For builders, developers, subcontractors and suppliers, the key is to recognise the warning signs early and understand what steps can be taken to protect your position.

Insolvency can affect the whole project

A construction business does not necessarily fail overnight. Financial problems may become apparent through late payments, requests to change payment terms, unpaid suppliers, reduced activity on site or repeated disputes over progress claims.

If a contractor, subcontractor, developer or supplier becomes insolvent, the consequences can include:

• unpaid progress claims
• delays or suspension of work
• difficulty securing replacement contractors
• disputes over defective or incomplete work
• claims against performance security or retention money
• loss of materials or equipment on site
• significant additional costs to complete the project

The earlier these issues are identified, the more options a business is likely to have.

What should you do if another party appears to be in financial trouble?

If you are concerned about the financial position of another party to a construction contract, do not simply wait for a formal insolvency appointment.

Start by reviewing the contract and your financial exposure. Check what is currently owed, what work has been completed, what security you hold and whether there are outstanding payment claims or disputes.

You should also consider whether you have rights to suspend work, terminate the contract, call on security or take other protective action. These rights will depend on the contract and the circumstances and acting too quickly or incorrectly can create its own legal risks.

Security of payment can be important

For construction businesses in Victoria, the Building and Construction Industry Security of Payment Act 2002 (Vic) provides an important mechanism for recovering progress payments.

The Victorian Security of Payment regime was significantly amended from 15 April 2026. Among other changes, payment claims can generally be made monthly, the timeframe for making claims has been extended, and the legislation now provides a statutory entitlement to claim the release of performance security.

These changes make it particularly important for businesses to understand their payment rights and ensure claims are made correctly and on time.

However, obtaining an adjudication determination does not necessarily mean you will recover the money if the other party is already insolvent. Insolvency can fundamentally change the practical value of a claim and the recovery options available.

Review your security

Before financial problems escalate, consider what security you have available.

Depending on the project and contract, this may include:

• bank guarantees
• performance bonds
• retention money
• personal guarantees
• security interests
• other contractual rights

The timing and method of enforcing security can be critical. For example, the amended Victorian Security of Payment Act now imposes requirements around giving notice before having recourse to performance security.

A review of your contractual security arrangements should therefore form part of any early response to concerns about a counterparty’s financial position.

What if you are the party facing insolvency?

If your own construction business is experiencing financial difficulty, waiting until you cannot pay your debts is rarely the best strategy.

Early advice can help identify whether the business can be restructured, whether contracts can be renegotiated, whether cash flow can be stabilised or whether a formal insolvency process is appropriate.

Directors also need to be conscious of their obligations when a company is experiencing financial distress. Continuing to trade without properly considering the company’s financial position can expose directors to significant personal and corporate risks.

Act before the project stops

Construction insolvency is rarely just an accounting issue. It can affect contracts, payment rights, security, employees, suppliers, project completion and ultimately the viability of other businesses in the construction chain.

If you are concerned that a contractor, developer, subcontractor or supplier may be in financial difficulty, early legal advice can help you understand your position before the situation becomes more difficult to manage.

At Madgwicks, our restructuring & insolvency and building & construction lawyers advise businesses on contractual rights, payment disputes, security, insolvency risk and strategies to protect their commercial position.

If you are concerned about the financial position of another party on a construction project, or your own business is experiencing financial pressure, contact Madgwicks Lawyers for advice early.

The information provided in this article is general in nature, cannot be relied on as legal advice and does not create an engagement. Every business is different and appropriate legal and financial advice should be obtained before implementation. Please contact one of our lawyers listed for advice about your specific situation. Output from ChatGPT and OpenAI on 27 August 2026 reviewed and updated by Madgwicks Lawyers prior to publication.