Developing measures to combat insolvency in the residential construction industry

What we did and why

The BPC supported research undertaken by Victoria University to better understand the causes of residential builder insolvency and identify practical strategies to strengthen the industry's resilience.

The construction industry is experiencing persistently high levels of insolvency, with significant consequences for builders, subcontractors, consumers, financiers and the broader economy. When a builder becomes insolvent, projects can be delayed or abandoned, consumers may face substantial financial losses, subcontractors can be left unpaid, and confidence in the construction sector is weakened.

To help address these challenges, the research examined why residential builders become insolvent, how financial distress develops over time, and what measures could reduce insolvency risk. The study used a mixed-methods approach, including analysis of 49 insolvency case studies, surveys, interviews and focus groups with industry stakeholders.

The aim was to generate evidence-based recommendations that support a more sustainable, financially resilient and accountable residential construction sector.

The research was led by Dr Malindu Sandanayake and supported by the BPC through a research grant awarded in 2024. The project was completed in 2026.

What we found

The research found that residential builder insolvency is rarely caused by a single event. Instead, it is typically the result of multiple interconnected pressures that accumulate over time across financial, operational, governance and regulatory domains. It identified four major contributors to insolvency.

Financial and market risks

Builders face increasing financial pressures from fixed-price contracts, material cost escalation, supply-chain disruptions, market volatility and rising interest rates.

Many businesses operate on narrow profit margins, leaving limited capacity to absorb unexpected costs, project delays or changing economic conditions. Limited access to restructuring options and external support further increases exposure to insolvency.

Workforce and governance failures

Skills shortages, workforce capability gaps and weaknesses in business leadership can undermine performance and financial sustainability.

Many builders possess strong technical expertise but have limited financial and business management skills. The research found that limited financial literacy, inadequate governance practices and poor financial oversight often contribute to business distress.

Financial management failures

Poor cash flow management, poor accounting practices and systems, and under-capitalisation were among the most common factors associated with insolvency.

Some builders struggle to maintain sufficient liquidity to withstand project disruptions or market shocks. Persistent under-pricing and low profitability can further erode business resilience and increase insolvency risk.

Project management failures

Project complexity, design changes, rework and contractual disputes contribute to delays and cost overruns.

Weaknesses in business and project risk management, combined with poor coordination across projects can place additional strain on financial and organisational resources, particularly when multiple issues occur simultaneously.

Identifying builders at risk

Builders experiencing financial distress typically display a combination of vulnerabilities rather than a single warning sign.

The research found that businesses at greater risk of insolvency often experience declining profitability, cash-flow constraints, growing debt levels, workforce shortages and capability gaps, weak governance and financial oversight, poor project controls and ineffective risk management, and increasing contractual disputes and project delays.

Recognising these risk factors early is critical because opportunities for recovery reduce significantly as financial pressure intensifies.

Early warning signs of insolvency

A key finding of the research was that insolvencies are generally preceded by clusters of warning signs. The study identified three broad categories of early warning indicators that commonly emerge before insolvency occurs.

Operational cost and schedule pressures

Increasing construction costs, project delays, rework and growing operational inefficiencies often signal rising financial stress.

Contractual and organisational instability

Changes in project arrangements, disputes, governance issues, workforce challenges and organisational disruption can indicate underlying business vulnerability.

Financial underperformance

Tightening liquidity, increasing debt, declining profitability, delayed payments and negative cash flow patterns are common indicators of financial distress.

The research found that these warning signs rarely occur in isolation. Insolvency is typically preceded by several indicators appearing simultaneously, accelerating financial deterioration and reducing opportunities for recovery.

What consumers may observe

Consumers often have limited visibility of a builder's internal financial position. However, several observable warning signs may indicate growing financial or operational stress, including:

• repeated project delays or unexplained work stoppages
• requests for early payments or frequent contract variations
• reduced communication or responsiveness
• frequent turnover of subcontractors or declining site activity
• requests to substitute specified products or materials with lower-cost alternatives
• escalating disputes regarding scope, timelines or payments.

The presence of a single warning sign does not necessarily indicate insolvency risk. However, the presence of multiple indicators may suggest increasing financial or operational distress.

Report recommendations

The report proposes four priority areas for reducing insolvency risk and improving industry resilience.

Improve education and training

Strengthening financial literacy, business management capability and risk management skills among residential builders can improve decision-making and reduce insolvency risk.

The report recommends practical, construction-specific training in financial management, business operations, project management and risk management to strengthen industry capability and resilience.

Support early intervention

Builders often seek assistance only after financial problems have become severe.

The report recommends measures that improve visibility of financial risk, including automated financial alerts, business health checks and digital project management tools that help identify emerging issues and support timely corrective action.

Improve builder financial compliance

The research found that stronger financial oversight could help improve transparency and accountability across the sector.

Recommendations include introducing mandatory independent financial audits, strengthening financial management requirements within builder licensing frameworks, and supporting ongoing professional development in financial and business management.

Increase consumer awareness

The report recommends providing clearer and more accessible information to help consumers undertake due diligence when selecting a builder, better understand building contracts, and recognise early warning signs of builder financial distress.

Improved consumer awareness can help consumers make more informed decisions and reduce exposure to financial and project risks.

What difference this makes

The research demonstrates that reducing builder insolvency requires more than addressing individual business failures. Insolvency is a systemic challenge influenced by financial pressures, organisational capability, governance practices, project management and regulatory settings.

The findings highlight the need for an integrated, industry-wide approach that combines capability development, earlier detection of financial distress, stronger financial compliance and greater consumer awareness.

By addressing the underlying causes of insolvency and supporting earlier intervention, the industry can improve business sustainability, strengthen consumer confidence and reduce the significant economic and social impacts associated with builder failures.

Download the report

Read the full report: Safeguarding the viability and confidence of the residential construction industry in the face of imminent insolvency risks

Related research

This research complements other BPC-supported research aimed at reducing insolvency-related harms and strengthening resilience across the construction sector, including:

• Insolvency in the construction industry
• Towards smart contracts and smart finance in construction