Developer insolvencies are not rare events. What happens to your contract, your invoices, and your liability when one occurs is something every builder should understand before they sign.

In recent years, the number of developer insolvencies in Australia has attracted significant attention. Rising interest rates, construction cost blowouts, and project delays created conditions where development margins compressed quickly, and some operators could not absorb the pressure.

For builders and subcontractors working for those developers, the consequences have ranged from significant delays in payment to losses that were never recovered at all.

Understanding your exposure when working for a developer and the steps you can take to reduce it  is not overly complex. But it does require some proactive thinking before contracts are signed and work commences.

What Happens in a Developer Insolvency

When a developer enters voluntary administration or is wound up, an external administrator is appointed to manage the process. That administrator’s primary obligation is to creditors the parties the developer owes money to in a defined order of priority.

Secured creditors typically banks and financiers sit at the top of that priority list. Unsecured creditors, which often includes builders and subcontractors with outstanding invoices, sit further down. In many administrations, unsecured creditors receive cents in the dollar, if anything.

Your building contract does not disappear when a developer enters administration. But what you can do under it, what you are owed under it, and how likely you are to recover that money changes significantly.

Unpaid Progress Claims

Unpaid progress claims become unsecured debts once a developer enters administration. They join the queue behind secured creditors.

Security of payment legislation exists in all Australian states and territories and provides a mechanism for pursuing unpaid payment claims. However, the effectiveness of that process is limited when the party you are claiming against does not have funds to pay, regardless of what a payment determination says.

The timing of when you exercise your security of payment rights relative to when an insolvency event occurs can significantly affect your position. Understanding the relevant time limits in your jurisdiction and acting promptly when payment is not made matters.

What to Look for Before You Sign

The time to assess developer risk is before the contract is signed and work starts. Once you are on site, your options narrow considerably.

There are some basic indicators worth looking at when assessing a developer counterparty. Are they a new entity with no track record, or an established developer with a history of completed projects? Do they have evidence of adequate project finance in place for the specific development you are being engaged on? Are there early signs of financial pressure, requests for extended payment terms before work has started, slow payment on initial invoices, or difficulty providing basic project documentation?

None of these are definitive indicators of future insolvency. But builders who pay attention to the commercial health of their developer clients tend to identify problems earlier and manage their exposure more carefully than those who focus solely on the building work.

Registration of Interests and Security

The Personal Property Securities Register, or PPSR, allows parties with an interest in personal property to register and protect that interest. For builders, this can be relevant in relation to materials and goods supplied to a site that have not yet been incorporated into the building.

Retention of title clauses in your supply or subcontract agreements, paired with appropriate PPSR registrations, can provide some protection for materials on site in an insolvency scenario. This is a technical area where legal advice is valuable.

Contractual provisions that give you rights to suspend work or remove materials upon non-payment are another protective mechanism worth understanding. Whether and how those rights can be exercised in an insolvency context depends on the specific circumstances and the law.

Project Bank Accounts

Some states have introduced or are considering project bank account regimes for certain categories of construction projects. These mechanisms are designed to protect subcontractor payments by holding funds in trust, separate from the developer’s or head contractor’s general assets.

Where project bank account requirements apply, understanding your rights under that scheme is important. Where they do not apply, the absence of that protection is something to factor into your risk assessment.

Insurance Considerations

Developer insolvency exposure is not typically covered by standard building contracts insurance. If you have concerns about your exposure on a specific project or with a specific developer, speak to your insurance broker about what coverage options might be available and appropriate for your situation.

Builder’s warranty insurance obligations also continue even when a developer becomes insolvent. Your obligations to homeowners remain, even when the party who engaged you is no longer able to meet their obligations to you.

The Practical Steps

Builders who manage developer insolvency risk well tend to do a few things consistently. They assess the financial health of developer counterparties before signing. They keep progress claims current and do not let payment backlogs accumulate. They act promptly when payments are not made rather than allowing arrears to grow. And they maintain clear documentation of all work completed and costs incurred.

In a market where developer financial stress has been a real feature of the landscape, treating developer risk as a routine part of your commercial assessment not just a background concern is sound business practice.

General information only: The content in this article is provided for general informational purposes and does not constitute legal, financial, or professional advice. Every business situation is different. We recommend consulting a qualified professional before making any decisions based on information published here.

Author: TGB Editorial