The problem we see here in the construction industry (and I'm sure it is true for others as well) is that (lets work on the example of a builder but it could be a drain layer or plumber or any other trade for that matter) is that a builder decides to go out on his own after working for someone else for years (and no doubt good at their job) but said builder has little to no financial backing or capital (when I studied accounting and economics you set up a business plan, found capital or investors to back that plan before actually starting out).
So said builder has won a contract to build a house, they go hand out to suppliers looking for credit to purchase supplies to build said house. Now this is all well and proper but on the 20th after first month said supply companies are going to want payment on good supplied to said builder but because the house isn't complete yet and the deposit (or progress payments) aren't enough the builder is struggling to make payment and it becomes a juggling act between getting paid and paying suppliers. So said builder is walking a tight rope along the line of insolvency and missing a payment to a major supplier can quickly tip said builder/company into receivership.
This is a problem I see occur on a regular basis and it's happening during the boom part of the cycle and it only gets worse during the bust part of the cycle.
In NZ it is really hard been a small time business owner working for yourself unless you have plenty of business nous and capital which is something many small businesses seems to lack unfortunately and then there are the bad actors, the ones who think they know what they are doing and continuously run companies into the ground and then phoenix into the next one. We see way to many of those and NZ law allows them to get away with it.
I’m only speculating, but I suspect part of the reason is the warranty that has to be offered on building work (7 years?).
Builders have to purchase an insurance to cover that warranty. When something goes wrong, the builder is the first port of call and is expected to provide the warranty work. If the consumer has issues contacting the builder, I think the next port of call is to the state building authority that tracks down the builder and tries to compel them to do the work. If the builder no longer exists, then the insurance kicks in.
So, I suspect, the modus operandi for a builder becomes… set up a company, build a few houses, close company and close off ongoing liability. Set up new company, …and repeat as often as needed.
The sad news is that some builders were not even buying the mandated insurance, so the end buyer was left high and dry.
A fairly classic case of privatise the profits and socialise the loses.
Maybe the increase the cost of materials is also driving them to ’go under’ (and later phoenix)?
We have the NZ Master builder association and they provide cover to their licensed builders but try claiming on one of those policies is like getting blood out of a stone. There really is little protection for the buyer if the builder goes bust/insolvent.
This is a good example of a major construction company collapse and has been ongoing for years in the courts,
The Supreme Court has rejected the appeal of the four directors of the collapsed construction firm Mainzeal, with $39.8m in damages, plus interest, awarded against them for breaching the Companies Act.
www.rnz.co.nz
It's a rare case where the board is been held to account for their bad management. Glad to see the former PM been held to account!