Introduction
The risk of contractor insolvency mid way though a construction project in the current market is real and really expensive.
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 contractor insolvency event should it arise. Mark identifies nine essential clauses to consider for inclusion in the construction contract.
All construction projects come with risk (and reward)
Delivery of any construction project comes with great rewards and risks. Some of the usual risks that immediately come to mind include:
- Cost overruns – unfortunately cost overruns in the construction industry are quite common, affecting projects of all sizes and scopes. 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. Whilst most programs will include a buffer or some ‘float’ in the program, there is always the risk that the project runs behind time and is not completed by the agreed date for completion. The impact of delays can manifest as increased cost of materials or labour, extended financing and utility expenses, as well as lost opportunities due to the delay.
- Site risk (latent condition risk) – encountering 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 contractor 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 contractor insolvency.
Insolvencies
The Australian Securities and Investment Commission reports that 14,722 companies nationwide entered into external administration in financial year 2025 ( (up from 11,053 in FY 2024). NSW recorded the highest number of first time insolvencies across Australia accounting for 5,692 (38.6%), followed by Victoria (28.8%) and Queensland (18.2%).
Construction Insolvencies
It is well documented that insolvencies in the construction industry account for the highest proportion of the nation’s insolvency statistics. Construction insolvencies accounted for 26% of all insolvencies nationwide in FY 2025, up from 20% in FY 2024, ahead of Accommodation and Food Services (24% in FY 2025 and 20% in FY 2024). Again 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]
- Demand for copper remains strong, particularly for electrical equipment, wiring and electric vehicle manufacturing. Copper prices continue to increase (up 13% on 2024). The global energy transition and growth in data centres are driving the demand for copper[3].
- 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.
- The current labour and skills shortage in the Australian construction industry affects all aspects of construction, from residential and commercial building to civil engineering and infrastructure projects.
- 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 contractor.
- The most used forms of construction contracts in Australia, the AS4000 and AS4902, do not provide the contractor with any relief for weather events.
- However contracts are often drafted to entitle the contractor to an extension of time but in many cases the contractor is not entitled to additional payment for delays caused by inclement weather.
- The often-negotiated position is that a contractor will be entitled to its costs for delays caused by the developer but not for delays caused by neutral events such as inclement weather that are outside the control of both the developer and the contractor.
- In those cases, the contractor bears the risk of additional overheads and delay costs caused by 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%[1]) 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 ability to pay past tax debts. Since 2020 the ATO is reporting increased tax debt levels with many taxpayers experiencing difficulty getting on top of their payment obligations.
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 construction contractors. The ATO says it will use the “full suite of powers” at its disposal.
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
If a principal or developer suspects that its appointed contractor is insolvent, then in the current market there is a real chance that it is. There are a number of potential indicators of contractor insolvency which, if present, should not be 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.
If a principal or developer suspects its contractor is unable to pay its debts as and when they fall due, it should take proactive action to investigate and confirm or reject this suspicion.
The actions and rights available to a principal or developer who suspects contractor insolvency, are invariably found in the construction contract entered into with the contractor.
How might the construction contract assist
Construction contracts often contain clauses that whilst they may not have been specifically drafted with contractor insolvency in mind, can assist a principal or developer to investigate and, if confirmed, manage a suspicion of contractor insolvency.
The following clauses if included in a construction contract can assist the developer with the identification, management and potential mitigation of the risk of contractor insolvency:
1. Access to contractor financial and other information
The developer’s construction contract should:
- Entitle the developer to request and receive contractor financial information.
- Entitle the developer to request and receive information from the contractor in connection with the work under the contract.
How might it may help the developer:
- 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 demand 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 and suppliers have not been paid for work or materials and are threatening to, or do in fact, stop work on the project, especially if the developer has paid the contractor for their work and materials but payment has not been passed through to the trades.
2. Matters and attendances at Project Control Group
The developer’s construction contract should:
- Entitle the developer to include matters for review and discussion at a Project Control Group (PCG) meeting, which matters may include contractor financial hygiene.
- Entitle the developer to require other persons, including subcontractors, to attend PCG meetings.
How might it may help the developer:
- This will allow the developer to include the matter of the contractor’s financial position or payment of subcontractors for discussion at the PCG.
- Such a clause will allow the developer to demand that trade contractors and material suppliers attend the PCG, allowing the developer to make direct enquiries as to whether the trade contractors are being paid on time.
3. Security-bank guarantee or retention money
The developer’s construction contract should:
- Require the contractor to provide security to the developer to protect the developer from financial loss if the contractor fails to fulfill its contractual obligations.
- Entitle the developer to have recourse to security to satisfy a bona fide claim.
- Entitle the developer to request additional security if security falls below agreed level (usually 5% of contract sum).
- The construction contract should state the purpose for which the security is provided by the contractor being not only to secure a valid claim under contract but also to allocate risk as to who will be out of pocket pending resolution of dispute (risk allocation mechanism).
How might it may help the developer:
- Security can be in the form of bank guarantee or retention money.
- Security from the contractor may not be appropriate for a minor works project but is market and reasonable for any significant project and should be considered.
- Such a clause provides the developer with a greater and earlier entitlement to call on any security provided by the contractor.
- 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 contractor should be required to top up the security so that at all times the developer holds the agreed value of security.
- The purpose of the security should be expressly stated to ensure that the developer can have recourse to the security the pursue a bona fide claim.
4. Contractual right of set off
The developer’s construction contract should:
- Provide the developer with a contractual right of set off.
How might it may help the developer:
- The developer should be permitted by the contract to offset or deduct a certain amount of money, loss, damage, or expense owed to it by the contractor from any amount owed by the developer to the contractor.
5. Take work out of contractor’s hands
The developer’s construction contract should:
- In the event of default by the contractor, the construction contract should provide the developer with a right to either terminate the contract or take the work out of the contractor’s hands.
How might it may help the developer:
- Termination of the contract will relieve both parties of all their obligations under the contract.
- It might not always in the best interests of the project to terminate the contract so the right to take part of the work out of the contractor’s hands may be preferable in certain circumstances.
6. Events of default
The developer’s construction contract should:
- Specifically identify events of default which entitle the developer to terminate or take work out of the contractor’s hands.
How might it may help the developer:
- An event of default should include non-payment to trade subcontractors.
- Trade subcontractors will invariably refuse to come to site if they have not been paid. Refusal to come to site by trades is often a strong indicator of contractor insolvency.
7. Access to project documents
The developer’s construction contract should:
- In the event of termination of the contract or an election by the developer to take work out of the contractor’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.
How might it may help the developer:
- If the developer is forced to complete the project itself or appoint a subsequent contractor to complete the works:
- the developer must have access to all project documents;
- the developer must be able to access the electronic project management document platform; and
- in the event that a liquidator is appointed to the contractor due to insolvency, gaining access to an electronic platform, such as Aconex can be problematic and time consuming.
8. WHS ‘principal contractor’
The developer’s construction contract should:
- Entitle the developer to conduct an audit of contractor’s health and safety records and compliance with WHS requirements.
- Require the contractor to provide all necessary access, relevant documents and other information reasonably requested.
How might it may help the developer:
- If the building contract (assuming contract value of greater than $250,000) is terminated, the appointment of the contractor as the ‘principal contractor;’ under the OHS 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 non compliance issues on site before it assumes the appointment of ‘principal contractor’.
9. Access to adjoining land
The developer’s construction contract should:
- Should ensure that the developer has the benefit of any and all access rights to adjoining land secured by the contractor.
How might it may help the developer:
- In the event of contractor insolvency and contract termination or work taken out of the contractor’s hands, the developer and any subsequent contractor should:
- have the benefit of all necessary approvals, permissions and consents to access adjoining lands which may be been secured by the contractor; and
- should not have to renegotiate the access rights which maybe costly and take time.
WHS
The former NSW Building Commissioner, Mr David Chandler stated that there is a strong correlation between a contractor’s compliance with its work health and safety obligations and the likelihood of the contractor carrying out non-compliant work.
The right to audit the contractor’s compliance with its WHS obligations may inform as to the likelihood of non-compliant and defective work.
Conclusion and key takeaway
Contractor insolvency is currently a real risk in the 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 contractor insolvency and to take pro-active steps to confirm and then manage contractor 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
[4] Altus Group — Australian construction price outlook – Q1 2025