What happens when your builder goes bust?

Porter Davis, BA Murphy Constructions, LDC, Pivotal Homes… there’s no doubt that the past few years have been rough for residential building, with a laundry list of companies entering administration.
Those companies are just the tip of the iceberg, though.
According to ASIC, there were 2977 insolvency appointments in the construction industry in the 2024 financial year – almost double the 10-year average.
The rise in insolvencies can be traced back, in part, to the pandemic and the impact that supply chain issues have had on the cost of materials.
“Since 2019, we have seen the cost of home building increase by 40%,” says, the chief executive of Master Builders Australia.
The industry has been hit by a plethora of issues that have left many builders unviable.
“Tradesmen shortages, planning and licensing delays, draconian industrial relations changes, material cost inflation, inefficient regulation, unfeasible lending practices and risk allocation are compounded to make projects unsustainable.”
Thousands of homeowners have also been caught out by these collapses. Many have been left out of pocket and face a time-consuming journey to get their work finished – if they can afford it.

So, for Australians looking to build or renovate a home, is there anything they can do to avoid getting caught out by a builder going bust? And if the worst happens, what are the avenues available to recoup costs and complete the work?

How to vet your builder
It’s ultimately difficult for a landholder or homeowner to know if the builder is experiencing problems or on the verge of collapse without intimate knowledge of their financial situation.
That’s not to say that people need to go in blind. In NSW, for instance, residents can take advantage of the relatively new Independent Construction Industry Rating Tool (iCIRT), which assesses building professionals and their track records using a star system.
For people who have already chosen a builder, there are a few red flags to watch for along the way.
What we recommend our clients is to ensure their builder has domestic building insurance.
It’s a bad sign if a builder isn’t forthcoming with a policy, so she says that people should avoid paying a cent until they see it.
Then, when you’re actually building, the second point we always give is don’t become a victim of a builder’s bad financial management – don’t ever fall victim to a builder asking for another $20,000 to get a project across the line or to get it done faster.
The issue is that people have often been waiting years to get into their homes, so by giving their builder a few thousand dollars extra they may feel like they’ll move the process on. But this is often a sign of a drowning builder.
We strongly recommend people to seek legal advice before signing a contract.
Once you’ve entered into a building contract, it’s pretty hard to get out of, unless you were subject to finance and that didn’t come through.

Where insurance can help
Insurance can provide a financial safety net – to some degree – in the event that something goes wrong in the construction or renovation process, such as a builder going bust.
In most parts of the country, it’s mandatory for builders to take out some sort of domestic building insurance before work begins and money changes hands. It is the builder who must take out the insurance. It has to be taken out at the start of the contract or the start of the works. The insurance policy must reflect the contract. It must have the same builder’s name, the same home address, the same contract price and the same owners listed as on the contract.

The type of insurance and details vary among States and Territories.
For example, licensed builders and other tradespeople working in NSW are required to take out cover through the Home Building Compensation Fund (HBCF) for projects valued at more than $20,000.
This covers homeowners for losses resulting from defective and incomplete work in the event that their builder becomes insolvent, dies, disappears or has their licence suspended. For policies taken out after February 1, 2012, the maximum compensation is $340,000 per dwelling.
Aside from building insurance, homeowners who plan to renovate their existing property should notify their existing home and contents insurance provider before work starts.

When your builder disappears
The process for obtaining compensation and finishing construction or renovation work after a builder enters administration isn’t necessarily straightforward. Nor is it likely to be quick.
In some cases, people won’t even be aware that their builder has gone bust for some time.
The smaller builders tend to just disappear and stop responding to emails or calls and there will be no one on site, so it might take a few weeks before people even realise that the builder has gone under.
If a builder enters administration, customers are likely to be on the list of eligible creditors, which means that it’s worth contacting the administrator to be kept abreast of any developments.
We also suggest that this is the time to seek legal support, if required, as there are likely to be insolvency provisions in the building contract.
You might want to stick it out and wait and see if anything is going to be resolved. Or you might decide to see if the builder is going to sell the rights to your contract to another builder.
That was an option for customers left with unfinished homes after the collapse of Porter Davis last year, with a number of other builders, including Metricon and Simonds, stepping in to finish the builds.
You might choose to terminate immediately, make your claim with the insurer and begin getting quotes to bring your claim so that you can finish your build.
It’s not a quick process by any means, though. Typically, you need a couple of different builders to quote on the works. You need a report on what’s defective, what’s finished, what needs work and anything that might need immediate attention to secure your property. Then you start dealing with the insurers to figure out what they are going to pay for and what shortfall you’re going to have.

Rebuilding consumer trust
While the number of builder insolvencies reached a decade-high last financial year, evidence is starting to emerge that brighter days are ahead.
With fixed-price contracts, builders weren’t able to complete homes within the contracted period and we saw a pickup in insolvencies as a result of that. We’ve seen materials prices rise by just 1.1% in the 12 months to June this year and build times are now back to what they were pre-pandemic. So, the industry is heading for a much more normal cycle.
What might need more time to repair is consumer confidence. We’ve seen this among our more cautious clients.
I think there’s been a loss of trust in the industry. There’s also concern around the number of builders that pop up for a while and then disappear. Everyone is edgy.
For people who do their due diligence and can afford the cost of a new build or renovation, now could even be an opportune time to go ahead. Activity has dropped off and builders are competing for customers at present.
It has been very much a boom-bust cycle for the industry, because as quickly as activity picked up at the start of the pandemic, it has slowed over the past 12 months. So, now we’re looking at the lowest level of building activity in a decade and we’ve seen renovation activity fall significantly.
The volume of building activity on the ground is slowing as a consequence of the rise in interest rates, so it is a very competitive time now where builders are fiercely competing for a very small number of customers in the market.

How homeowners are protected
The question of building insurance is complex, because schemes differ across States and Territories. Here’s a guide to what, who and how much they cover.

Australian Capital Territory
• Scheme/insurance: residential building insurance.
• Minimum cost of work: $12,000.
• Cover: Up to $85,000 (set to increase to $200,000 from January 2025).
Building work on houses and apartment buildings (three storeys and below) valued at more than $12,000 must be covered by residential building insurance. It protects owners against financial loss for incomplete or defective work should a builder die, disappear or become insolvent. Builders are responsible for taking out insurance and providing owners with evidence of it before work commences.

New South Wales
• Scheme/insurance: Home Building Compensation Fund (HBCF).
• Minimum cost of work: $20,000.
• Cover: Up to $340,000 (for policies issued after February 1, 2012).
The fund provides insurance cover for residential building projects and it’s mandatory for builders and tradespeople to take out on projects valued over $20,000. The HBCF will compensate homeowners for losses that occur from defective or incomplete work in the event that their builder becomes insolvent, dies, disappears or has their licence suspended.
Northern Territory
• Scheme/insurance: residential building cover.
• Minimum cost of work: $12,000.
• Cover: Up to $200,000.
Residential building cover is provided in the form of a fidelity fund certificate. It covers owners if their builder goes bankrupt, dies, disappears or has their registration cancelled for costs they may incur to complete the work with a new builder or fix non-structural and structural defects. Registered builders have to obtain an annual level of cover and get a certificate for each eligible job.

Queensland
• Scheme/insurance: Queensland Home Warranty Scheme (QHWS).
• Minimum cost of work: $3300.
• Cover: Up to $200,000 (or $300,000 with additional cover).
The QHWS is an initiative administered by
the Queensland Building and Construction Commission (QBCC) providing home warranty insurance on residential projects valued above $3300. It’s paid via a premium on contractors to the QBCC when projects commence and it covers homeowners for financial loss if their builder doesn’t finish work or fix defects or if the building suffers from subsidence or settlement.

South Australia
• Scheme/insurance: building indemnity insurance.
• Minimum cost of work: $12,000.
• Cover: Up to $150,000.
Contractors undertaking any building work that requires council approval and costs more than $12,000 must take out indemnity insurance. This covers owners in the event that the builder dies, disappears or is declared bankrupt and the work is left incomplete or is faulty.

Victoria
• Scheme/insurance: domestic building insurance.
• Minimum cost of work: $16,000.
• Cover: Up to $300,000 (for policies issued on or after July 1, 2014).
Registered builders undertaking residential building work valued at $16,000 or more are required to take out domestic building insurance and provide proof of it to their customers before accepting payment for their work. The insurance is designed to cover owners if the builder dies, disappears or becomes insolvent before the work is complete (including defects).

Western Australia
• Scheme/insurance: home indemnity insurance.
• Minimum cost of work: $20,000.
• Cover: Up to $200,000.
Work valued over $20,000 undertaken by a registered builder is required to be covered. This provides cover for owners against financial loss if their builder dies, disappears or becomes insolvent and is unable to complete the work or meet satisfactory building standards. It needs to be obtained by the builder before work begins.

Tasmania
A home indemnity warranty scheme is in the process of being reintroduced.