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Finding solid ground: What can I do if my home builder collapses?

Home is where the heart is. It's also the most significant investment most of us will make in our lifetime.

So, when news breaks about the collapse of a prominent builder, it's only natural to feel anxious about the security of your own home builder or to be wary about starting a new build.

There has been a disturbing surge in builder collapses across Australia, making thousands of homeowners, investors, and would-be home builders uncertain about the future.

What is causing these issues and is there anything you can do to protect yourself if you are already building, or thinking about building, your own home?

What is behind the recent spate of home builder collapses?

Over the past 12 months, the Australian construction industry has experienced a significant number of home-builder collapses, including high-profile name Porter Davis.

 

 

According to Australian Securities & Investment Commission data, 1236 companies in the construction sector had gone into liquidation, receivership, or administration up until March this year, compared with 1284 for the 2021-22 financial year.

And experts believe the pain is far from over, with AMP chief economist Shane Oliver expecting more builders to go bust.

The reasons for these collapses are multiple and complex, depending on the builder, but there are several common factors.

Rising material and labour costs

Australia has experienced a significant increase in material and labour costs, with a rise of 11.4 percent in the past 12 months. This has made it challenging for builders to maintain profitability while offering clients competitive pricing. Smaller builders, in particular, have struggled to absorb these higher costs, leading to financial distress and, in some cases, insolvency.

Global supply chain disruptions

The COVID-19 pandemic has profoundly impacted global supply chains, causing widespread disruptions in the delivery of essential materials for construction. As a result, builders have faced delays in obtaining necessary supplies. This leads to increased costs and project overruns, ultimately affecting their financial viability.

Spike in demand and fixed-price contracts

The construction industry experienced a surge in demand for new home builds and renovations thanks to help from the government, usually at fixed-price contracts. However, Master Builders Australia CEO Denita Wawn said builders did not anticipate the big rises in inflation. And while they factored in labour shortages, they did not expect those shortages to be as bad. Consequently, some building projects on fixed-term contracts were completed at a loss or with minimal profit margins.

Reduced availability of finance

The availability of financing for construction projects has become increasingly limited with the global repricing of real estate debt – exacerbated by the Credit Suisse fallout – shifts in investor sentiment and tightened lending standards. The reduced access to finance not only constrains the growth potential of the construction sector but also puts additional pressure on builders and developers who rely on external funding. This, in turn, can lead to delays or even cancellations of projects, further exacerbating the challenges the construction industry faces.

What can I do if my builder collapses?

If your builder collapses, it is natural to worry whether your home will ever be completed. While the road ahead will undoubtedly be stressful, there are several steps you can take to protect your interests:

1. 1. Examine your contract. This document should outline your rights and protections in the event of a builder's collapse. It may also provide details about warranties, insurance, and what happens if the builder cannot complete the project.
   2. Identify the liquidator. This person or company is responsible for winding up the builder's affairs, selling its assets, and distributing the proceeds to creditors. They will be your main point of contact regarding the company's insolvency.
   3. Stay informed. Ensure you are kept up-to-date on the progress of the liquidation process. This might involve subscribing to updates from the liquidator, keeping an eye on public notices, or regularly checking in with the liquidator's office.
   4. Attend creditors' meetings. These meetings can provide valuable information about the company's financial situation, the reasons for its failure and the expected outcomes of the liquidation. You will also have the opportunity to ask questions and, in some cases, vote on important matters.
   5. Keep detailed records. Lastly, get all your paperwork in order and maintain records for any future claims. This might include contracts, correspondence, invoices, receipts and any other documents related to your dealings with the builder. Comprehensive records can be instrumental if you need to lodge a claim or provide evidence of your financial loss.

It's also a good idea to seek legal advice to ensure you're doing everything possible to safeguard your investment.

Do I need to find a new builder to complete my home?

 

 

If your builder collapses, you will likely need to find a new builder to finish the project. Before engaging a new builder, consider the following steps:

• • Take control of the site and ensure it's secure. Secure the construction site to protect your investment and prevent unauthorised access, theft or vandalism. This may involve installing fencing, locks, or surveillance equipment and possibly hiring security personnel until you find a new builder.
  • Review your contract. It may specify what happens if the builder cannot complete the work. There might be a clause allowing for a replacement builder or providing other remedies.
  • Consult with the liquidator. If the builder has gone into liquidation, the liquidator might have specific instructions or advice for you about completing the work. They can provide guidance on how to proceed, whether it is feasible for another builder to take over the project, and any potential legal or financial ramifications.
  • Check your insurance. Depending on your location and the specifics of your contract, you may have home warranty insurance or other coverage that could assist in the event of builder insolvency. This insurance could cover the cost of hiring a new builder to complete your home.
  • Assess the status of your project. Evaluate the state of the build and identify the remaining work that needs to be completed. This will help you determine the scope of work for the new builder and ensure a smooth transition. If the job is near completion and you think it’s easier to engage subcontractors, check they are licensed builders. But remember: other expenses are associated with home building after it’s completed. Make sure you account for them too.
  • Research and select a reputable builder. Take your time to research and choose a new builder with a proven track record and solid reputation. Seek recommendations from friends, family or online reviews, and conduct thorough due diligence to ensure the new builder can complete your home to your satisfaction. And ensure the new builder has appropriate insurance.

What protection do I have if my builder collapses?

Protections for consumers vary according to where you live in Australia. In many cases, builders must take out insurance to protect their clients. Here is a brief overview of the requirements:

Australian Capital Territory

Under the Building Act, builders must provide residential building cover for all residential building work valued over $12,000. This insurance protects homeowners for up to five years from the completion of the project and covers loss due to the builder's insolvency, death, or disappearance.

New South Wales

In NSW, customers are protected through Home Building Compensation (HBC) cover, previously known as Home Warranty Insurance. Builders in NSW must take out HBC cover for residential building projects over $20,000, including the construction of new homes, renovations and extensions.

Northern Territory

In the Northern Territory, residential building protection is provided through a fidelity fund certificate, which covers homeowners against costs incurred when switching to a new builder if their current builder goes bankrupt. Homeowners can claim up to $200,000 for incomplete or defective homes, capped at 20 percent of the contract price. The certificate offers coverage for non-structural defects for one year and structural defects for six years.

Queensland

In Queensland, builders must provide Home Warranty Insurance for residential construction projects valued over $3300. The Queensland Building and Construction Commission (QBCC) provides the insurance. It covers homeowners for up to 6.5 years after completing the work or the builder's insolvency, death, or disappearance.

South Australia

Builders must provide Building Indemnity Insurance for all residential building work valued over $12,000. The insurance covers homeowners for up to five years from the completion of the project and protects against loss resulting from the builder's insolvency, death, or disappearance.

Victoria

In Victoria, builders must obtain Domestic Building Insurance (DBI), formerly known as Builders Warranty Insurance, for all residential building projects valued at more than $16,000. This insurance safeguards homeowners for up to six years after the project's completion or in cases where the builder becomes insolvent, passes away or vanishes.

Western Australia

Builders are required to provide Home Indemnity Insurance for all residential building projects valued over $20,000. This insurance covers homeowners for up to six years from the completion of the project or the builder's insolvency, death or disappearance.

Tasmania

Under the Building Act 2016, homeowners are encouraged to seek appropriate insurance coverage to protect themselves against potential risks.

What if the builder has been taking my money while insolvent?

If your builder faces insolvency and stops working on your project, you might want to end the contract and hire a new builder. But you must be careful when doing this. The ipso facto provisions in the Corporations Act 2001 prohibit contract termination solely due to the builder's insolvency. You should get legal advice to know the proper steps to take and how to handle notices in the contract.

 

 

Also, pay attention to any money claims the builder made before and during their insolvency. Different laws apply in each state and territory, and builders might still be able to ask for money even if they have financial issues. Again, talk to a legal expert to understand how this works in your area.

Lastly, if you have an agreement involving your builder and a bank or financial company, the builder's financial problems might affect that agreement. Check these agreements and ask a legal expert if you need permission from the bank or financial company before taking action against the builder. This helps you avoid breaking any rules in the agreement and putting your project at risk.

If I want to build a home, how can I protect myself?

All this talk about home builders going under might make you nervous about building your own home. But there are thousands of new homes built around Australia each year without any major issues and there’s no reason why yours shouldn’t be one of them. Given the scale of your investment, however, you should always do what you can to protect yourself. Here are some steps you can take:

• • Research builders. Before selecting a builder, conduct thorough research. Look at their past projects, read reviews, and speak with previous clients if possible. In addition, a credit check can provide insight into the builder's financial stability. This can be a strong indicator of their reliability. Some have public records of their financial statements.
  • Verify insurance. Request to see the builder's insurance policy and understand what it covers. This will help ensure you are protected in case of unexpected circumstances, such as a builder's insolvency, construction delays, or building defects.
  • Obtain adequate insurance. If the builder's insurance doesn't cover all potential risks, consider taking out additional insurance for full protection. This could include home and contents insurance, public liability insurance, or construction and renovation insurance.
  • Avoid pre-contract deposits. Don't make a deposit payment before the contract is officially signed, especially when buying off the plan. Pre-contract deposits aren't typically covered by insurance . Which means you could lose your money if the builder goes under before work starts.
  • Understand your contract. Before signing, ensure you fully understand your contract and the builder's obligations. You should seek legal advice to ensure you're not missing any important details.

When everything crumbles…

Building your own home can be a fraught time without the additional stress of your builder collapsing. Even if you feel like you’re in good hands, take a closer look at your contract and see if you can add any other protections, such as taking out additional insurance.

And if you’re planning to build, a few extra checks before you sign on the dotted line could save you a heap of heartache in the future.

As always, if you’re having a problem with your builder, get in touch, and we’ll help you handle it.