Time to read : 5 Minutes
You’ve painstakingly saved your deposit… you’ve chosen where and what you want your happy home to look like... and you’ve signed up with the builder that’s going to make that vision a reality.
But what happens if that builder goes bust? Does your property dream become a nightmare?
Here’s what you need to know.
The state of the building industry
The cost of living isn't just hitting our everyday essentials. Building materials have been particularly badly hit, putting many builders under financial stress.
On top of that, the shortage of tradies to do the building work itself is going through the roof, pun intended.
The Reserve Bank governor Michele Bullock has said these were two of the biggest reasons as to why it took longer than hoped to bring down inflation.
And, frighteningly, that’s why there were nearly 3,000 insolvencies in the construction industry in the last financial year, an increase of 28% from 2023. And both years, that was the largest category of insolvencies.
Part of the issues can be traced back to the mass supply shortages brought about by the pandemic.
Many companies were caught out by the steep rise in costs, which couldn’t be recouped because they had offered customers fixed price contracts.
And a fixed price certainly removes some risk for customers… but not if it means the company can’t then complete the build.
So, before we get to how to protect yourself in the first place, just what can you do if the company you have contracted to build – or renovate – goes to the wall?
What are your rights if a builder goes bust?
Much will depend on whether a builder has domestic building insurance – while the builder pays the premiums, this insures you if it cannot complete the work (different states have different requirements).
Be aware: if there’s a shortfall in the sum insured amount versus what completing your home will cost, you might still be out-of-pocket.
And escalating building costs or additional price pressures created by the insolvency of a bigger building company, can make this more likely.
Sometimes, under the terms of the insurance, you will be assigned a ‘non-complete’ builder to, yes, complete your home.
You will have no say in this… and no guarantee the process will be smooth or to your satisfaction.
Another possibility is that your bust builder will sell the rights to your contract to another builder. And you’ll find yourself in a similar circumstance to above.
But a third situation might be up to you to find a new builder that’s willing to inherit the problems of a partly completed home, and finish off a project they didn’t start.
In this high-demand market, they probably have enough of their own work rather than taking on this more difficult project.
How can you protect yourself from any of this?
As you might have guessed, a large amount comes down to choosing the right builder in the first place.
And yes, your first vital criteria is a builder that carries appropriate and adequate insolvency insurance.
This needs to be taken out at the start of the contract (the start of the works is another option but then your deposit could be in jeopardy). At a very minimum, the insurance policy details must contain the same details as the contract. The following need to match:
builder's name
owner’s name
home address
contract price.
Inconsistencies can work out expensively.
But it’s also vital you check the cap on any policy payout – this might be only, say, $300,000.
So beyond making sure the insurance is in place, make sure you do due diligence in the builder itself and it measures up to their claims.
Ideally, you want to know how many contracts it has and how delayed they are.
It can’t hurt to simply ask.
But if the builder won’t disclose these details, a quick chat with one of their tradies can shed light on whether they’re up-to-date with paying ‘subbies’.
Top tip: also talk to recent customers – the key word in the sentence being recent.
Are they satisfied? How did timelines go? And pricings? Was there a need to vary that price and by how much?
Check with the builder, too, whether any price ‘variations’ can be capped? If not, this can blow out your budget.
Also, simply, give the company a really thorough Google check: is there any indication or even a rumbling online about financial issues?
Finally, there is a new tool, developed by credit bureaux Equifax, that’s helping customers gain some confidence.
The Independent Construction Industry Rating Tool (iCIRT) provides a star rating – from 0 to 5 stars. The more stars, the more confidence you can have in your building professional.
Bottom line
With rising material costs and labour shortages, the building industry is not cracked up to what it used to be… and sadly builders are going bust.
If you’re determined to build, do your due diligence. Check your builder holds appropriate domestic building insurance, look at their track record, and seek customer feedback.
Because the last thing you want is to entrust your property dream to a builder that is going to shatter it.
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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.
