Surety pricing can differ from bank pricing and depends on the covenant and the project, some beneficiaries (certain councils and landlords in particular) specify a bank guarantee and will not accept a bond, and the surety will underwrite the customer much as a lender would. Some providers also offer bank guarantees without requiring property security. Whether a beneficiary will accept a surety bond in place of a bank guarantee is a matter for negotiation in each case.
A different kind of guarantee: the NSW Pre-sale Finance Guarantee
The New South Wales Pre-sale Finance Guarantee is not a bank guarantee. It is a government commitment to buy off-the-plan dwellings so a developer can meet a lender’s pre-sale condition and draw down construction finance. It is worth distinguishing, because it solves a different problem: not securing an obligation, but satisfying the pre-sale condition a lender sets before releasing construction funding.
The scheme works by having the government commit to purchase off-the-plan dwellings in eligible residential developments so lenders will approve finance and construction can start sooner. The published settings are as follows. The commitment can cover up to 50% of dwellings in a project, rising to 75% for developments under 20 dwellings and up to 100% of affordable dwellings delivered by registered community housing providers, capped at $50,000,000 per project and $30,000,000 for the smaller and affordable categories. Eligible dwellings are valued at up to $2,000,000, or $2,500,000 for homes with three or more bedrooms. The government’s commitment is at a minimum 10% discount to independently assessed market value, though that minimum discount does not apply to affordable housing providers, and the commitment is renounceable, so dwellings can be on-sold to private buyers at full market price at any time. The program is backed by a $1,000,000,000 revolving fund and is stated to run from October 2025 to September 2030.
The scheme carries fees. The government charges an application fee (from $10,000 up to $40,000 depending on the commitment sought), an establishment fee ($10,000 to $50,000), and a monthly line fee calculated at between 1% and 1.5% per annum on the outstanding commitment. Eligibility generally requires planning approval, a lender’s indicative term sheet showing the pre-sale requirement, a minimum of four dwellings, and the ability to start construction within six months of formal contracts. For a project with approval in place where a lender’s pre-sale condition has not been met, the scheme provides a route to satisfying that condition and reaching construction loan drawdown. It applies only in New South Wales, and the fees form part of the cost of the finance.
How do guarantees and bonds change your feasibility?
Guarantees and bonds affect a feasibility in two places: as a direct cost (the fees) and as a constraint on capacity (the cash or borrowing headroom they lock up). The fees are readily modelled as cost lines and are rarely large enough to change a decision on their own. The capacity effect is less visible, because every guarantee on issue is either cash that cannot be deployed or borrowing capacity that cannot be drawn for the build.
Take a mid-sized project carrying a $400,000 council bond, a $150,000 lease guarantee on a display suite, and $500,000 of construction security. That is over $1,000,000 of security on issue. As fees, at say 2% per annum, that is around $20,000 a year. As capacity, it is more than $1,000,000 of cash or bank limits unavailable to fund land and construction across the life of the project, and on a capital-constrained deal that can be the constraint that brings more expensive mezzanine finance or equity into the stack. The choice of instrument, bank guarantee against surety bond against cash, determines which of those resources is consumed.
Carrying each guarantee or bond fee as a cost line, and reflecting the cash or facility capacity it consumes, keeps the security visible against total development cost and against peak debt rather than being treated as an administrative item to be settled later. The fees are small. The capacity they consume is not.
How do bank guarantees and bonds work in New Zealand?
New Zealand uses the same core instruments, bank guarantees for leases and council works and bonds inside construction contracts, but its retention rules were overhauled in 2023 and now require retention money to be held on trust automatically. For a developer working on both sides of the Tasman, the lease and council-bond picture is broadly familiar, while the construction-retention regime is stricter than in most Australian states.
The key change is the Construction Contracts (Retention Money) Amendment Act 2023, which took effect on 5 October 2023 and amended the Construction Contracts Act 2002. Under the reformed regime, retention money is automatically deemed to be held on trust for the party it is withheld from, so the holder does not have to actively create a trust. The holder must keep the money in a separate New Zealand bank account used only for retentions, report on it roughly every three months, and faces penalties of up to $200,000 for a company and up to $50,000 for a director for non-compliance. The Act also allows a party to hold a “complying instrument”, such as a bond, instead of depositing cash retention, which mirrors the substitution used in Australia. Performance bonds on New Zealand jobs are commonly issued under the NZS 3910 standard construction contract.
For leases and consent-related security, New Zealand practice tracks the Australian pattern: a bank guarantee is the usual form of lease security, and bonds secure completion of works tied to a resource consent or subdivision. Deposit bonds exist in New Zealand, though they are less prevalent than in Australia. The same mechanics apply as in Australia: release triggers are set by the underlying document, a guarantee left open past the obligation continues to attract fees, and the security forms part of the project’s funding exposure.
Getting the security question right before you sign
Security instruments look administrative and operate financially. A bank guarantee, a performance bond, and a deposit bond each allow a counterparty to be given comfort without handing over cash, and each costs a fee for as long as it remains on issue while tying up either cash or the borrowing capacity needed for the build. The choice of instrument determines which of those resources is consumed, and on a capital-constrained project that can matter more than the headline fee.
A few points follow from the mechanics above. The instruments are not interchangeable, and whether a surety bond or a deposit bond can be used in place of a bank guarantee depends on what the beneficiary will accept. Every guarantee has a release trigger set by the underlying document, and until release is obtained the fee continues and the capacity remains committed. Where limits on recourse exist, they sit in the underlying contract rather than in the guarantee itself. And because security is both a cost and a capacity constraint, it forms part of the funding position for a project rather than a separate administrative item. How each of these applies turns on the specific contract, the counterparty, and the provider.
This guide is general information for property developers and others in the industry, not legal, tax, credit, or financial advice. Bank fees, surety pricing, council policies, and the security-of-payment rules referenced here change and vary by provider and by deal, so confirm the current position and the primary source for your own project, and obtain advice on your specific circumstances before you commit.