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.
To follow the whole process start at If The Builder Goes Bust