Introduction
This article provides guidance to those undertaking construction works and identifies a number of contract provisions which, if included in the construction contract, can assist a developer to identify and then manage a builder insolvency event should it arise.
All construction projects come with risk (and reward)
Some of the usual risks that immediately come to mind include:
- Cost overruns – Whilst most developers and principals include a ‘contingency’ in their project financial modelling, it is not always sufficient.
- Delays in build program – Delays in construction are inevitable notwithstanding that most programs will include a buffer or some ‘float’ in the program. The impact of delays can manifest as increased cost of materials, cranes or labour, extended financing and utility expenses, as well as lost opportunities due to the delay.
- Site risk (latent condition risk) – unexpected site conditions including contamination (usually asbestos) will have an adverse effect on the cost and completion time of the project.
Good planning and a collaborative approach between the project sponsor (principal or developer), the builder and the design and specification consultants can go a long way to mitigating these risks.
However, one of the most significant and prevalent risks in the current market is the risk of builder insolvency.
Insolvencies
Insolvencies in the construction industry account for the highest proportion of the nation’s insolvency statistics. NSW recorded the highest number of construction insolvencies across Australia accounting for 1,567, a significant 44% of all construction insolvencies in FY 2025, followed by Victoria 1,051 (29%) and Queensland 565 (16%).
Causes of Construction insolvencies
The causes of insolvency are many and varied and are often industry or project specific. The following construction industry trends have contributed to the increasing number of insolvencies in the construction industry:
1. Increased construction costs
- According to CoreLogic’s latest Cordell Construction Cost Index (CCCI), the cost of construction increased by 3.4% for the 12 months to December 2024.
- Rising concrete prices (up 5% on 2024) reflect the material’s energy-intensive production process at a time of increased energy costs and combined with global pressures to decarbonise[1].
- Brick manufacturing cost increases (up 9% on 2024) have also been affected by rising energy costs – as brick kilns are reliant on natural gas – and transport costs. Brick production is labour-intensive, adding further costs to production.[2]
- The cost of construction was reported as being 30.7% higher since COVID-19
2. Labour and skills shortages
- CoreLogic cites labour costs as the key driver of increased construction costs.
- Trades such as carpentry, plumbing, electrical work, and masonry are among the most affected areas.
- Causes of the current labour and skills shortage are said to include:
- an aging workforce;
- lack of training and apprenticeships;
- immigration restrictions; and
- the increased demand for labour across the large public infrastructure projects.
3. Extreme or inclement weather
- Delays caused by recent extreme or inclement weather events place stress on programs and invariably leads to increased cost often borne by the builder.
- Whilst under many contracts, the builder is entitled to an extension of time, often is the case that the builder bears the risk of additional overheads and delay costs caused by a neutral event such as an inclement weather event, further eroding already tight margins.
4. Increased insurance premiums
- Premiums for Construction Works Insurance, Public Liability and Professional Indemnity have increased (6 – 8%[3]) for a number of reasons including:
- climate-related events (bushfires, cyclones, and floods);
- legislative reforms (enhanced workplace safety and consumer protections); and
- market conditions such as supply chain disruptions, labour shortages, and inflationary pressures have raised construction costs resulting in greater potential claim amounts.
ATO tax debt
Another potential driver of companies, including those in the construction industry, into formal insolvency administration is an inability to pay past tax debts.
The ATO’s recently released 2025 – 26 Corporate Plan indicates that the ATO will intensify action on recovering $50B of collectable tax debt, much of which is owed by small business which would include builders.
Businesses which do not engage with the ATO or set up a payment plan for unpaid GST, pay as you go (PAYG) withholding or employee super, run the risk, according to the ATO, of being the subject of firm ATO action such as Director Penalty Notices (DPNs) and garnishees.
Such actions could drive an insolvent company into insolvency administration as directors seek to avoid personal liability for their company’s tax debts.
Signs of contractor insolvency
There are a number of potential indicators of builder insolvency which, if present, should not ignored:
- Overdue project or lapsed deadlines
- Unpaid subcontractors
- Unpaid employee entitlements
- Staff departures
- Litigation
- Subcontractors refusing the come to site
- Disputes
- Safety issues
- Refinancing efforts
- Outstanding taxes.
The actions and rights available to a principal or developer who suspects builder insolvency, are invariably found in the construction contract entered into with the builder.
How might the construction contract assist
The following clauses whilst not specifically drafted with insolvency in mind, if included in a construction contract can assist with the identification, management and potential mitigation of the risk and loss arising from builder insolvency.
The project construction contract should:
1. Provide for access to builder financial and other information
- Profit & loss statements, balance sheet, aged debtor and creditor ledgers will give guidance as to the financial strength or weakness of a construction business and its ability to withstand a period of temporary cashflow difficulty.
- The right to request and receive information in relation to the works may allow the developer to make enquiries and confirm whether trade contractors or material suppliers have been paid on time.
- The greatest risk to the developer’s project is if trades have not been paid for work or materials and are refusing to come to site, especially if the developer has paid the builder for their work but payment has not been passed through to the trades
2. Matters and attendances at Project Control Group
The developer should be entitled to:
- include matters for review and discussion at a Project Control Group (PCG) meeting, which matters may include builder financial hygiene; and
- require other persons, including subcontractors, to attend PCG meetings
This will allow the developer to:
- include the matter of the builder’s financial position or payment of subcontractors for discussion at the PCG; and
- request that trade contractors and material suppliers attend the PCG, allowing the developer to make direct enquiries as to whether these trades or suppliers are being paid on time.
3. Require the builder to provide security
- Security affords protection to the developer against financial loss if the builder fails to fulfill its contractual obligations
- Security can be in the form of bank guarantee or retention money.
- The amount of security is often a percentage of the contract sum, usually between 5 – 10%.
- If the contract sum increases or a call is made on the security, the builder should be required to top up the security so that at all times the developer holds the agreed value of security.
4. Provide the developer with a contractual right of set off
- The developer should be permitted by the contract to offset or deduct (back charge) a certain amount of money, loss, damage, or expense owed to it by the builder from any amount owed by the developer to the builder.
5. Specifically identify events of default which entitle the developer to terminate or take work out of the builder’s hands
- Determining whether a breach of contract gives the ‘innocent’ party a right to terminate the contract gives rise to considerable uncertainty and risk where the breach is not expressly stated to give rise to such a right of termination.
- Acts of default which give rise to a right to terminate or take work out of the builder’s hands should be specifically set out in the contract and should include:
- departure without cause from the agreed program;
- failing to comply with a direction of the developer;
- forming the reasonable opinion that there is reason to believe that the builder is not be able to pay its debts as and when they fall due;
- trade subcontractors will invariably refuse to come to site if they have not been paid. Refusal to come to site is often a strong indicator of builder insolvency and should be a default entitling the developer to terminate the contract or take work out of the builder’s hands.
6. Allow the developer to take work out of the builder’s hands
- In the event of default by the builder, the construction contract should entitle the developer to elect to either terminate the contract or take the work out of the builder’s hands.
- It might not always in the best interests of the project to terminate the contract so the right to take (the remaining) part of the work out of the builder’s hands may be preferable in certain circumstances.
7. Allow the developer access to all project documentation
- If the developer is forced to complete the project itself or appoint a subsequent builder to complete the works, it must be able to access all project documents.
- In the event of termination or the taking of the work out of the builder’s hands, the developer must;
- be able to access a complete set of plans, specifications and other documents affecting work;
- have, and be able to, access information and documents uploaded on an electronic project management document platform such as Aconex.
- In the event that a liquidator is appointed to the builder, gaining access to documents or to an electronic platform controlled by the builder such as Aconex, can be problematic, costly and time consuming.
8. Entitle the developer to conduct an audit of builder’s health and safety records and compliance with WHS requirements
- If the building contract (assuming contract value of greater than $250,000) is terminated, the appointment of the builder as the ‘principal contractor;’ under the WHS law will also be terminated and the developer will revert to being the ‘principal contractor’.
- The developer will then be legally responsible for managing and controlling health and safety risks on the project.
- An audit before termination will allow the developer to become informed as to any WHS issues or other works non compliance issues on site before it resumes the appointment of ‘principal contractor’.
- The former NSW Building Commissioner, Mr David Chandler identified a strong correlation between unsafe worksites and the incorporation of serious building defects.
Conclusion and key takeaway
Builder insolvency is a real risk in the current marketplace to the successful delivery of a construction project.
Principals should ensure that their construction contracts are drafted so as to give them the best chance to make appropriate lines of enquiry if they suspect builder insolvency and to take pro-active steps to confirm and then manage builder insolvency.
[1] Altus Group — Australian construction price outlook – Q1 2025
[2] Altus Group — Australian construction price outlook – Q1 2025
[3] Altus Group — Australian construction price outlook – Q1 2025