What happens if your builder goes bust? Your rights and next steps

Thousands of Australians have been caught up in builder collapses. Here's how to check a builder's credentials, understand building insurance and protect yourself if a 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 the Australian Securities and Investments Commission, 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 Denita Wawn, the chief executive of Master Builders Australia.

The industry has been hit by a plethora of issues that have left many builders unviable.

"The delivery of new homes and related infrastructure has also been obstructed by ongoing and concurrent challenges," she says.

"Tradie 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 check whether a builder is financially stable

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.

Emma Restall, a partner in the building and construction team at Melbourne-based law firm PCL Lawyers, says the number one thing she recommends to clients is ensuring 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."

Restall strongly encourages people to seek legal advice before signing a contract.

"We do a lot of contract reviews and people will often ring up and ask if they really need it done. But the question is, for the sake of a few hundred or a few thousand dollars, would you rather be protected and make sure that everything is accurate and valid if you're about to cough up $700,000?

"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."

What insurance covers if a builder goes bust

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 - a homeowner can't take out a domestic building insurance policy," says Restall.

"And 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.

There are similar schemes in other States and Territories (a home warranty insurance scheme is in the process of being reintroduced in Tasmania.)

Aside from building insurance, homeowners who plan to renovate their existing property should notify their existing home and contents insurance provider before work starts.

What to do when a builder enters administration

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, Emma Restall says people won't even be aware that their builder has gone bust for some time.

"When a company goes into administration, a lot of homeowners don't find out straightaway, unfortunately, unless it's a larger builder splashed over the news," she says.

"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.

Can you recover money after a builder collapse?

Restall also suggests that this is the time to seek legal support, if required, as there are likely to be insolvency provisions in the building contract.

From there, Restall says homeowners will need to decide how they want to proceed.

"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," says Restall.

"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.

"And 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," says Tim Reardon, chief economist at the Housing Industry Association.

"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. Restall has seen this among her 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," she says.

"So, we have had an increase in clients who want their contracts reviewed. But we've also had an uptick in clients dealing with insolvency or who have had problems with builders."

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. Reardon says 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."

Get stories like this in our newsletters.