Industry News

Mitigating insolvency risk in the construction industry

The employment of digital tools can help developers, financiers and insurers mitigating insolvency risk in the construction industry.

Executive summary:

  • The insolvency of companies involved in construction projects is increasing in New South Wales.
  • Developers and financiers must demonstrate compliance with relevant legislations. A failure to comply can result in significant costs and delays.
  • Insurance policies can help manage risks in these projects, but comprehensive due diligence is necessary before engaging any parties in projects.
  • Digital tools, such as the KPMG Origins Building Trustworthy Indicator (BTI) are being adopted across the industry to help manage risks and compliance by tracking projects and data in real time.

Recent high-profile cases of insolvency among builders and consultants have left financiers and developers in NSW grappling with how to engage new parties in ongoing projects. The figures are not promising; according to ASIC, the construction industry alone witnessed 1,284 company collapses in the 2021-2022 financial year. This has only become worse, where a staggering 605 construction companies became insolvent within the first quarter of 2022-2023 alone. Engaging appropriate participants in construction projects therefore requires careful consideration to protect the interests of all parties involved.

In addition to navigating these scenarios, developers and financiers must also demonstrate compliance with relevant legislation, such as the NSW Residential Apartment Buildings (RAB) Act and the Design and Building Practitioners (DBP) Act. These laws are designed to protect the interests of apartment purchasers, and failure to comply can result in significant costs and delays, leading to the postponement of sales contract settlements and potential defaults on lending between financiers and developers. 

In this context, insurance plays a crucial role in managing these risks. Builders and consultants can obtain professional indemnity insurance to cover any claims arising from their work, including those that may arise after their involvement in a project has ended. Developers and financiers can also obtain insurance to cover losses resulting from insolvency, delays, or defects. 

However, it is important to keep in mind that insurance policies can only cover certain risks, and there are limitations and exclusions that must be considered. For example, policies may not cover pre-existing defects or exclusions in contracts, and the limits of coverage may not be sufficient to cover all losses. Furthermore, with the recent legislative changes currently being implemented in NSW, increasing scrutiny and works stoppages of non-trustworthy players are further derailing construction progress in unforeseen and costly ways.  

To mitigate these risks, financiers and insurers must take a proactive approach to assess the risks associated with each project and the parties involved, such as performing thorough due diligence in assessing the financial stability and track record of builders, consultants, and contractors before engaging them in construction works. Contracts, policies, and agreements should also ensure alignment with relevant legislation. 

One such approach is the employment of digital tools in helping manage such risks. The Building Trustworthy Indicator (BTI) is a new digital solution for developers and financiers facing risks associated with engaging new builders and consultants in ongoing projects. BTI offers a transparent means of managing compliance and tracking of projects in real-time. The platform also helps to build trust and confidence by differentiating trustworthy and reliable parties from those with a history of non-compliance, enabling informed decisions about who to engage in projects. By leveraging market-led approaches and the latest technologies, BTI can offer a way forward for a transparent and trustworthy construction industry. 

Engaging new builders and consultants in ongoing projects requires careful planning and consideration, particularly in the event of insolvency. Compliance with relevant legislation and standards is crucial, as is adequate insurance cover to manage the associated risks, and hence it is more important than ever for all parties involved to keep abreast of the latest developments and best practices in insurance and risk management. By taking a proactive and strategic approach, financiers, insurers, and developers can minimize disruptions and protect their interests while delivering successful projects. 

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