Security and bank guarantee clause: what it means, a typical example, and what to ask for
A security clause requires you to give the builder a bank guarantee, insurance bond or cash retention it can draw on if you fail to perform. An unconditional bank guarantee can be called without proving anything first, so the controls are in the clause: when the builder may call it, how much notice you get, and when it comes back.
A typical builder version
The Subcontractor must provide unconditional undertakings for 5% of the Subcontract Sum. The Contractor may have recourse to the security at any time and without notice to the Subcontractor where the Contractor considers that it is owed any amount by the Subcontractor.
Illustrative wording of the kind found in builder-authored subcontracts, not taken from any one contract.
What it means for you
The builder can cash your guarantee whenever it believes it is owed money, without telling you first, and you are left to recover it later.
- Recourse without written notice.
- Recourse where the builder merely "considers" an amount is owed.
- Security on top of retention, taking total security above 5%.
What market looks like
Total security capped at 5%, recourse only for amounts due and unpaid after written notice (at least 5 business days), half returned at practical completion and the balance at the end of the defects period. In Victoria, since 15 April 2026, calls on security need at least five business days' notice under the Security of Payment Act.
What to ask for
"The Contractor may have recourse to security only for an amount due and payable by the Subcontractor that remains unpaid at least 5 business days after the Contractor has given written notice of its intention to have recourse, stating the amount and the basis."
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Common questions
Can a builder call on a bank guarantee without notice?
If the subcontract allows it, often yes; an unconditional guarantee is paid by the bank on demand. In Victoria, calls on security now require five business days' notice. Elsewhere, negotiate a notice period into the clause.
Is a bank guarantee better than cash retention?
Often, for cash flow: your money isn't held. But it ties up a facility with your bank and can be called quickly, so the recourse terms matter.
One clause rarely tells the whole story
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General information, not legal advice. Example wording is illustrative. Check any clause you rely on against your full contract and your state's Security of Payment Act. Written by Mat Kennedy, The Construction Contracts Co.