Using your con­struc­tion con­tract to man­age and mit­i­gate con­trac­tor insol­ven­cy risk

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