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How this builder went out of business from one customer...

How this builder went out of business from one customer…  

The project started just like any other. The customer, Mr. Smith, loved the floorplan, and couldn’t wait to move into their new home. Joe Massouri Pty Ltd* was just as excited to start the build. Never did Joe imagine that this project would eventually lead to a legal claim resulting in an avalanche of expenses  which would eventually force him out of business.

Smooth start ends on the rocks…

The first stages of the build went smoothly and the customer made all the progress payments promptly. Just as the house was in its final stages, and it was time for the last two payments, the excuses started – Mr. Smith’s pay hadn’t come through this month, or the bank was delaying release of the funds.

As a family man himself, it didn’t feel right to Joe to stop the build and risk leaving the family without a roof over their head, so he proceeded with the project in good faith. The construction was about to wrap up and, as Joe issued the final bill, he was met with words which any business owner would dread hearing…the customer was not able to make the last two payments.  

Loaded with legal costs

There are laws in the Fair Trading Act 1987 (NSW) which protect the interests of the customer when businesses do the wrong thing. However, where customers fail to pay, the business owner may have to bear costs of legal proceedings in recovering outstanding invoices. The cost of this alone can sometimes be enough to send businesses into bankruptcy, especially for sole traders.

In Joe’s case, the only way for him to recover the outstanding payments was to commence court proceedings. Unfortunately, Joe was eventually forced to drop the court proceedings due to the financial strain of legal fees. He had already paid for all the materials required to complete the project out of his own pocket. As a result, the business was not able to pay its debts as they fell due and was not able to continue to trade.

The customer isn’t always right

So how does a builder, or any business taking payments in stages, manage a slow-paying (or non-paying) customer? We suggest making payment terms clear up front and in writing. Communicate regularly with your customer in writing, specify the payment due dates, and the consequences if progress payments are not made on time.

While slight payment extensions might be the norm in the industry, we recommend to never purchase materials out of your own pocket if your customer tends to be delayed in making payments.

It’s all about trusting your intuition, sometimes there might not be any warning signs until the end. If you are lucky enough to pick up on warning signs early you can take the necessary actions to ensure you’re not having to constantly chase payments.
Insurance for Legal Expenses**

As experts in both the construction industry, and insurance, HIAIS understand the pressures and risks builders and contractors may face with any given project.

Construction Legal Expenses Insurance through HIAIS has been designed for builders and others in the building industry to cover legal costs which may arise due to industry-specific contractual disputes with customers or suppliers. It provides access to legal advice and can cover costs and attendance expenses (of both parties) incurred.

Non-payments from customers is just one area which could lead to significant legal costs. Construction businesses may also be exposed to the risk of customers taking action against them due to other disputes, and Construction Legal Expenses may help cover legal costs arising out of these disputes.

For more information on Legal Expenses Insurance through HIAIS, visit the Legal Expenses page on our website.

* All names used in this article have been changed for privacy reasons.
** Subject to full terms, conditions and limits of the policy. Please review the full policy wording for more information.

© 2019 Aon Risk Services Australia Limited ABN 17 000 434 720 AFSL 241141 (Aon)
This information is intended to provide general insurance related information only.  It is not intended to be comprehensive, nor does it, or should it (under any circumstances) be construed as constituting legal advice.  You should seek independent legal or other professional advice before acting or relying on any of the content of this information. Before deciding whether a particular product is right for you, please consider the relevant Product Disclosure Statement (if applicable) and full policy terms and conditions available from Aon on request or contact us to speak to an adviser.   Aon will not be responsible for any loss, damage, cost or expense you or anyone else incurs in reliance on or use of any information contained in this article.


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