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:

  1. Cost over­runs – Whilst most devel­op­ers and prin­ci­pals include a con­tin­gency’ in their project finan­cial mod­el­ling, it is not always sufficient.
  2. 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.
  3. 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:

  1. Over­due project or lapsed deadlines
  2. Unpaid sub­con­trac­tors
  3. Unpaid employ­ee entitlements
  4. Staff depar­tures
  5. Lit­i­ga­tion
  6. Sub­con­trac­tors refus­ing the come to site
  7. Dis­putes
  8. Safe­ty issues
  9. Refi­nanc­ing efforts
  10. 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

If you would like to repub­lish this arti­cle, it is gen­er­al­ly approved, but pri­or to doing so please con­tact the Mar­ket­ing team at marketing@​swaab.​com.​au. This arti­cle is not legal advice and the views and com­ments are of a gen­er­al nature only. This arti­cle is not to be relied upon in sub­sti­tu­tion for detailed legal advice.

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