Construction has a higher rate of business failure than most sectors, for structural reasons: thin margins, long payment chains, fixed-price contracts against variable input costs, and heavy exposure to a single large customer or project. When a builder or head contractor fails, the losses cascade to subcontractors, suppliers and homeowners.
Almost every effective protection has to be in place before the failure, and most of them before signing.
For homeowners and clients
Do not prepay. The single largest cause of catastrophic homeowner loss is a large deposit or progress payment made ahead of work performed. Payments should follow value delivered, verified on site. A builder requiring substantial payment well in advance of work is either under cashflow pressure or organising your money as their working capital, and neither is your problem to solve.
Use a written contract with a payment schedule tied to milestones. Building contracts above a prescribed value must be in writing and must contain certain minimum content, including a payment schedule and dispute provisions. Standard form residential building contracts are published by the industry associations and are considerably better than an informal arrangement.
Understand what the guarantees cover. Implied warranties under the Building Act apply to residential building work and cannot be contracted out of. They give a homeowner rights against the builder — which are worth little if the builder no longer exists. Third-party guarantee products sold through the industry associations transfer some of that risk to an insurer, but the cover is specific and worth reading rather than assuming.
Check before engaging. Companies Office records show directors and company history, including previous failed companies. A director on their fourth building company in eight years is a signal.
For subcontractors and suppliers
Retentions are now trust money. Retention money withheld under a commercial construction contract must be held on trust in a separate account, which means it should sit outside the pool available to general creditors on insolvency. Ask for the information you are entitled to about where your retentions are held, and treat reluctance as a warning.
Use the payment claim regime properly. A compliant payment claim under the Construction Contracts Act obliges the payer to respond with a payment schedule within the required timeframe. Failure to respond generally makes the claimed sum payable in full and recoverable as a debt. This is a statutory advantage that costs nothing, and casual invoicing gives it away.
Register security interests where you can. Suppliers providing goods on credit can register a purchase money security interest on the Personal Property Securities Register. It must be registered correctly and in time, but it materially changes your position in an insolvency.
Watch the payment pattern. Deteriorating payment behaviour is the earliest reliable signal of distress, and it usually appears months before failure. A customer stretching from 30 to 60 to 90 days is telling you something.
Warning signs worth acting on
- Requests to bring forward payments or to pay outside agreed terms.
- Part payments without explanation, or payments that arrive only after chasing.
- Sudden changes in key staff, particularly finance staff.
- Work stopping on site for reasons that keep changing.
- Suppliers refusing to deliver, or requiring cash on delivery.
- A new company set up by the same directors alongside the existing one.
If it happens
Where a customer enters liquidation or receivership, stop work and take advice before doing anything else. Continuing to supply an insolvent customer usually increases the loss.
Register your claim with the liquidator, and gather your documentation early — contract, payment claims, schedules, delivery records, retention information and any security registration. Unsecured creditors generally recover little, so the value of your position depends almost entirely on whether you hold security, a trust claim over retentions, or a personal guarantee.
Personal guarantees from directors are worth asking for at the outset. They are commonly given in construction supply, and they are the difference between a total loss and a recoverable one.
Where to look
MBIE publishes guidance on building contracts and consumer protection for residential building work, the Companies Office register is free to search, and the Personal Property Securities Register is available at ppsr.companiesoffice.govt.nz.
General information only, not legal advice. Insolvency is fact-specific — take advice early.
