When the builder folds: protecting your clients in a high-insolvency market

Construction insolvencies in Australia have spiked to levels unseen since the late 90s, with over 300 building companies failing every quarter.¹ For brokers, this means a standard construction loan submission now requires direct due diligence on the builder before the application hits a lender portal. If a builder cannot finish the job, your client faces massive valuation shortfalls, expired pre-approvals, and an inability to secure additional funding because their equity is wiped out by cost overruns.

The fallacy of the fixed-price contract

Most brokers treat a signed fixed-price building contract as a safety net. This is a mistake. When material costs for timber and structural steel rise by 40%, a fixed-price contract becomes an anchor that drags the builder toward bankruptcy. Once a builder stops paying subcontractors, the project grinds to a halt. The lender then freezes progress payments. Your client is left with a site worth less than the cost to complete it. I have seen clients who were quoted $500,000 for a build in 2023 find themselves needing an extra $120,000 just to hire a new builder to fix a defective slab and finish the framing in 2026. If the initial quote is significantly cheaper than competitors, it is not a bargain. It is a sign the builder has mispriced their risk. Do not assume the contract protects your client against a builder who is already insolvent.

Managing the progress payment trap

Progress payments are where most brokers lose visibility. If a builder requests payment for stages that have not been physically completed, they are effectively using your client as an interest-free bank. This is a common precursor to insolvency. You must advise your clients to personally verify the site status before authorising any release of funds. A builder asking for a 10% deposit before site preparation begins is pushing the limits of standard state legislation, which usually caps deposits at 5%.² When lenders see aggressive payment schedules, they tighten their own risk appetite. Some non-bank lenders have responded by tightening LVR limits on construction projects to 80% or requiring additional cash-at-bank buffers to account for potential cost blowouts. If the paperwork looks rushed, pause the application. Verify the progress before you move to the next stage of funding.

The refinance risk in a high-rate environment

If a project stalls for twelve months due to a builder collapse, the original loan approval is essentially dead. When the client attempts to finish the project, they must requalify at today’s rates. With the RBA cash rate sitting well above the levels seen in 2022, the 3% serviceability buffer now creates a massive gap in borrowing capacity. A family that could easily borrow $600,000 three years ago might find their ceiling dropped to $480,000 today. If their build cost has simultaneously risen by 22% due to inflation, the project becomes unfinishable without significant capital injection. You should be stress-testing your construction clients for a 12-month delay as a matter of standard practice. If they lack the liquidity to cover a 20% cost overrun, they are not ready for a build contract. Plan for the worst case.

Your pre-submission checklist

Do not rely on the builder’s word. Perform a quick insolvency check through ASIC, confirm the builder holds a valid Domestic Building Insurance certificate for the specific site address, and examine the contract for any 'variation clauses' that allow for excessive price hikes. When you have the right lender involved, they can provide staged funding that aligns with legitimate milestones. If you are handling complex construction deals and want to avoid the administrative grind, the Halo team handles the operational side of these submissions so you can stay in the client conversation. Otherwise, keep these checks in your back pocket for your next build-loan inquiry.

FAQ

What is the first sign a builder is in trouble? Frequent requests for early progress payments or deposits exceeding 5% often indicate cash flow problems.

How does an insolvency affect an existing loan? If a builder collapses, the bank stops progress payments. You must then requalify the client, often with a lower borrowing capacity due to current RBA rates.

Are fixed-price contracts reliable? No. In a high-inflation market, fixed-price contracts often lead to site abandonment if the builder cannot cover rising material costs.

Should I verify site progress myself? Yes. Always instruct clients to verify that the work is finished before signing off on any lender progress payment forms.

If you're running scenarios like this and the document chase is eating your week, the Halo Fortune MM team handles the operational layer — Halo Flex covers self-employed alt-doc and low-deposit deals where majors decline; Halo Chat (broker-only RAG) returns cited lender-policy answers in under 30 seconds. Apply for broker access at halofortune.com.au — no fees.

FAQs

Q: What should I do if my client’s builder goes into liquidation mid-construction?

Advise the client to immediately notify their lender and seek legal advice. Check if the contract has a domestic building insurance policy (e.g., in Victoria or NSW) that covers incomplete work. The broker can help refinance to a new builder if the lender allows novation.

Q: Are off-plan buyers protected if the developer goes bankrupt?

Protection varies by state. In some states, deposits must be held in a statutory trust account. In others, a bond or insurance scheme applies. Brokers should refer clients to their state’s building regulator and recommend lenders that require deposit insurance.

Q: How can I assess a builder’s financial stability for my client?

Review the builder’s licensing, insurance, and project history. Check for any insolvency notices via ASIC. Encourage clients to request references and consider using a builder with a track record of completing similar projects. Some lenders have pre-approved builder panels.

Sources

Footnotes

1. https://www.macrobusiness.com.au/2026/05/aussie-homebuilders-struggle-to-stay-afloat/ , Aussie homebuilders struggle to stay afloat ↩

2. https://www.macrobusiness.com.au/2026/05/aussie-homebuilders-struggle-to-stay-afloat/ , Aussie homebuilders struggle to stay afloat ↩