It may not be Halloween right now, but here's something that should scare every single property developer - close to a third of builders go under in their first 3 years.
They leave behind unfinished works, unpaid subcontractors and enormous headaches for developers and property owners.
This means it's crucial you undertake a thorough due diligence process on a builder before committing to a contract. Let's explore how you can do that.
READ MORE HERE
In order to understand what due diligence you need to conduct, you need to understand...
Why Do Builders Go Broke?
There are five main reasons builders go broke:
These problems are often magnified by inaccurate estimating. A builder may price a project based on today’s costs but, because of lead times and delays, end up delivering it with tomorrow’s higher costs. That mismatch eats into margins and can destroy liquidity. For developers, these systemic risks mean that even reputable builders can be vulnerable under the wrong circumstances.
As an example, take a look at the Covid period. Material prices and labour costs rose dramatically, some trades increasing by as much as 30 per cent. Yet many builders remain locked into fixed-price contracts signed months or even years earlier.
As a result, they were forced to absorb these cost increases themselves. Insolvency statistics reflected this stress. In Victoria, for example, builder collapses rose by more than a third in early 2021 compared with the previous year. The pattern is similar in other states.
This also shows that historical performance isn't always enough. Property developers need to assess the builder's current position thoroughly as well to identify potential risks.
Licensing and Credentials
The first step in the due diligence process is to confirm licensing and credentials. Every Australian state and territory maintains a public register where you can check that a builder is properly licensed, that their licence matches the category and scale of work you require, and that no restrictions or disciplinary actions apply. This is a basic but critical check.
A builder licensed only for smaller works may still offer to take on your larger project. But if something goes wrong, your insurance or legal remedies may be compromised. Verifying licensing also gives you a starting point to assess how long the builder has been in operation and whether they’ve maintained a clean record.
Track Record and References
The next step is to examine their track record. Look for information about how many projects they’ve completed, what types of developments they specialise in and whether they’ve delivered similar projects to yours.
Examining their project pipeline can reveal whether they are expanding too quickly or suffering a contraction. A sudden increase in the size or type of projects a builder takes on can indicate they’re scrambling for revenue, which can be a red flag.
Checking a builder’s references is still one of the simplest and most revealing steps. Speak directly with past and current clients. Ask them about their experience, how issues were handled and whether they would use the builder again.
Visit active sites if possible. Seeing the quality of work and how organised the site appears will tell you a lot. Also ask to speak with subcontractors or suppliers. They often know before anyone else whether a builder is paying on time or running into cash flow issues.
Pay particular attention to reviews from the last three to six months, which will capture current market conditions and stress levels. This broader picture helps you identify patterns that may not show up in paperwork.
Financials
Financial stability is a cornerstone of builder due diligence. Builders go broke primarily because of cash flow problems, undercapitalisation and cost overruns on previous jobs. Although private financial data can be hard to obtain, there are still ways to get a sense of a builder’s financial health.
Where possible, it is sensible to request or obtain basic financial information, especially for larger projects:
Credit reports, ASIC company searches and public records can reveal outstanding court judgments or defaults. Ask the builder directly for references from their bank, accountant or major suppliers. In larger projects, it is not unreasonable to request high-level financial statements or at least confirmation from a professional adviser that the company is solvent.
It might not always be the case, but builders who resist all scrutiny may have something to hide. Tread carefully.
Contract Terms
Contract terms are another critical tool for managing risk. A reputable builder should be comfortable with a progress payment schedule that aligns with completed work stages, and be cautious of builders who insist on early bulk payments for materials or labour, as this can expose you to loss if they become insolvent.
Fixed-price contracts are generally preferable from a developer’s standpoint because they provide cost certainty and make lenders happy, but they must be realistic. Ensure you understand how provisional sums and prime cost items are handled in the contract, because these can significantly affect the final cost and indicate whether the builder is pricing risk realistically.
Most importantly, obtain independent legal advice on the contract before signing and again before taking any enforcement action for breach.
Pricing
Price analysis also matters. While it’s natural to want a competitive tender, a quote that is dramatically below the market average can be a warning sign of underestimation or desperation rather than genuine efficiency. The builder may try to claw back losses later through variations, claims or, in the worst case, by abandoning the job.
When comparing tenders, ensure you are comparing like with like. Scope, materials, timeframes and inclusions should be consistent. Consider engaging an independent quantity surveyor to check that the builder’s allowances and rates are realistic.
Insurance and More
Insurance coverage is another piece of the puzzle. Check that the builder has the appropriate public liability, workers’ compensation and contract works insurance. If your project is covered by any statutory insurance scheme (such as Home Warranty Insurance in some states), ensure the builder can provide the necessary certificates. Be aware, however, that these schemes primarily protect homeowners, not developers of multiple dwellings, so you should not rely solely on them as a safeguard.
Communication style and professionalism are also crucial. During your early interactions, note how promptly the builder responds to calls and emails, how clearly they answer questions and how willing they are to be transparent. This is often a predictor of how they will behave once construction begins. A builder who is evasive or inconsistent before the contract is signed is unlikely to improve under pressure.
Also consider the builder’s operational capacity. Do they have enough staff, project managers and trades to handle your job on top of their current workload? Ask how many projects they are currently running and how they resource them. Check whether they rely heavily on a small number of subcontractors or suppliers, which can create bottlenecks if one party fails.
As The Build Progresses
Finally, remember that due diligence does not end once the contract is signed. Ongoing monitoring of the builder’s performance and financial health is essential.
Frequent site visits, combined with maintaining good relationships with key subcontractors, will give you a more accurate picture of progress and morale. Regularly compare the work completed to the agreed timeline or Gantt chart and be fair and reasonable when legitimate cost increases occur.
If you see early warning signs such as delayed work, unexplained changes in personnel, or unusual payment requests, address them promptly. It’s far easier to resolve issues while a builder is still solvent than after they’ve collapsed.
Bottom line, the best developers treat builder selection and vetting with the same seriousness as site acquisition or financing. By embedding due diligence into your standard process, you’ll not only safeguard your current project but also build long-term relationships with reliable builders who appreciate your professionalism.
Thorough due diligence may not eliminate every risk, but it dramatically improves your odds of a smooth build, on-time completion and a profitable outcome. In an industry where margins are thin and reputations are hard won, it’s one of the smartest investments you can make before breaking ground.
They leave behind unfinished works, unpaid subcontractors and enormous headaches for developers and property owners.
This means it's crucial you undertake a thorough due diligence process on a builder before committing to a contract. Let's explore how you can do that.
READ MORE HERE
In order to understand what due diligence you need to conduct, you need to understand...
Why Do Builders Go Broke?
There are five main reasons builders go broke:
- Cashflow
- Capitalisation
- Weak financial controls
- Poor management
- Carrying forward losses from past jobs
These problems are often magnified by inaccurate estimating. A builder may price a project based on today’s costs but, because of lead times and delays, end up delivering it with tomorrow’s higher costs. That mismatch eats into margins and can destroy liquidity. For developers, these systemic risks mean that even reputable builders can be vulnerable under the wrong circumstances.
As an example, take a look at the Covid period. Material prices and labour costs rose dramatically, some trades increasing by as much as 30 per cent. Yet many builders remain locked into fixed-price contracts signed months or even years earlier.
As a result, they were forced to absorb these cost increases themselves. Insolvency statistics reflected this stress. In Victoria, for example, builder collapses rose by more than a third in early 2021 compared with the previous year. The pattern is similar in other states.
This also shows that historical performance isn't always enough. Property developers need to assess the builder's current position thoroughly as well to identify potential risks.
Licensing and Credentials
The first step in the due diligence process is to confirm licensing and credentials. Every Australian state and territory maintains a public register where you can check that a builder is properly licensed, that their licence matches the category and scale of work you require, and that no restrictions or disciplinary actions apply. This is a basic but critical check.
A builder licensed only for smaller works may still offer to take on your larger project. But if something goes wrong, your insurance or legal remedies may be compromised. Verifying licensing also gives you a starting point to assess how long the builder has been in operation and whether they’ve maintained a clean record.
Track Record and References
The next step is to examine their track record. Look for information about how many projects they’ve completed, what types of developments they specialise in and whether they’ve delivered similar projects to yours.Examining their project pipeline can reveal whether they are expanding too quickly or suffering a contraction. A sudden increase in the size or type of projects a builder takes on can indicate they’re scrambling for revenue, which can be a red flag.
Checking a builder’s references is still one of the simplest and most revealing steps. Speak directly with past and current clients. Ask them about their experience, how issues were handled and whether they would use the builder again.
Visit active sites if possible. Seeing the quality of work and how organised the site appears will tell you a lot. Also ask to speak with subcontractors or suppliers. They often know before anyone else whether a builder is paying on time or running into cash flow issues.
Pay particular attention to reviews from the last three to six months, which will capture current market conditions and stress levels. This broader picture helps you identify patterns that may not show up in paperwork.
Financials
Financial stability is a cornerstone of builder due diligence. Builders go broke primarily because of cash flow problems, undercapitalisation and cost overruns on previous jobs. Although private financial data can be hard to obtain, there are still ways to get a sense of a builder’s financial health.
Where possible, it is sensible to request or obtain basic financial information, especially for larger projects:
- Credit checks
- Balance sheets
- ASIC records
Credit reports, ASIC company searches and public records can reveal outstanding court judgments or defaults. Ask the builder directly for references from their bank, accountant or major suppliers. In larger projects, it is not unreasonable to request high-level financial statements or at least confirmation from a professional adviser that the company is solvent.
It might not always be the case, but builders who resist all scrutiny may have something to hide. Tread carefully.
Contract Terms
Contract terms are another critical tool for managing risk. A reputable builder should be comfortable with a progress payment schedule that aligns with completed work stages, and be cautious of builders who insist on early bulk payments for materials or labour, as this can expose you to loss if they become insolvent.
Fixed-price contracts are generally preferable from a developer’s standpoint because they provide cost certainty and make lenders happy, but they must be realistic. Ensure you understand how provisional sums and prime cost items are handled in the contract, because these can significantly affect the final cost and indicate whether the builder is pricing risk realistically.
Most importantly, obtain independent legal advice on the contract before signing and again before taking any enforcement action for breach.
Pricing
Price analysis also matters. While it’s natural to want a competitive tender, a quote that is dramatically below the market average can be a warning sign of underestimation or desperation rather than genuine efficiency. The builder may try to claw back losses later through variations, claims or, in the worst case, by abandoning the job.
When comparing tenders, ensure you are comparing like with like. Scope, materials, timeframes and inclusions should be consistent. Consider engaging an independent quantity surveyor to check that the builder’s allowances and rates are realistic.
Insurance and More
Insurance coverage is another piece of the puzzle. Check that the builder has the appropriate public liability, workers’ compensation and contract works insurance. If your project is covered by any statutory insurance scheme (such as Home Warranty Insurance in some states), ensure the builder can provide the necessary certificates. Be aware, however, that these schemes primarily protect homeowners, not developers of multiple dwellings, so you should not rely solely on them as a safeguard.
Communication style and professionalism are also crucial. During your early interactions, note how promptly the builder responds to calls and emails, how clearly they answer questions and how willing they are to be transparent. This is often a predictor of how they will behave once construction begins. A builder who is evasive or inconsistent before the contract is signed is unlikely to improve under pressure.
Also consider the builder’s operational capacity. Do they have enough staff, project managers and trades to handle your job on top of their current workload? Ask how many projects they are currently running and how they resource them. Check whether they rely heavily on a small number of subcontractors or suppliers, which can create bottlenecks if one party fails.
As The Build ProgressesFinally, remember that due diligence does not end once the contract is signed. Ongoing monitoring of the builder’s performance and financial health is essential.
Frequent site visits, combined with maintaining good relationships with key subcontractors, will give you a more accurate picture of progress and morale. Regularly compare the work completed to the agreed timeline or Gantt chart and be fair and reasonable when legitimate cost increases occur.
If you see early warning signs such as delayed work, unexplained changes in personnel, or unusual payment requests, address them promptly. It’s far easier to resolve issues while a builder is still solvent than after they’ve collapsed.
Bottom line, the best developers treat builder selection and vetting with the same seriousness as site acquisition or financing. By embedding due diligence into your standard process, you’ll not only safeguard your current project but also build long-term relationships with reliable builders who appreciate your professionalism.
Thorough due diligence may not eliminate every risk, but it dramatically improves your odds of a smooth build, on-time completion and a profitable outcome. In an industry where margins are thin and reputations are hard won, it’s one of the smartest investments you can make before breaking ground.
