What Happens If Your Builder Becomes Insolvent?

Construction is a high-turnover, low-margin business run substantially on other people’s money. A builder usually pays wages, subcontractors and suppliers before being paid for the same work, so even a profitable builder can fail on cash flow alone. When one does, the project stops, and everyone involved finds out at the same moment what their contract actually provided for.

The damage is rarely spread evenly. Whoever is furthest ahead on payments relative to the value of work in place loses the most, because the money has gone and the work is not there. On residential jobs that is often the owner, because a front-loaded stage payment schedule moves money ahead of value by design. On commercial jobs it is more often the subcontractors, who have performed and not been paid.

What compounds it is that an insolvency closes doors. Remedies available a week earlier can become unavailable or worthless: a claim against a company with no assets is an exercise rather than a recovery, and in several Australian jurisdictions a company in liquidation cannot use the statutory payment claim and adjudication process at all. Whether that applies to a particular matter turns on the Act in the relevant state, so it is worth checking rather than assuming.

The conclusion people reach afterwards is the useful one: almost everything that would have helped had to be in place before. That is why builder insolvency is a contract question first and a dispute question second.

Do not get ahead of the work. This is the single most effective protection and it costs nothing. Pay for value in place, satisfy yourself that the stage claimed has genuinely been reached, and resist a schedule that loads the early stages above their real value. Monthly progress claims assessed against work actually performed track value far more closely than fixed stage amounts do.

Have security, and know how it is called on. On residential work the statutory scheme is home warranty or home indemnity insurance, and in most states builder insolvency is one of the events it responds to. Confirm the certificate exists, is in the right name and matches the contract before the deposit is paid, because a policy that was never taken out is discovered at the worst possible moment. On commercial work, retention, a bank guarantee or an unconditional undertaking performs the same function, and the contract should be explicit about when it can be drawn on.

Check the entity rather than the name. Contracts are signed by companies, and the trading name on the signage is not always the contracting party. Confirm the builder’s licence is held by the entity actually signing, and consider whether a parent company or director’s guarantee is warranted on a substantial project.

Deal with termination and step-in expressly. A contract that anticipates insolvency says when it can be terminated, what happens to the site and to the materials on it, who owns the design documentation and whether it can be used to finish the work, and whether the principal may engage subcontractors directly. On larger projects, a deed with the key subcontractors can mean the work continues instead of stopping.

Keep records as you go. If it happens, your position depends on evidence: what was claimed, what was certified, what was paid, and what is actually on site and installed. That is far harder to assemble after the event than during it.

If it has already happened, move quickly and get advice on the specific facts. The early questions are which insolvency process the builder is in and who now controls the company, whether the contract has been terminated and by whom, whether an insurance claim is available and what its time limits are, and what should not be paid while the position is being worked out. Paying the wrong party after an insolvency event can create a second problem on top of the first.