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 2 payments, the excuses started – the colour of the kitchen splashback wasn’t right; Mrs. Smith wasn’t happy with the quality of the tiles in the guest bathroom.

Eager to complete this project, and a family man himself, Joe continued with the build in good faith, hoping the disagreements would resolve themselves once Mr. Smith saw the finished product.

But as the construction wrapped up, and Joe issued the final invoices Joe was met with the words he’d dreaded hearing throughout his building career – the client was not happy with the work completed, and refused to make the remaining payments.

Loaded with legal costs

There are laws in the FairTrading Act 1987 (NSW), and tribunals which allow customers to take action against businesses if they believe they’ve done the wrong thing, or not fulfilled contractual obligations. However, if a customer refuses to pay for the services of a business due to a dispute, the cost of legal proceedings to recover the money sits with the business. With legal costs easily running into the tens of thousands of dollars, this can be enough to send any small business owner into bankruptcy.

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, his 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 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, if a client hints they’re unhappy with any work completed so far, we recommend to not continue with the project without first resolving or rectifying the issue.

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 policywording for more information.