When the builder goes under, the fine print is the only thing left standing.

Roughly 2,000 homes under construction and over 13,000 more in the pipeline. That is the scale of the collapse of Sydney developer Bathla Group, which entered voluntary administration in late August of this year. Buyers who paid deposits are waiting to find out if their homes will be finished, and subcontractors are unsecured creditors, with no certainty about what (if anything) they will recover.

This is a stark reminder that in construction, the biggest legal risk may not be a dispute about workmanship. Instead, it might simply be the financial collapse of the party on the other side of the contract.

This article explores managing contractor and developer insolvency risk.

Why insolvency risk sits with the principal

When a builder or developer becomes insolvent mid-project, the principal can be left with an unfinished building, deposits or progress payments that are difficult to recover, subcontractors downing tools and chasing unpaid invoices, and months of delay while administrators assess the business.

Once a company is in voluntary administration, legal proceedings against it generally cannot be started or continued without the administrator’s consent or a court order. That protects the company while its future is assessed, but it can leave an aggrieved principal stuck in a holding pattern.

What principals can build into a contract to reduce this risk

1. Conduct financial due diligence before signing: Credit checks, trade references, financial statements, and a review of whether the pipeline of projects is realistic against balance sheet strength. Thousands of projects on thin margins is a very different risk profile to a modest, well-funded one.
2. Security for performance: Unconditional bank guarantees or retention held until practical completion (and often through the defects liability period) give the principal a fallback if the contractor cannot finish or leaves defects unremedied.
3. Payments tied to verified progress: Structure payments around milestones independently verified by a superintendent or certifier, rather than fixed dates or large upfront sums. This strategy limits how much cash is exposed at any point.
4. Step-in rights: A well-drafted step-in clause lets the principal (or a financier) take over administering the contract (for example, engaging replacement contractors or completing works directly) without necessarily terminating outright.
5. Parent company or director guarantees: Where the contracting entity is a special-purpose vehicle with limited assets, or even just a subsidiary or a larger parent company, a guarantee from a related company or individual adds another avenue of recovery. The form of guarantee can be inserted as an annexure or schedule to the contract, so it can be prepared and signed at the same time as the contract.
6. Ongoing financial monitoring: For larger or longer projects, contractual rights to request updated financials, notice of material adverse changes, or evidence of ongoing insurance and subcontractor payments, are useful to understand the circumstances of the contractor at any stage of the project, and not just at the beginning.
7. Home warranty / builder’s warranty insurance: Statutory home building compensation schemes exist in most states precisely because owners can be left exposed by builder insolvency. Know the coverage and its limits before you need to rely on it, and keep in mind that this is only required in certain circumstances.

Good contract drafting will not stop a builder or developer from becoming insolvent, but it can materially change how exposed you are when it happens, such as how much money is at risk, how fast you can respond, and what leverage you have to get a project finished rather than leaving it abandoned or unfinished for an extended period of time.

If you are entering a significant construction contract, it is worth having these mechanisms reviewed by a lawyer before you sign, not after something goes wrong.