Protecting yourself in case of builder insolvency

Protections for consumers

Rising costs for labour and materials in the residential building sector are generating some concern for consumers about whether these pressures may impact their builder's financial stability.

There are protections for consumers if a builder does become insolvent, as long as:

• the contract is valued at over $20,000, and
• home building compensation cover is in place.

What you need to do when dealing with a builder

Consumers can limit their exposure to potential losses by taking the right steps when engaging and dealing with a builder.

Entering a new contract to build

Do not make payments until home building compensation cover is in place

Home building compensation cover protects homeowners as a last resort if their builder cannot complete building work or fix defects because they have:

• become insolvent
• died
• disappeared or
• had their licence suspended.

A builder must provide you with a certificate of cover when entering a building contract for work valued at $20,000 or more. They must not ask for payment until the cover is in place.

Consumers should not make any payments until they have received the certificate of cover. If no insurance is in place, you may not be able to recover your money if the builder cannot complete the work.

The maximum deposit is 10%

A builder can only seek the maximum of 10% of the total contract price as a deposit before work commences. Any payment above this amount may not be recoverable under home building compensation cover.

Be aware of upfront payments

Builders commonly seek a separate agreement and upfront payment for the preparation of plans and other work before entering into a building contract. This payment is generally not covered by home building compensation cover and may not be recovered if the builder becomes insolvent.

When building work is in progress

Progress payments

Consumers should only make authorised progress payments. 

A progress payment is authorised when:

• the contract clearly sets out specific stages of work and the amount or percentage of the contract value payable at the completion of each stage, or
• the contract provides for fixed payment intervals or an “as invoiced” payment, where the payment is for labour and materials for work already performed and supporting invoices and receipts are provided.

If a consumer makes a progress payment that is not an authorised progress payment (for example, makes an additional or early payment) this may affect their ability to recover losses for that payment under home building compensation cover.

Completed builds within warranty period

The Home Building Act 1989 provides consumers with a right of action for building defects within 6 years for major defects and 2 years for all other defects, starting from the date when the work was completed.

Consumers are encouraged to promptly raise any issues with their builder. If the builder does not respond or disputes the defect, you can seek assistance from the Building Commission NSW by lodging a complaint.