The building industry is tough right now. Why builders go broke is not because they’re “elite” or “trusted” in the building industry. Their survival comes down to cash flow, profitability, and good risk management.
At IBA, we work with more than 20 builders and do extensive background checks to minimise risk for our clients. We are not looking through their books (this can docted), but instead we speak with suppliers, trades, and industry contacts to get a feel for how each builder is operating on the ground.
It is not a perfect system because you can check today, but if you consider the length of time it takes for build a home (anywhere 12 to 24 months) and a lot can change for builders & many factors can contribute to why builders go broke. That is the risk many people underestimate.
Here are some of the key things to look for when choosing a builder & how builders can avoid going under.
- Are they capping the number of jobs they take on each month?
- Is there a clear criteria for what they will and will not build?
- Do they have solid cash reserves? For example, one of our builders keeps $500,000 minimum in a dedicated account purely for cash flow, with additional funds available if required.
Why does this matter? Because this is the kind of real-world financial pressure builders face every day. It’s why builders go broke.
A builder may have a $30,000 retaining wall scheduled for construction in six months’ time. When they go to book it, the supplier demands full payment upfront or they will not order the materials. The builder pays today but will not be paid until months later when the wall is built and claimed.
Next, the builder needs to order a $9,000 feature light for installation 12 months from now. The supplier is a new business, only four months old, but they want full payment upfront. If that supplier goes under, that $9,000 is gone.
Multiply this across the amount of homes under construction, and you begin to understand the financial strain some builders are facing.
And here’s the truth most forget, even the richest companies in the world shut down businesses that don’t make money. Google closed Google+, Amazon pulled the pin on entire divisions like Amazon Restaurants and Amazon Care, and Disney regularly axes brands, streaming platforms, or even movie studios when they’re unprofitable.
This is why many smart builders have shifted to single storey homes. Two storey construction adds complexity, increases timelines, makes it hard to find trades and inflates financial risk. That said, there are builders who still deliver two and even three storey homes profitably because they manage the process well and understand the risks. We work with a few of them.
Also, be wary of the “trust us because…” line. That is not due diligence. Ask questions. Does the reasoning make sense? Can they explain the risks, the process, and what protects you? Blind trust is risky in any environment.
It’s also worth pointing out that most builders who collapse are not doing it intentionally. Why builders go broke isn’t because they’re not good people who genuinely want to succeed and deliver great homes to happy clients. Unfortunately, it’s the building industry resembling a minefield at the moment.
For the record, this post is not about one builder or business, it is about providing a better understanding of the issues and wider risks across the industry.
The bottom line is this: financial strength, risk management, and solid business systems matter more than branding, display homes, or who is the loudest on social media.
In this market, you can have a good build and an enjoyable experience, but you should get the right advice as well as doing your homework. Ask the hard questions. In this market, survival belongs to the smartest operators, not the noisiest. If you want help doing your homework, get in touch today.