What happens if my builder goes bust during the build?

What should you do first?

A building company becomes insolvent when it cannot pay its debts. It is then usually wound up, either by its own decision or by court order. The NSW Government's advice on home building delays tells owners to notify the home building compensation insurer in writing immediately, because a delay may affect the claim.

icare lets you lodge a loss notification through its online portal or by form. You can lodge one before a trigger event has happened. It records the problem and helps protect your right to claim later.

Then take these steps while the claim gets under way.

• Get urgent advice on any payment due under your contract and on who can now receive it. Do not make early or extra payments the contract does not authorise, because they may not be recoverable.
• Confirm the cover by searching your address or the builder's licence number on the HBCF Certificates Register at Verify NSW.
• Find the appointed liquidator or administrator by searching the builder's company on ASIC's registers and contact them about your contract.
• Secure the site and photograph the work as it stands, along with any materials on site.

Unpaid subcontractors are not entitled to come onto your site and take back materials that you have paid for and that form part of the building works. The NSW Government advises reporting any theft or damage to NSW Police on 131 444.

What does home building compensation cover pay?

Home building compensation cover is last resort insurance that icare says is required for most residential work over $20,000 unless an exemption applies. It helps only where a policy is in place and a trigger event has happened. That means the builder has become insolvent, died or disappeared or has had their licence suspended for not complying with a court or tribunal order to pay you.

For unfinished work, icare's guide to what the cover includes lists the loss of your deposit and the cost to complete the work, within the policy limit. It also covers defective work for six years for major defects and two years for other defects. The claim is based on your actual financial loss, taking into account how much work was done, what you have paid and what it will cost to finish. The limit is $340,000 for policies issued from 1 February 2012, shared across every claim on that property. For unfinished work the policy wording adds a second cap of 20% of the contract price including agreed variations. On a $1 million contract the most it pays for non-completion is $200,000.

Time limits apply. For unfinished work the policy asks you to notify icare within 12 months of the latest of the contract date, the agreed start date or the date work stopped. Act promptly rather than waiting for news of the insolvency.

Payments the cover may not return

The cover protects payments made within the rules of your contract. The NSW Government's guide to protecting yourself from builder insolvency sets out three kinds of payment that may fall outside it.

• Any deposit above the legal maximum of 10 per cent of the contract price.
• Early or extra payments that were not authorised progress payments under the contract.
• Upfront payments under a separate agreement for plans and other work before the building contract.

Can you end the contract and bring in another builder?

The Building Commission NSW home building contract for work over $20,000 treats liquidation as a ground for the owner to end the contract by written notice. After termination, unfixed materials on site can stay with the owner. If the reasonable cost of finishing the job exceeds what would have been due under the contract, the difference becomes a debt the builder owes you. An insolvent builder may never pay that debt in full.

Your own contract may set different steps. Take legal advice before you terminate and keep icare informed while it assesses the claim. The cost of finishing with a new builder is central to what it pays.

The best protection starts before the contract. Our guide to choosing a luxury home builder in Sydney covers licence checks, home building compensation and the questions to ask before you sign.