Builders going bust - 5 ways to avoid losing money without being a secured creditor

I woke up this morning to news of yet another builder in liquidation - this time its Sunshine Coast contractor Freestyle F.C. Pty Ltd t/a Coastgard.

It's too late now to do anything for the subcontractors and suppliers that will lose money with this collapse. But there are a handful of things you can do in the future to mitigate the risk of loss to builder/contractor insolvency in the future - and most of them don't cost a cent!

1) Avoid using cash retention for retentions over $25,000.00. Do this by providing bank guarantees in lieu of cash retention - or even better - negotiate retention right out of your contract from the outset. Particularly for trades that don't typically have defects like demolition contractors, builder's clean, formworkers, etc. If the builder won't accept nil retention for these trades, try to negotiate a full release at practical completion.

Further, if you have historical retentions with a builder that looks shaky - act now to swap out those old retentions with a bank guarantee, or if they're due for release, actively debt recover now and don't wait! Suppliers might be surprised to know that the adjudication regime is available to suppliers who are just supplying goods under a construction contract (a purchase order), even if they don't actually carry out any installation of those goods.

2) If at any point during the contract you're not paid, or payments are starting to come late, lawfully suspend work under the Contract, and do it promptly. The longer you stay on site the more you lose if there is a solvency issue. There's a way to suspend work under Queensland's security of payment legislation, and under the Queensland Building and Construction Commission Act 1991 (QLD). To be clear, I'm not suggesting you just up and walk off the job with a shake of the fist and a nasty email - you could end up in a world of contractual hurt if you do that. If you're not sure how to lawfully suspend, obtain some advice.

3) Invest in creditor insurance, and when you do, read and understand what your policy actually covers and what it doesn't. Then, make sure you know what you've got to do (and not do) to make sure you don't void your insurance. This type of insurance is not cheap, but it is one of the only ways you can completely ensure (or should I say insure) that you won't lose money if your builder goes broke.

4) Take notice of the morale and culture on site. Is your builder handing out back charges like there's no tomorrow (literally)? Are the bins overflowing and nobody is coming to empty them? Are there a bunch of other trades that are nowhere to be seen? A conversation with fellow trades to see if they're being paid is completely free. Some more tell tale signs can be sudden talk of liquidated damages, blanket costs charged to each trade for crane/scaffold over run costs, or even a sudden attempt by the builder's contract administrator to send you contractual notices that are nonsensical and too little too late. If the situation looks really dire, consult a construction lawyer about using a Subcontractor's Charge before the builder goes into liquidation.

5) If you have expensive plant, machinery, equipment or material on site that you haven't been paid for, (and you've got a security agreement in your subcontract that allows you to register a security interest over that material), register it on the Personal Property Security Register (PPSR). This isn't necessarily an easy thing to do for the average Joe, so again, get some advise on it (and NOT from those cowboy door-to-door PPSR salespeople who are out there selling labour only subcontractors some random service). PPSR is only good for subcontractors and suppliers that have expensive plant and/or machinery or materials kept on site, such as bobcats, lifts, cranes, expensive mechanical condenser units, switchboards etc.

Hope this article was helpful, feel free to contact me for a more in depth discussion on the topic on 0490 370 945 or by email [email protected].