Warning: soaring building costs could derail more projects under construction. What can homeowners do if they are caught out?

What can homeowners do when their building company goes bust?

 

As the property downturn continues, reports of building companies and developers going into liquidation keep coming. The Herald recently reported that Bayside Designer Homes could no longer continue operating, leaving 9 unfinished building projects across Auckland, in Milford, Beach Haven, Hobsonville, Castor Bay, Mt Roskill, Massey, Rothesay Bay, Sunnyvale and Papakura.

 

Former television presenter Ingrid Hipkiss and her partner Jack Tarrant, along with 8 others, have become creditors of Bayside Designer Homes. Hipkiss was deeply disappointed, saying her new home in Three Kings remained unfinished. Another creditor said he had signed a building contract worth NZ$2,500,000 with the company. Yet 12 months had passed with no substantial progress: the company had only demolished the old house.

 

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Damien Grant of insolvency specialist Waterstones said he had found that, in the first two months of this year, the number of construction companies entering liquidation far exceeded those in other sectors, including food and hospitality. Construction companies accounted for nearly 1/3 of all company liquidations in January and February 2023. He believed this could be a consequence of the cooling property market and predicted that the proportion of insolvencies involving these companies would continue to rise over the coming months.

 

Commenting on such cases, Consumer NZ said customers could easily find themselves in difficulty when their builder faced collapse. Unfortunately, there was little they could do. In these circumstances, customers became unsecured creditors, and their only option was to register their losses with the liquidators and receivers. Consumer NZ advised homeowners to find out whether they were protected by a building guarantee provider and understand what their existing guarantee covered.

 

Master Builders chief executive David Kelly said homeowners should seek advice from a specialist construction lawyer when drawing up contracts from the outset to protect their legal interests. Taking precautions was particularly important for homeowners affected by building company liquidations.

 

 

Kelly added that in the current construction environment, homeowners should be extremely cautious about fixed-price contracts, because soaring building material prices could leave homeowners facing unreasonable demands for contingency payments under fixed-price contracts, putting the entire project at risk of stalling. He believed that, once a building company became insolvent, neither the current consumer protection legislation nor the Building Act contained provisions offering financial protection. People should therefore take out building guarantee insurance before signing contracts for construction or renovation projects, giving them an effective way to address problems if a crisis arose.

 

Peter Wolfkamp, the resident building expert on Newstalk ZB, said he was concerned about the recent string of construction company collapses. He recalled speaking to around 130 builders at a conference a few years ago, when none had experienced late payments. Now, however, almost every construction business faced bad debts, including builders, plumbers, electricians and drainlayers. If all these small businesses were burdened by bad debts, it would seriously affect their ability to expand and develop, preventing them from hiring staff or buying new plant or equipment.

 

Soaring building costs are a hurdle every construction company faces

 

New Zealand Commerce and Consumer Affairs Minister David Clark recently said 283 construction companies had gone into liquidation in the 11 months to November last year。

 

Behind these figures lies persistently high inflation. In January this year, the Herald reported that quarterly construction cost inflation in New Zealand had halved in the latest quarter, yet the annual rate still reached a new high of 10.4%. CoreLogic NZ's Cordell Construction Cost Index showed that construction cost inflation was 1.7% in the final quarter of last year, down from 3.4% in the third quarter.

 

Westpac senior economist Satish Ranchhod said last month that strong construction cost inflation could persist for some time. Over the past year, the cost of building a new home had risen by 14% nationwide and by 17% in Auckland.

 

A building company called Stroud Homes Pukekohe reportedly also entered liquidation last Thursday. This will affect 9 contracts it had signed for new homes, with some projects yet to start and others nearing completion. Another building company, JHIM Homes, also announced that it was entering liquidation in January.

 

It is worth noting that builders often initiate their own insolvency proceedings, rather than creditors or liquidators doing so. When creditors seek millions of New Zealand dollars in compensation, recovering even a cent is almost impossible. These creditor companies are invariably suppliers and subcontractors in the construction industry. They too have been struggling with rising costs and trying to recover their outlay.