Vetting, insuring and replacing a builder mid-project
Developers assume the lender is underwriting the project and the sponsor. On a construction facility the lender is also underwriting the builder — and builder problems terminate more construction facilities than valuation problems do.
What a lender needs on a new or unproven builder
The approval criteria a private construction lender applies to a builder without an established track record:
- Individual and company building practitioner registration
- Home warranty and contract works insurance evidence
- A CV detailing the practitioner’s specific project roles — project manager, site manager, contract administrator — not just a list of projects
- A trade breakdown with margin shown as a separate line
- Quotes confirming roughly 70% of the contract sum’s key trades are pre-committed
- ATO portals for the building company
- Evidence of $300,000–$400,000 of working capital, because a new builder has little to no supplier credit
Where a builder is running several projects concurrently, expect an additional request: how the builder will split time across them, and whether a dedicated site supervisor will be engaged.
Expect the lender to also flag that the build price will likely be higher than an established, high-volume builder’s, because of lower trade buying power. That is a feasibility input, not an objection.
The workaround when the builder is marginal
A deliberately low blended first-mortgage LVR attracts lighter builder scrutiny. Funding land and build separately at conservative percentages — for example 65% of land as-is value plus 65% of the construction contract, producing an effective ~43% LVR against GRV — and covering the shortfall with second-mortgage debt is a legitimate way to get a marginal or new builder approved.
A low-LVR first mortgage simply draws far fewer questions about the builder than a high-LVR one does.
Builder tax compliance is a live credit risk
This is the one that catches developers by surprise, because it has nothing to do with their own project.
A builder’s tax or financial position not being current can cause a lender to withdraw entirely — even after progress claims have started. That has been the stated reason for a withdrawal mid-build.
Two practical consequences:
- The recency bar is strict. Private financiers have required an ATO portal summary across all accounts, an activity statement portal extract covering 12+ months, and an income tax portal extract covering 12+ months — all dated within about a day of the investment committee meeting. Source these from the builder’s accountant early.
- An unlodged BAS discovered mid-diligence does not have to stop the deal. Get a formal payment arrangement in place quickly — a lump sum of around 15% followed by fixed monthly instalments has worked — and keep the lender updated so other workstreams progress in parallel.
If the builder restructures into a new entity to resolve a tax position, budget six to eight weeks for home warranty insurance approval of the new entity, driven by an assessment of assets, liabilities and pipeline, with no guaranteed cover amount until that assessment completes.
Insurance: the two products people confuse
Contract works insurance, not domestic building insurance, is what a QS checks against the contract sum. They are different products and DBI does not satisfy this requirement. A quantity surveyor has flagged held contract works cover as insufficient to cover the full building contract sum — which blocks certification regardless of physical progress.
Two related requirements:
- The builder’s legal name must match exactly across the building contract, the building permit and the insurance policy.
- Cover must not have lapsed and must be sized to at least the full ex-GST contract value. An outdated certificate blocks a claim even after the QS has approved release.
Construction warranty insurers also independently sanity-check the contract price. One flagged a $900,000 contract price as too low for the specified build quality on a $2.674m facility — and required an owner’s intention letter, signed specifications, a written funds-use reconciliation of the full facility against the contract value, a margin confirmation and a bill of quantities. Where the borrower is also the builder or a related party, have that package ready before lodging.
Replacing a builder mid-project
The standard evidence set to keep a construction facility on track after a termination:
- The new builder’s state-authority letter of eligibility, evidencing the insurance limit
- A CV documenting relevant experience
- An updated QS report reflecting the new contract, the new builder and current market rates
Package all three before approaching — or re-approaching — a mezzanine or second-mortgage lender. Going back with a partial pack invites a decline that is hard to reverse.
One trap: a change to the named building-contract entity triggers a change-of-builder review even when it is administrative. A sole-trader-to-company transfer by the same individual counts, and can require a fresh valuation. Have the registration grant letter, building permit and amended building contract ready, and loop the QS in as soon as the entity change happens rather than after a claim is queried.
Related: if the builder changes after a to-be-erected valuation has been obtained, check whether the original valuer and lender will accept a change-of-builder addendum. If not, a brand-new TBE valuation is required.
Three red flags on an incoming file
- Self-certified progress claims with no independent QS. It may have worked with the current lender; a new funder will almost certainly insist on third-party verification. Flag it early and produce a cost-to-complete report before pitching.
- An unexplained drop in cost-to-complete. Reconcile a distressed builder’s stated cost-to-complete against the last formal QS figure and confirm what progress payments were actually received in between. An unexplained fall without matching drawdowns suggests the true remaining cost is understated — one file showed a ~$770,000 gap.
- A fixed fee plus a large management fee plus a liability waiver. One proposal combined a fixed-price contract with a separate 12% management fee and a side agreement waiving the builder’s liability for quality, cost and duration — requiring the developer to waive the right to sue. A no-liability side agreement shifting all risk to the developer is a signal to negotiate the fee down, and to benchmark the price against independent take-offs.
Demolition and site sequencing
Two timing items that routinely blow out a program:
- Asbestos. Budget time and cost for a hazardous materials report before relying on any demolition quote for a fire-damaged or older dwelling. Fire damage can push required work from a standard removal classification to a higher one, materially changing cost — one quote excluded any asbestos allowance entirely until the report determined the classification.
- Demolition takes 6–8 weeks, plus 2–3 weeks more if the works span the Christmas and council-closure period. The standard sequence is asbestos sampling within about two weeks of quote acceptance (quote revised if found), then temporary fencing and signage, then removal once the demolition permit issues. Confirm upfront whether sampling, permit lodgement and power/gas disconnection are in scope or separate — council permit cut-offs around mid-December can shift a start from mid-February to mid-March.
Cross-check the invoice against the contract
Before authorising or querying a builder’s progress-claim invoice, cross-check it against the contract’s own stage-payment clauses — a deposit, for instance, may only become claimable once the building permit issues and the contract has commenced — and reconcile it against the actual bank statement transaction: payee, amount, date.
Contract-to-drawing-to-permit mismatches are also caught here. A QS or lender review has caught unit counts, storey counts and garage configurations differing between the signed contract, the drawings and the planning permit. A single mismatched detail stalls both the QS report and the loan until the builder issues a signed addendum.
General information only. It is not credit assistance, legal advice, financial product advice, or an offer of finance, and it does not take account of your objectives, financial situation or needs. Requirements and figures are indicative, de-identified observations over 2024–2026 and vary by lender and jurisdiction.