House Building can be a high risk business…………..so what happens if the builder of your new house goes bust?
Your house building contract should have clauses included for the eventuality of the builder becoming insolvent. Read the contract carefully but make sure you get in touch with your solicitor.
There should also be a Builder Insurance Policy, in your name, so check the contract.
If a builder goes into administration it’s still technically trading and may be bought by another builder so the best thing is to keep in contact with the administrators.
If the builder is being liquidated remember the house is on your land and you have paid for a large part of what has been built through the stage payments, so the first thing you need to done is to protect your money and assets. Here are some steps you should think about after you have talked to your legal representative:
If you can, put a stop on any stage payments which may be going through.
Go to the site and change any locks.(It’s illegal for tradesmen to remove items from a house in lieu of unpaid bills but that doesn’t stop them trying.)
If the site has temporary fencing talk to the fencing supplier about paying for the fence to remain.
Secure any materials stored on the site.
Organise insurance for the house for fire, vandalism and theft.
Once everything is secure you can work with your solicitor to formally terminate the contract and engaging a new builder to finish the work to the original plans.
Have you ever had a builder goes bust building your new home? and did it all turned out OK?
Well if you have followed the advice of the previous Bankruptcy Post you should have stopped all payments and made the site secure, to protect the money you have previously paid.
The next step is to get all the information about the build together including:
The original contract documents including, The Drawings and, The Specification.
Evidence of all payments made.
Details of the Builders Insurance. The insurer should be mentioned in the Contract If you haven’t got details of the cover you should contact them and get a copy.
Any variations that you have requested.
Any increases of cost that the builder has notified you about, (for example Site Work Costs).
Copies of all council permits.
All other correspondence.
A record of how much work has been completed. As well as writing everything down takes lots of photographs.
Cost you have incurred, such as paying fence rental.
Getting all this information together should help you, and your lawyer, in:
Officially ending the old contract.
Dealing with the building insurance (see your contract for details of the insurer) regarding assistance in completing the build.
Organising a contract with a new builder to complete the works.
While you are getting the information you should try to keep in touch with your builders administrator to monitor the situation. If another builder wants to buy your builder’s business that could be the quickest and easiest way to complete your house.
So the builder has become insolvent and the house is half built…………..what are the financial implications?
To finish a partially built project using another builder is going to cost more than if your original builder finished the project. For an idea of possible costs see Is The Insurance Enough?
Builders don’t like taking over half built projects and you aren’t in a buyers market so rates will be higher.
There should to be a couple of things that could help you:
Unless progress has been slow there is likely to have been a fair bit more work done than you have paid for since your last Stage Payment. – Under most contracts you don’t have to pay the builder for work completed prior to the bankruptcy until the house is completed and you can deduct any additional costs from any payments due to the builder, or his administrator.
Many states now require the builder to have insurance against insolvency. This insurance should allow you to claim up to a percentage (typically 20%) of the total contract value to have the house finished by another builder. This completion must be to more than the original specification.
I’ve spoken before about the importance of records and when dealing with completion of your house it is vital that you keep good records of all costs associated with the completion of the house.
Make sure your costs include all professional advice from lawyers, project managers, and other building professionals that you may need to engage.
If you want to find out more about Builders insurance Its worth looking at the QBE website.
A friend of mine whose builder went bust told me that the recovery added another $30,000 to the cost of the house………………How much did it add to your house?
I have previously talked about dealing with the mess when a builder goes bust.
To make the financial aspects clearer a worked example follows:
This is based on a contract for a house to be built for $300,000.
A typical building insurance is 20% of the contract cost so it will be $60,000.
Assuming the builder becomes insolvent during the construction of the frame.
You should have already paid out
$15,000 (5% Deposit)
$30,000 (10% Base Stage Payment)
$45,000 Total Payments
A new builder is going to charge more than the remaining $255,000 to finish the job as they will have to do quite a bit of extra administration and estimating. Say plus 20% ($306,000).
You have probably had some legal costs say $10,000.
The total cost of building the house is now:
$45,000 Initial payments for Original Builder.
$306,000 New Builder Cost
$10,000 Additional Legal cost
$361 ,000 Total.
You will be reimbursed up to $60,000 by the insurer so the total cost to you will be $361,000, which is $1,000 more than the original cost.
As any new builder will probably charge a percentage on the remaining work its possible that if you are in the later stages of a build the insurance will be enough. If you are right at the start it may be best to walk away and start again with a new builder.
If you have allowed the builder to charge more than the Standard Progress Payments there is more likely to be a shortfall in insurance money increasing the amount you will need to find.
If your new house is under construction a typical procedure to finish the house with the insurer is:
The insurer should appoint a building consultant.
The consultant will inspect the house and work out the scope of works to complete the house.
The scope will be passed to you for acceptance.
Three quote will be required based on the scope of works. These quotes can be from builders nominated by the insurer or you can seek quotes yourself from licensed builders.
Once quotes are received the insurer will work out the amount of their liability and make an offer of the amount they consider appropriate.
Assuming you confirm your acceptance of the offer you can then accept a quote and sign a new building contract with your choice of builder.
The contract will include a new house warranty insurance policy which should be issued to you. (You then have two policies; one for the original builders work, and one for the new builders completion work).
Normally the insurer will make stage payments as required under the new contract on your behalf until the amount of the agreed insurance settlement funds are spent.
Your mortgage provider will then continue making stage payments until the house is completed.
Remember its important to keep your mortgage provider aware of the progress of the claim and the proposed new building contract.