The Construction Crisis: Why Builders are Failing

Anthony Perl: 00:00:02

Construction insolvency, builders, homeowners, and the

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collapse of fixed price certainty.

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Welcome to IO, Insolvency Options, with

Darren Vardy, the managing director

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of Insolvency Options and a registered

liquidator with over 30 years of

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experience helping businesses and

individuals navigate financial challenges.

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In today's episode, Darren examines

the wave of insolvencies impacting the

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construction industry and explains the

flow on effect for homeowners, trades,

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suppliers, and the broader housing market.

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He shares lessons from project home

builder collapses, including the

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importance of homeowner warranty

insurance, the dangers of payments made

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ahead of work completed, and why fixed

price contracts may need to evolve.

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I'm your co-host, Anthony Pearl.

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Let's dive into unlocking more

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Darren Vardy: about insolvency options.

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Anthony Perl: Darren, we come to a

topic probably a little bit too near

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and dear to my heart, as you know.

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The construction industry really is one

of the big ones that has had, not just

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been impacted in terms of the number that

have been going under and well publicised

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in many cases, but the impact that that

then has as a flow on to not just the

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people who might be building, but all of

the suppliers that are connected to these

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construction companies along the way.

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It's a big issue at the moment, at a

time when a government is trying to

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generate more housing rather than less.

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Darren Vardy: Yeah, look, at the

moment we're, according to the

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government, we're in a housing crisis.

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There is a lack of supply and the

government is throwing a lot of resources

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at trying to rectify that situation.

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But unrelated to that, but impactful

of that, is some recent failures

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of some large project homes.

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And no doubt these project home builders

were probably integral to fixing the

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supply issue by building new dwellings on

the land that has been sort of released

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by the various government departments

to enable communities to be built.

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And as the probably the largest

one of late is Beechwood Homes.

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Uh, we've got Port Davis Homes as well.

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And, you know, what we're finding

is with those, a significant impact,

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yes, on the trades and the suppliers

and the tax debt, but we're also

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finding a significant impact on

the homeowner and on the customer.

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And particularly with the Beechwood Homes

matter where it became clear that one

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customer had paid $400,000, pretty much

all of the build, to Beechwood Homes.

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We're in circumstances where not a

shovel of soil had been turned and

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when the company was placed into

liquidation, it's also understood that

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there may not have been homeowners

warranty insurance policy in place.

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Albeit that as part of a contract,

they no doubt paid for one because

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a homeowner's warranty insurance is

required for all building over $20,000.

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But to hear that a policy doesn't

exist, in my view, is criminal, let

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alone taking someone's, you know,

hard-earned saved money where there has

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simply been no works done whatsoever

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Anthony Perl: And I think the

challenge for people in this scenario

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is that you're completely reliant on

what will happen in insurance, and

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often it's a big waiting game then.

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Darren Vardy: It is.

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I was appointed to a smaller project

home builder back in twenty twenty-three,

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a company by the name of Unison Homes.

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Now I can say that of the three

million dollar creditor pool that

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existed, two point two million

dollars were claims of homeowners.

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Now, in that instance, there were

probably two customers that didn't

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have homeowners warranty insurance

that had been purchased by the company.

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However, the monies paid by

those particular homeowners

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weren't overly substantial.

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No doubt that they were substantial

to them, but in the whole scheme of

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things, they weren't a large amount of

money that they were out of pocket for.

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And in fact, I believe, I recall

that the funds paid were funds

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paid very close to the time of

liquidation to enable homeowners

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warranty insurance to be obtained.

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And you may be talking, you know,

costs of somewhere between, you know,

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it's three and seven thousand dollars.

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So yes, it's a lot to the

homeowner, but in the whole scheme

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of things, it's not a large loss.

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It could be a lot worse.

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But in my view, the issue we have,

I think, and I think a systemic

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issue with home building contracts,

it enables payments and significant

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payments to be made in advance.

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And I think

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that needs

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to be looked at to the extent that

customers, mums and dads, homeowners,

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are covered by virtue of before

anything happens, payment is made

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for a homeowners insurance policy.

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Maybe that payment needs to go direct to

the government department who controls

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the provision of homeowner warranty

insurance, so the money doesn't go through

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the company per se, the building company.

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But that being said, before anything

happens on a home building contract,

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there needs to be evidence, in my

view, that a policy exists just in case

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there is a financial issue with the

builder throughout the project timeframe

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Anthony Perl: I think the lack of

flexibility in some of the contracts

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makes it incredibly difficult because

it's very much in favor of the builder,

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and that's where the issues then lie.

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As you say, you're paying in

advance, and if the builder fails to

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deliver or fails to pay a supplier

for that and it isn't delivered,

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it's the customer who loses out.

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And often, as we're talking about here,

if it's in the final stages, it can

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mean the difference between getting

an occupancy certificate and not.

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And if you don't have the occupancy

certificate, you're paying rent on a

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place and waiting for long processes

to be enabled and slowly creating huge

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amount of financial and mental anguish for

people who are innocent parties in it all.

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Darren Vardy: Correct.

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And that's where the contract is, for want

of a better term, dictated by the builder.

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They are often always loaded at

the front end, given the supplies

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that the builder needs to acquire.

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Which makes sense.

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However, quite often we find when

there is a failure during the process,

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more often than not, there has been

more money paid than the value of

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the works completed, leaving the

homeowner, customer at a shortfall.

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And the whole purpose of

homeowners warranty insurance

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is to cover that shortfall.

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And if that's not in place whatsoever,

which is the whole purpose of

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that regime, well then that

we've got a failure of the system

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Anthony Perl: The challenge, of course,

is that the public demands a fixed price

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contract in these kinds of circumstances,

and yet we've seen what's happened in the

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world over the past two or three years.

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So if you signed a contract two, three

years ago, and it's taken that long

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for it to go through the process, it's

the building company that's potentially

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wearing a whole heap of extra costs,

which is hurting its cashflow and having

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this flow on effect with all of that.

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And that's the challenge, isn't it?

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I mean, what was it like when you

went into the company that you

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looked after through this process?

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Was that a real impact as well?

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Darren Vardy: At the time, given

that it was January '23, that

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was certainly their major issue.

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You know, we had building

product costs going up by 30%.

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It was right off the back of COVID.

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They were trading right through

COVID, fixed price contracts.

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The margin that they did have, which

is a very, generally a very slim

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margin, was just eroded and overtaken

by the increasing costs of product.

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Anthony Perl: So talk me through what the

process was like, 'cause I think everyone

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listening in will be, will be interested

to know at what point were you actually

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called in, and what was it like both

on for the side of the owners of that

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company, but then also both the suppliers

and the customers, how did that process

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play out and what did it look like?

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Darren Vardy: I think it's fair to say

that I was brought in far too late.

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The business owners were optimistic that

they could, for want of a better term,

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ride the storm, and they were optimistic

that once COVID had settled and the

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impacts of COVID had settled, that

they would be back to pre-COVID time.

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And what they found was

something very different.

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Whereas where during the COVID period,

those prices went up and they stayed up.

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I guess it's not dissimilar to what

we've seen recently with the fuel prices.

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But the prices didn't come back and

therefore had a significant impact

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in their whole business model.

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And they actually found that their

business model needed significant

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changes, and they could not do the, for

want of a better term, you know, mass

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production of properties, dwellings with

the costings and the contract prices that

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they were advertising and entering into.

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Anthony Perl: And what does it look

like in terms of, you know, paint me

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that picture of the owners firstly.

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You've come and opened the door.

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What does it look like

for them in that process?

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Darren Vardy: The property owners?

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Anthony Perl: No, the, the

owners of the business initially.

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Darren Vardy: Sure.

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So the owners of the business

effectively, in this case, got to a

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stage where they didn't have any cash

flow coming in on the projects to

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enable the purchase of materials and

to continue with the ongoing trade.

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So just they really found themselves

in a position where they simply had

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no cash left to deal with anything.

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So every option that may have

been available to them was off the

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table by virtue of the fact that

they left it to the 11th hour to

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seek some guidance and advice.

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Anthony Perl: And where did

they end up post all of this?

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Darren Vardy: Obviously, the

company was in liquidation, went

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into liquidation in early January.

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We'd completed the liquidation

by about the middle of August.

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The directors, I believe, also had a

number of personal guarantees for which

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they've had to try and deal with, um,

and I recall that they may have actually

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just been made personally bankrupt.

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Anthony Perl: So then now let's look

at it in terms of the suppliers.

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Who gets what first and when,

and how much did it look like

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for the suppliers in this?

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Darren Vardy: Well, given

the, given the nature of the

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business, there were no employees.

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They contracted all their suppliers

out, so all their trades, all their

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contractors were all unsecured

creditors who lined up with the ATO.

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But given that we had 10 to 12 incomplete

projects that were unable to be finished,

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there was no income or no money coming

in from the completion of those.

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So there was no assets recovered,

therefore there was no return back to the

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trade creditors and or the tax office.

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Anthony Perl: And so then when it

came to all the people who were their

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customers, what did the process look like?

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I gather that, you know, it starts

with day one when you're appointed.

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What does that process like for them?

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Darren Vardy: So we were

fortunate enough that these guys

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had some really good records.

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So as soon as we got appointed, we

issued a notice to all the homeowners

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advising them of our appointment

and that their recourse was as

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against any homeowner warranty

insurance that existed at the time.

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As I indicated earlier, there was

only two customers that didn't have

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a policy in place, so for the money

they paid, which was not overly

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significant, they were an unsecured

creditor of the company lining up next

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to the trade creditors and the ATO.

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Whereas with the balance of the customers

who had the benefit of a homeowner's

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warranty insurance policy, they were

able to make a claim against the Home

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Building Compensation Fund and then deal

with them to get their build completed.

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Anthony Perl: Talk to me about this

whole idea as well, that we live in a

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society that has been very much built

on you have to own your own home.

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We've got lots of TV shows out there

about renovation and construction.

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It's a passion for a lot of

Australians to want to do that.

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There's a lot of people that step

into that property development

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space, whether it's just flipping a

home or living in one for a little

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while and then turning it around,

w- or to bigger scale developments.

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What's the blight on the

industry at the moment?

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What's the future of it?

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Because the, the volume of businesses

that have fallen into administration

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is significant in this space.

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Darren Vardy: Yeah, I think the

blight on the industry at the moment

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is that there is a supply issue.

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Is there enough builders

to meet the supply issue?

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And the answer to that is no, and, and

we've seen that with the increase in

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demand for these trades, which has in turn

resulted in an increase in their rates.

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How do you fix the issue?

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Well, I think the government does

need to have a good look at it, and

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it all comes down to, in my view,

how we match up the supply needs

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with the resources that we have.

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And, you know, we've seen of late,

specifically in the construction industry,

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where there has been some small failures

of builders through no fault of their

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own, but the allowance or the ability even

going through a restructure program and a

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turnaround, the ability to obtain ongoing

homeowner warranty insurance for their

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clients is actually being restricted by

the very people who want the supply built.

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So the government, in my view,

needs to have a good look at that.

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And yes, where there has been

builders who have taken money and

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essentially ripped people off,

yes, they should be rubbed out.

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But I think where there are good builders,

through no fault of their own, just a

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set of circumstances where they've had an

insolvency event, they've got the support

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of their creditors to do a turnaround, in

my view, they need to be given the ability

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to obtain ongoing homeowners warranty

insurance Because if they don't, how do

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they successfully complete a turnaround?

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So there's a few different forces

operating against the greater

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good, which in my view needs

to be looked at and dealt with.

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Anthony Perl: Just to wrap up this

conversation, because I think we

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could talk for a long time about this

sector, but I think there are two

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things that strike me is, is that is

it the death of fixed price contracts?

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Is that something that has

to be a thing of the past?

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And secondly, the

warning around insurance.

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It's not like it covers 100% either,

and insurance prices indeed could

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rise as a result of all of this as

well, so that also has an impact.

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Darren Vardy: Fixed price contracts, I

think it's too difficult to quote a fixed

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price contract these days when there are

delays beyond the control of in the supply

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chain and the additional costs through

the supply chain which can come up.

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So I do think that fixed price contracts

may become a thing of the past.

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The benefit of a due and charge

contract is that the homeowner is on

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top of and getting assessed regularly

the value of the work's done.

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So they're only paying for the

value of the work's done, and

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there's some comfort in that.

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Does it cost more?

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I think there's arguments both sides of

the fence on that, but it's certainly

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less risky and more controllable.

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Although with fixed price contract,

you generally have a timeframe for

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getting work done, which you can hold

the builder to and seek damages if

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they fail to complete within time.

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You don't have that luxury with a due

and charge contract as the standard

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due and charge contract agreement sits.

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So I think we'll end up finding over

the flux of time a bit of a hybrid

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where some of the fixed price contract

terms will come into play, such as

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time delays, scheduling, and the like.

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Albeit works will be done on a cost plus

basis with a, I guess, a fair estimate

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at the beginning as to what it will be.

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So I think there is an opportunity

to get to that hybrid contract model,

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which has protection mechanisms for both

parties, and I guess we'll just have to

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sit back and wait and see how that goes.

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Anthony Perl: And just lastly

on that, just to a point that I

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made, insurance, you need to be

aware that it doesn't cover 100%.

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Darren Vardy: Correct.

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Absolutely, it doesn't.

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I know with the Unison Homes matter,

I looked this up, the maximum

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threshold of the indemnity at

that time was $340,000 per claim.

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Looking at another one at the moment,

which is a job I got appointed to

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recently, home builder, not a project home

builder, but just a small home builder.

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His indemnity threshold on appears

to be around the $225,000 per claim.

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So no, it doesn't, and it's not there to

cover the completion of your building.

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It's there to cover the additional

costs that you are out of pocket.

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Anthony Perl: Well, that's all

for this episode of IO: Insolvency

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Options, but next time we'll begin

a detailed look at retail insolvency

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through the Mosaic Brand story.

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Darren's going to explain how household

retail names can still collapse under the

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weight of aggressive expansion, stretched

supplier payments, COVID disruption, rent

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pressure, and deteriorating cash flow.

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It's a powerful reminder that

size and brand recognition do

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not guarantee financial strength.

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We've created a workbook for this

episode of the podcast with some

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questions for you to answer, key

quotes, and action steps to follow.

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Check out the show notes for

the link to download your copy.

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For details on how to get in

touch with Darren and his team

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on insolvency challenges, please

also consult the show notes.

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This podcast is produced by my

team at podcastdoneforyou.com.au,

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helping professionals share

their expertise through

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powerful podcast content.

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If you found value in today's episode,

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subscribe to IO: Insolvency Options.

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Until next time, remember, there's always

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