It’s the call no principal or developer wants to get: your contractor has gone into liquidation, and the site is at a standstill. Tools down, workers gone, project incomplete. You’ve invested significant time and money into the project, and now everything is in limbo.
So what happens next? Can you recover, carry on with the project, and protect your interests? The answer is: yes, but what you do in the early stages will make a big difference to the outcome.
First Things First: What Does Liquidation Mean?
If your contractor has gone into liquidation, it means the company has reached the end of the road. It is formally insolvent, unable to pay its debts, and has appointed a liquidator to wind up the company, sell off its assets, and distribute the proceeds to creditors.
Liquidation is different to other forms of external administration like voluntary administration or small business restructuring, which may leave the door open for the business to continue in some form. In liquidation, the company cannot keep trading. Its building licence is usually automatically cancelled (in Queensland, this happens under the QBCC Act), and it can no longer lawfully perform construction work.
In short, the contract can’t proceed as planned and you need to start looking at your next steps.
Step 1: Review Your Contract
Before doing anything else, go back to your contract. Most well-drafted construction contracts include clauses that allow for termination or suspension if the contractor becomes insolvent. This is often defined in the contract as an “insolvency event,” which usually includes liquidation.
- Check what the contract says about:
- Your right to terminate due to insolvency
- Taking the works out of the contractor’s hands
- Accessing or drawing on security (e.g. bank guarantees or retention funds)
- Recourse against insurance or other protective mechanisms
Make sure you follow the procedure outlined in the contract carefully. Give any required notices, observe timeframes, and keep clear records. Getting this right upfront will protect your position and make it easier to defend any claims brought by the liquidator down the track.
Step 2: Secure the Site and the Works
Once it’s confirmed that the contractor is in liquidation, your immediate focus should be on securing the site and preserving the value of the partially completed works.
This might include:
- Restricting site access to prevent unauthorised removal of tools, equipment or materials
- Taking stock of what’s on site, what’s been completed, and what’s outstanding
- Notifying the liquidator that the contract is terminated or suspended, and that you are taking control of the site
You may also want to document the condition of the works and the site. Photos, reports or third-party inspections can be useful if disputes arise later over what was delivered or what costs were incurred after the liquidation.
Step 3: Protect Your Financial Position
In most cases, liquidation will mean you are now an unsecured creditor in the contractor’s liquidation. Realistically, that means any claims you might have for incomplete or defective work may not be recovered.
However, there are some ways to protect your financial position:
- Hold on to retention funds – unless the contract requires otherwise, do not release retention or security. These funds may be your best tool to cover the cost of completing or rectifying the work.
- Assess any offsetting claims – if the contractor owes you money (for example, because you’ll need to pay more to get someone else in to finish the job), document those losses and claim offsets if the liquidator seeks payment from you.
- Avoid unnecessary payments – liquidators may ask you to pay progress claims, even if the work is incomplete or defective. Don’t agree to anything without legal advice. If you have legitimate claims or costs to deduct, you may be able to resist those demands.
Step 4: Plan for Completion
You’ll need to engage a new contractor to complete the project but this comes with its own set of risks.
Start by carefully assessing:
- The scope of incomplete works and any defects
- The cost to complete – it may be more than the original contract value, particularly if market rates have risen or the works need to be redone
- Whether your contract allows you to use any of the original contractor’s plans, designs, or intellectual property
- What warranties or guarantees may still be enforceable (e.g. for subcontractor works or supplier warranties)
From there, you can decide whether to engage a new contractor under a novated arrangement, re-tender the remainder of the works, or proceed with selected subcontractors directly. Whichever route you choose, make sure you have a clear written agreement in place, including scopes, timelines, payment terms and risk allocations.
Step 5: Consider Subcontractors’ Charges and Claims
In Queensland and some other jurisdictions, subcontractors can use the subcontractor’s charge process to secure payment from money that would otherwise be paid to the head contractor. If you’re the principal and the head contractor has gone into liquidation, you may receive notices from subcontractors seeking to have their claims paid directly.
These charges are legitimate, and you’ll need to deal with them properly but again, make sure you don’t pay anything twice. If you’re not sure what your obligations are, seek advice before releasing any funds.
Step 6: Communicate with the Liquidator (But Cautiously)
The liquidator’s job is to recover as much money as possible to pay creditors which includes looking at the company’s contracts, outstanding payments, and any assets or claims. You may need to interact with them in relation to site handover, access to documents, or disputed claims.
Co-operate where needed but protect your position. Don’t agree to anything (particularly around payments) without checking your contractual and legal rights. Keep written records of all communications and seek advice if you’re unsure about your obligations.
Can You Insulate Yourself From This Happening Again?
While you can’t prevent a contractor from going bust, you can take steps on future projects to reduce the impact, such as:
- Include robust contract terms allowing for early termination, access to works, and recourse to security
- Request regular financial information or health checks throughout the project
- Avoid paying ahead of schedule or releasing retention early without good reason
- Keep good records of variations, costs to complete, and site conditions
- Stay alert to warning signs. Late payments to subcontractors, erratic site behaviour, or persistent claims can all signal financial distress
Final Thoughts
A contractor going into liquidation mid-project is never ideal. But it doesn’t have to mean the end of the road for your project. If you act quickly, follow your contract, secure your position and plan carefully, there are practical ways to minimise the damage and carry the works through to completion.
It’s also a reminder of the value of preparation. The right clauses, the right procedures, and the right mindset can make a big difference when the unexpected happens.
