Insolvency in the construction industry

The research undertook in-depth analysis on why so many residential building companies become insolvent, and why this keeps occurring. Through data analysis, systems mapping and interviews with industry participants, the research uncovered the underlying conditions that make the sector financially fragile.

The research found that insolvency in residential construction is a systemic problem, not just the result of poor management. It’s driven by a mix of financial, regulatory, educational and cultural factors, along with external pressures that are often unpredictable and difficult to manage.

Insolvencies are most common among small, long-established building companies. These businesses often operate with tight margins, limited cash reserve and high exposure to debt, leaving them vulnerable when costs rise or payments are delayed. Business failures are not just due to poor management because even experienced business owners are affected, pointing to structural issues within the industry.

The research identified 4 interrelated drivers that weaken financial resilience across the sector:

Funding structures

Builders and subcontractors carry most of the financial risk due to rigid progress payment models, limited pre-construction funding, low deposit caps for construction projects and inflexible bank lending practices.

Limited business acumen

Many builders have strong technical skills but limited business or financial skills, leading to poor risk management, contractual disputes with sub-contractors, and delayed responses to financial stress.

Regulatory complexity and compliance burden

Overlapping and inconsistent rules across schemes (building codes, licensing schemes, company obligations) and jurisdictions creates confusion, duplication and added compliance costs, especially for small builders.

Data gaps

A lack of detailed, timely insolvency data makes it hard to identify early warning signs or design targeted policy responses.

Together, these findings show that building company failures are a symptom of deeper structural issues in the industry. Addressing them will require coordinated reform across finance, regulation, education and training, and data systems to build a more stable and resilient residential construction sector.

Report recommendations

The report makes 23 recommendations to tackle the main causes of insolvency by improving regulation, strengthening builders’ education and business capability, and creating systems that support fairer sharing of financial risk, early identification of financial stress, and better decision making. A summary of the recommendations and their rationale is:

Address systemic flaws in funding structures

The current financial structure of residential construction places disproportionate risk on small and medium-sized builders and their sub-contractors. These vulnerabilities are reinforced by rigid progress payment schedules, limited access to pre-construction finance, low deposit caps, and bank lending practices that classify construction as a high-risk sector.

Strengthen business capability, contract literacy and dispute resolution

Many builders have limited business and financial management skills, which contributes to poor risk management, contractual disputes, and slow responses to financial stress. Industry culture often places greater value on technical expertise than on strategic or financial planning, reinforcing these weaknesses. Small and medium-sized builders often avoid early professional advice because many accountants and lawyers lack construction-specific knowledge. This gap delays the detection of financial problems and reduces the stabilising influence of expert support.

Reduce regulatory complexity and the compliance burden

The fragmented and overlapping regulatory environment creates confusion, duplication and compliance fatigue, especially for small and medium-sized builders. Inconsistent licensing requirements, insolvency-triggered builder licence suspensions, and different requirements and processes across jurisdictions disrupt business continuity and weaken sector stability.

Improve data and early warning systems

Gaps in industry data make it difficult to spot early signs of financial stress, assess whether policies are working, and design targeted actions to prevent business failures.

Read the full report: Why are insolvencies so high the construction industry and what can be done about it?

What difference this made

The research provides evidence-based insights to help better understand insolvency risks, and how policy changes and regulation reform could improve outcomes for builders, sub-contractors, consumers and the broader economy.

The research informed the two submissions (June and August 2025) to the Queensland Productivity Commission’s (QPC) 2025 inquiry into construction industry productivity. The submissions provide research insights to help shape the Commission’s understanding of key issues. The submissions also responded to QPC’s specific inquiries about current deposit caps for domestic building contracts, the costs and benefits associated with trust account obligations in Queensland, and how challenges in the training and apprenticeship system are influencing the construction industry’s workforce.

The research also informed a submission (September 2025) to the Commonwealth Productivity Commission’s Five Pillars of productivity inquiries, responding to draft recommendations on three lines of inquiry:

• Creating a more dynamic and resilient economy through improved regulation that promotes business growth and productivity.
• Building a skilled and adaptable workforce through fit-for-purpose occupational entry regulations (e.g. builder licensing) and building skills and qualifications for a more productive workforce.
• Harnessing data and digital technologies by providing new pathways for access to data about insolvencies.

The research has also been examined in an episode of the INSOL Talks podcast, where two of the researchers, Dr Elizabeth Streten and Dr Amanda Bull, discuss the study and its implications for the Australian residential construction industry, and for insolvency systems in Australia and globally. In the episode, they outline the key findings, summarise the evidence underpinning recommendations, and explain the rationale for the proposed policy and practice responses. The discussion provides a concise and accessible account of the research outcomes and their relevance to construction and insolvency industry participants.

BPC supports other research to reduce harms

This research complements other research the BPC is supporting to reduce harms caused by insolvency and phoenix activity in the construction sector:

• Developing measures to combat insolvency in the residential construction industry by Victoria University, supported by the BPC through a research grant awarded in 2024.
• Towards smart contracts and smart finance in construction by Queensland University of Technology, supported by the BPC through its partnership with the Building 4.0 CRC.