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For the growing number of Australians who’ve been hit by the construction sector crisis, there has been some steep learning about building contracts and insurance cover. And with high-profile insolvencies in the construction sector set to continue, as inflation predictably worsens, understanding what’s going on with the building sector in Australia – and how to protect your own homeownership plans – is important.

What is behind the construction sector crisis?

Insolvencies in the sector are heading towards a 10-year high. The figures from ASIC reveal an average of five Australian construction companies are collapsing every day.

In a recent ABC news report, Master Builders Gold Coast regional manager Adam Profke described the crisis as “an exceptionally tough time; it's unprecedented”.

The reasons behind it, he says, include “rising prices, labour shortages and interest rate increases” that led to cost blowouts, which meant builders on fixed-price contracts became unable to sustain the financial losses.

The laws around fixed-price building contracts vary across Australian states and territories but the end result when things go wrong is the same – builds that can’t be completed.

In some states and territories, where fixed-price contracts don’t allow builders to raise agreed prices, builders go broke and leave homeowners devastated.

In other parts of Australia, where builders do have the right to amend contract pricing because of price rises, it’s the homeowners who can’t meet their end of the changed bargain, due to lack of borrowing capacity to pay for a building blowout that sees many contracts almost double in price.

I’m about to buy off the plan. What do I need to know?

Off-the-plan apartments and house-and-land packages are typically cheaper than established properties, offer the security of a fixed price, and can be made more affordable with government grants.

Expect to be asked to pay a 10 per cent deposit up-front and the remaining 90 per cent once the project's been completed (typically up to 24 months after the purchase agreement).

But if delays do happen – and the crisis and skills shortage in the building industry makes that a real risk – buyers need to beware of locking in a fixed-price contract in case the property value falls before it's completed. If that happens, you may struggle to find a lender to approve your home loan and you may not be able to meet your part in the contract.

Getting your conveyancer to add a subject to finance clause to your contract could protect you from losing your deposit or being sued by the developer if your finance can’t be secured when it comes to the crunch.

Check the builder’s insurance

In every Australian state and territory (except Tasmania and the NT), it’s a legal requirement for builders to obtain insurance for all residential builds valued over a certain amount before they take your deposit.

This offers you legal protection for failure to start or finish a job, or work that is defective.

But it’s far from being an endless pot of compensation. Or any compensation at all …

The reality, as too many Australians hit by the construction industry collapses are now finding, is that many insurance providers only pay out up to 20% of the contract price – even if all you’re left with is a shell of what was meant to be your dream home.

I’m already affected by a broke builder. Will I get my money back?

Depending on the builder’s insurance cover, you may only see around 20% of your agreed contract price. But, with some law firms already scrabbling to jump on the class action bandwagon, there will be future lawsuits. But how long they will take, as well as the amount you will actually get from an insolvent business, is likely to create a less than positive outcome.

The bottom line

According to Australian Bureau of Statistics figures, the average cost of building a new home has climbed from $327,000 to $450,000 in the past two years. The construction sector crisis is likely to get worse before it gets better and the financial fallout – with many people losing life savings – is set to leave its mark for years to come.

Do your due diligence but be aware that even high-profile builders and property developers have gone to the wall. Really … anything is possible.

Go deeper: What does the latest RBA cash rate decision mean for your home loan?

Financial disclaimer

The information contained on this web page is of general nature only and has been prepared without taking into consideration your objectives, needs and financial situation. You should check with a financial professional before making any decisions. Any opinions expressed within an article are those of the author and do not specifically reflect the views of Compare Club Australia Pty Ltd.