01 May 2026
10 min read
#Construction, Infrastructure & Projects
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Victoria’s amended Building and Construction Industry Security of Payment Act 2002 (Vic) (SOP Act) is now in effect, following the commencement of changes introduced by the Building Legislation Amendment (Fairer Payments on Jobsites and Other Matters) Act 2025 (Vic) on 15 April 2026.
For the construction sector, the regime now allows a greater scope of claims to be brought through the process and introduces new provisions that affect commercial risk allocation on existing and future construction projects. It also brings Victoria into line with similar laws in other jurisdictions.
Our overview of the key changes under the amended SOP Act provides further context. This article examines the new statutory process for claiming the release of performance security, a mechanism that did not exist under the previous legislation.
A construction contract usually requires a contractor to provide security, typically in the form of cash retention or a bank guarantee, to secure the performance of its obligations under the contract. If the contractor defaults or fails to perform its obligations, the contract usually sets out the principal’s entitlement to have recourse to that security.
The principal is also required to return security at certain stages of the works being performed, usually as determined by the superintendent (if one is appointed). The most common approach is that 50% of the contractor’s security is released at practical completion, with the balance released at final completion.
For simplicity, this article refers to principals and contractors, but the equivalent applies to a head contractor holding security as against a subcontractor or supplier.
Previously, contractors had no entitlement to seek the return of performance security under the SOP Act, with all rights governed by the construction contract and common law.
A principal may call on or have recourse to a contractor’s performance security where the contract terms allow for that to occur. For example, clause 5.6 of AS 4300-1995 sets out a conditional framework requiring three conditions to be established before the principal is entitled to have recourse to the security:
However, under existing market practices and in many principal-friendly construction contracts, this standard clause is amended to remove the conditional requirements of a call on security. For example, by:
In light of this amended framework, which is principal-friendly, principals often hold security for an prolonged period and may be entitled under the relevant contract to call on security in relation to amounts owing under that contract, even where a contractor has previously made a successful security of payment application.
The amended SOP Act now provides contractors with a statutory mechanism to seek the return of security. This provides contractors with a new tool they would not otherwise have to shift the balance of risk with respect to the practices described above.
The amended legislation introduces new sections 17A to 17G, which permit a person who claims to be entitled to the release of all or part of a performance security to serve a claim on a person who, under the relevant construction contract, is or may be liable to release that security.
Section 4 of the amended SOP Act defines ‘performance security’ to include a performance bond or retention money.
A ‘performance bond’ is defined as “a security issued to or executed in favour of a party to a construction contract to secure the performance by another party of obligations under the contract”. The definition expressly includes both a guarantee and a bond, and is likely to apply broadly to most forms of security provided in the current market.
On the other hand, ‘retention money’ is defined as money that is retained under a construction contract as security for the contractor’s performance. This can include money that the principal withholds from payments otherwise due to the contractor or money that the contractor pays to the principal which is then held as security.
Importantly, a claim for the release of all or part of a performance security is unaffected by the termination, purported termination or expiry of the relevant contract under section 17A(3) of the amended SOP Act.
The amended SOP Act allows a contractor to directly claim the return of security. Under section 17A(2) of the amended legislation, any such claim for the return of security must:
Section 17B of the amended SOP Act provides that a claim for the release of performance security may be served no earlier than the earliest of either:
There is no express statutory right to make a claim for the release of performance security at practical completion unless that right is prescribed by the relevant contract. Many construction contracts provide for a release of half of the security at practical completion and the other half at the end of the defects liability period. Whether a performance security claim under the amended SOP Act is available at practical completion therefore depends on the wording of the contract.
Critically, section 17B may allow a claimant to make a claim for the release of security 20 business days after the expiry of the defects liability period (typically 12 months after practical completion), even if other requirements for final completion have not yet been achieved. For example, while the contract may require that the provision of a deed of release or that there be no ongoing disputes in order for final completion to be achieved, the amended legislation may allow a claimant to claim security under those circumstances.
Section 17C creates a deadline by which a performance security claim must be made, which is, in summary, the latest of:
This creates a potentially very narrow window to make a performance claim, with the earliest date potentially being a minimum of 20 business days after the defects liability period ends (under section 17B), and the deadline being the last day of the following month (under section 17C). For example, if the defects liability period ended on Wednesday, 29 April 2026, the earliest date to make a performance security claim would be Thursday, 28 May 2026, and the last business day to make the claim would be Friday, 29 May 2026 (a two business day window). This is, of course, subject to the wording of the contract allowing a longer window to make a claim.
Section 17D expressly prohibits ‘contracting out’ of sections 17A to 17C of the amended SOP Act, and any term of a construction contract that seeks to delay the release of performance security beyond the time prescribed under the amended legislation is void.
In a similar manner to payment claims made by a contractor, section 17E of the amended SOP Act introduces the concept of a performance security schedule.
As for payment schedules, where a respondent fails to serve a performance security schedule, the claimant may:
Under section 18A(2), similarly to where a respondent fails to issue a payment schedule in response to a payment claim, a claimant for performance security must provide a ‘second chance’ notice to a respondent that fails to issue a performance security schedule on time, if the claimant intends to seek adjudication for return of its performance security.
New section 17H of the amended legislation limits a principal’s entitlement to seek recourse to a contractor’s performance security. In particular, recourse to performance security is now prohibited under the amended legislation unless notice has been given, meaning that existing clauses which dis-entitle the contractor to notice of a call are now invalid.
Under section 17H(1), a principal must notify the contractor of its intention to have recourse to the performance security and wait at least five business days, or a longer period if prescribed under the contract, before having recourse to that security. Section 17H(2) sets out the requirements of the notice of intention to have recourse, which includes, amongst other things, a description of the circumstances that entitle the principal to the security.
As a result of these amendments, principals will be required to more carefully consider their entitlement to the contractor’s performance security and will need to ensure that notice is given.
On the other hand, contractors have some greater comfort that their security will not be accessed by the principal without prior notice, and a principal doing so would likely enable the contractor to file an injunction or otherwise resist the call.
It is now imperative that parties to construction contracts consider what types of amendments should be made to existing contract templates. For example, any clauses which link the release of security to a contract up the chain or ‘no injunction’ clauses should be closely considered to determine if they are compliant with the amended SOP Act.
Both principals and contractors alike should familiarise themselves with the new process for making and responding to claims for the return of performance security. Principals should consider how to protect their commercial objectives by other means, such as whether contract requirements should be brought forward in the project timeline to avoid being in a position where a contractor has not completed all requirements at final completion, but nonetheless has a statutory entitlement to the return of its performance security.
Holding Redlich’s team of experienced construction lawyers is well-placed to assist industry participants as needed with these crucial amendments. If you have questions about the amended SOP Act or need assistance with reviewing current contracts, please contact partners Lachlan Ingram or Dado Hrustanpasic. You can also watch our on-demand video here which covers the amended legislation in more detail.
Disclaimer
The information in this article is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.
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