Australia’s construction industry is experiencing an insolvency crisis. Here’s what to do if you suspect your builder is bankrupt

The end of COVID-19 didn’t herald the end of issues plaguing the construction industry, including lengthy wait times to complete homes and residential builders going bust.

Housing Industry Australia South Australian director Stephen Knight said the average time for a house to be finished is now about 14 months — still much longer than the six to nine-month timeframe it took to build a house before the pandemic.

There were also hundreds of building companies unable to recover. The Australian Security and Investment Commission reported 31 per cent of insolvencies — 783 businesses — in the September quarter of 2023 were in the construction industry.

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Knight said he was concerned about an uptick of insolvencies at the end of 2024 when construction demand was expected to increase again as state governments invest in more homes to tackle the housing crisis.

As happened when a number of big players went into liquidations in 2023, struggling builders have at times left customers in the dark about the progress of their homes and the company’s financial situation.

If that happens to you, here are a few things to keep in mind.

Step 1: Keep a record of communication

At the very beginning of the process of builder selection, Knight advises to check the company has a builder’s licence, and that it can provide a copy of its insurance covering the customer if the builder dies or becomes insolvent.

This insurance is compulsory in most states.

He also said it was important to ask around and read reviews relating to the business.

Builders who might be small or new might not have as many customer reviews. One way to research their history is to search the names of the company’s owners and directors.

P&B Lawyers partner Lindsay Kotzman said over the last year, his firm had supported an increased number of clients who were concerned about insolvent builders or who needed to terminate a building contract as a result of increased interest rates.

He stressed it was vital when building a new home to have the contract reviewed by a lawyer, even if it’s a template contract offered through Housing Industry Australia or the Master Builders Association.

He said template contracts can include broad terminology biased towards the builder and can make it difficult for customers to argue against in court.

“Whatever a builder promises you, if it’s not in writing, then it’s worth next to nothing … make sure it’s in the contract,” Kotzman said.

Regardless of strong protections in the building contract, a builder can face challenges completing work because of factors out of their control.

Kotzman said some of the signs that a builder is struggling could be missing milestones for each stage of the build, there have been lengthy delays between phases of construction, or if the quality of the work is less than expected.

The first step to consider if you suspect your builder is struggling financially is to raise the issue with your builder and keep a record of all these communications.

Kotzman said one part of this discussion could be asking the builder to prove it has the capacity to finish the home.

He said some builders invoiced customers for work that’s been incomplete.

He said it was essential customers did not pay builders for incomplete work because if the business collapsed, they may not be able to recover the extra money paid.

“If you think your builder has run into cash flow problems, you might say (to the builder), ‘you bring me the bill for your contactor, once he’s completed the job I’ll pay him direct’ and that comes off the (total) price,” Kotzman said.

Step 2: Go to the consumer watchdog

Knight said it was in the interest of the builder to have a house completed as quickly as possible because delays would mean the builder is not receiving payment for completed work.

But if customers have tried to communicate with the builder and are not receiving responses, they may approach the relevant consumer watchdog in their state to help facilitate mediation.

Consumer Business Services in South Australia, for example, issues building licenses.

In the event where there are concerns about a builder, CBS can suspend licenses and stop builders from taking on new clients.

If customers lodge a formal complaint with the consumer watchdog, they will be asked to provide evidence of their concerns, including emails, contracts and pictures.

Both the complainant and builder will then be contacted to set up a compulsory mediation meeting, which the builder must attend or risk receiving a fine or being prosecuted.

The purpose of the meeting is for both parties to reach an agreement, which must be complied with.

If the agreement is beached, the consumer authority can apply to a relevant court for an order enforcing the terms of the agreement.

If an agreement cannot be reached, the consumer watchdog may decline to be involved in the case.

Step 3: Consider involving a lawyer

In some circumstances, it might be worth finding a compromise with the builder to get the home finished because Kotzman said it was not ideal for either party to go to court because of the extra cost and further delays.

“If you need to give a little bit of time or possibly even a little bit of extra money in order to get the job done, it’s almost always going to be a lot cheaper than terminating the project and then trying to start all over again.”

“The costs of going to court will start at anywhere between $10,000 to $20,000,” he said.

There could also be a possibility that the builder is trading while insolvent, as is being investigated in the case of Felmeri Homes in Adelaide.

When customers have little faith that the builder will meet their demands, or they suspect the builder could be trading while insolvent, a lawyer should be involved.

“It’s usually money well spent to go to a lawyer to get the builder to fess up to the personal circumstances. It may way be the lawyer can negotiate an outcome with the builder,” Kotzman said.

Kotzman said if a customer cancelled their contract without fully understanding the risks they may be liable to pay the builder the loss of profits.

Building insurance

If customers are notified their builder is bankrupt, building indemnity insurance can be accessed for a new builder to complete or fix the existing work.

The insurance, which has different names depending on the state/territory, may cover all of the remaining build or a proportion of it, depending on the limit of liability.

QBE offers indemnity insurance in South Australia, Western Australia and the Australian Capital Territory.

It said in South Australia the insurance “covers homeowners for loss of deposit, incomplete or defective building work if their licensed builder dies, disappears or becomes insolvent.”

In Western Australia, the insurance can be claimed if the builder’s license is deregistered. In Victoria, it can be claimed if the builder fails to comply with a tribunal or court order and in NSW the insurance will apply in both circumstances.

In Queensland, the insurance can be used if a customer terminated their building contract because the builder defaulted on the terms of the contract.

When lodging a claim, the insurer will ask for the policy number, builder’s details, proof of payments, a copy of all contracts and construction plans and evidence of building contract termination.

With some insurers, customers can obtain quotes from a new builder of their choice, while the insurer will also contact a number of registered builders for quotes.

In the worst-case scenario that a customer cannot access the indemnity insurance because their case does not fit the criteria, the case could end up in court.

Kotzman said it was ideal if the original builder could complete the house because a new builder could be reluctant to take on a half-completed project fearing potential defects with the existing work.

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