Tag Archive for: home building compensation fund

Reforming the HBCF

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There is currently a new reform proposed for the HBCF, previously known as the Homeowners Warranty.

A discussion has been held in terms of reforming and changing the HBCF, which all of us in the industry know that it is compulsory. For any kind of construction project that is over the amount of $20,000.00, it is compulsory to obtain the Home Building Compensation Fund (HBCF). This is not fair in terms of the homeowners, for whom the maximum amount that you can actually claim is only $360,000.00.

What if the builder who is managing your project goes broke, disappears out of nowhere, or worse, passes away? Give your professional experience; discuss what you believe the HBCF should be and what changes must be made to achieve this. This is still an ongoing debate about proposing some changes and capping off the maximum claim.

If you are anyone that’s working in that space of construction, it’s highly recommended that you click on the link below and have your say in terms of what the reform should be targeting. HBCF Reform – Have Your Say https://www.sira.nsw.gov.au/consultat…

What is HBCF? - Magico Constructions Magico Constructions

What is HBCF? Home Building Compensation Fund Explained

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So what is HBCF and when is it legally required for a project to have HBCF in place?

In short, HBCF stands for Home Building Compensation Fund. Prior to the 15th of January 2015, it was known more commonly as ‘home warranty insurance’. (Some people still refer to it as home warranty insurance to date)

It is compulsory for all residential projects to have HBCF in place when the contract work is over $20,000 and under 4 storeys high.

Most people seem to have a false understanding that HBCF is meant to serve as some sort of ‘insurance’ for their building project.

Whilst it is true that it serves to cover and protect the client in certain events (which we will cover in detail below).

For most people, it is simply a fee you must pay which provides you little to nothing in return.

It used to be that Builder could obtain HBCF from various insurance companies such as GIO, Allianz, QBE, and Suncorp, just to name a few. (List of past providers can be found here)

However, on the 1st of January 2018, the NSW Home Building Compensation Scheme took into effect. There is now only one company that provides HBCF, which is icare.

The irony of the name ‘icare’ is one that most Builders probably can relate to and appreciate.

What does HBCF Cover?

As iCare phrases it: Certificate of Insurance issued by icare HBCF compensates homeowners for losses arising from defective and incomplete work where the builder or tradesperson:

  • Becomes insolvent/bankrupt
  • Dies
  • ‘Disappears’
  • Has their license suspected by NSW Fair Trading

So as you can see, for most people, these events won’t really be applicable to them.

In my discussions with other Builders, most feel that all HBCF really serves to do is to bail out the incredibly dodgy Builders and extreme cases.

However since it is a legal requirement for projects under 4-storeys to have in place, it is an expense that you must factor in when constructing.

Unlike comprehensive car insurance which will cover you for all repairs (provided you pay for the excess fee and premium), HBCF will not cover all expenses.

As of writing this, HBCF only provides a maximum cover per dwelling of:

  • $300,000, if issued before 1 February 2012
  • $340,000 for all other policies.

So in the event that your project costs more than the above amount, you will need to come up with the funds yourself.

How is HBCF Calculated?

Similar to comprehensive car insurance, the cost for HBCF will vary dependent on the ‘type’ of the project and the construction cost.

HBCF is usually calculated based on a percentage of the construction cost. However, for different project types (such as homes, duplexes, townhouses) the percentages vary.

There is also either a discount or loading applied based on which Builder you select for the project.

Example 1:

A new single dwelling project (C01) of the contract value of $2,000,000 equates to:

Base premium:$19,000.00

GST:$1,900.00

Stamp Duty (9% on Base + GST):$1,881.00

TOTAL:$22,781.00

Example 2:

A new duplex (2 dwellings) project (C02) of the contract value of $2,000,000 equates to:

Base premium:$19,000.00

GST:$1,900.00

Stamp Duty (9% on Base + GST):$1,881.00

TOTAL:$22,781.00

Example 3:

A new multi-dwelling (4 dwellings) project (C03) of a contract value of $2,000,000 equates to:

Base premium:$57,200.00

GST:$5,720.00

Stamp Duty (9% on Base + GST):$5,662.80

TOTAL:$68,582.80

(TOTAL for each dwelling)$17,145.70

Note: This is based on the assumption of there being 0% discount and loading for both examples.

So as you can see, the cost for HBCF varies between single dwellings and multi-dwellings.

In the instance of example 3. Whilst each dwelling is paying less for the HBCF covers the total cost of the HBCF. It ends up costing over triple the amount when compared with a single-dwelling project which has the same construction cost.

Another thing to keep in mind is that at the end of every construction project, the Builder must notify icare of the ‘actual’ cost for the project.

For instance, if the Builder had quoted $ 2 million dollars for a single dwelling project and it ended up costing $ 2.5 million dollars. The Builder will need to inform icare of the actual cost of the project and pay the additional cost.

Book a free call with our team today and get expert guidance from a licensed and qualified builder.

Challenges of the NSW HBC Scheme - Magico ConstructionsMagico Constructions

Challenges of the NSW HBC Scheme

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For those who are working in the NSW construction space, please consider voicing your opinions and concerns on the Home Building Compensation (HBC) Scheme.

Those who know me understand that I have always advocated for an overhaul of the HBCF.

Link to Home Building Compensation Fund Review

For most multi-million-dollar projects, the HBCF cover of ‘just’ $340,000 offers very little in the grand scheme of things.

Not only that, given that the HBCF policy only covers extreme situations — such as a major defect, the builder going insolvent, or being unable to complete the work — the costs of HBCF can often be an unnecessary expense for the owner.

The current HBCF overhaul under consideration proposes increasing the coverage from $340,000 to either $440,000 or $540,000.

While I do support the idea of increasing the cover amount, I am not in favour of raising the average insurance cost by $4,790 to $5,130 for new home builds, or by $1,450 to $1,550 for renovations and alterations.

One thing many may not be aware of is how incredibly difficult it is for builders to increase their HBCF insurance cover.

For a new building company, it’s often almost impossible to grow the business, even if you want to, as increasing your HBCF cover typically requires capital injections — making it financially impossible for most.

The other gripe I’ve always had with HBCF is the fact that it fails to consider that most multi-million dollar projects often having a building cycle that is longer than 12-months.

Meaning that the majority of your HBCF insurance coverage can be held hostage by projects that run over a 12-month cycle or are running late.

This effectively prevents the builder from being able to pick up new projects, which results in the cashflow purgatory that many face which leads to insolvencies.

In fact, the current ASIC data shows that ‘there were 1372 construction companies which entered into external administration for the first time in 2023-24 compared to 981 in 2022-23, and 513 in 2021-22. Construction industry insolvencies in NSW increased by 40% in 2023-24.’

However, what that data doesn’t capture is the building businesses that are sole traders or partnerships that have also gone into administration or insolvent.

Now, more than ever it is important to choose your builder wisely.

For builders, it is even more important to choose your clients wisely.

Having recently gone through unprecedented events involving difficult owners myself, I must confess that I’ve learned a lot about the legal shortcomings of industry-standard contracts.

Did you know that as a builder, if you encounter a difficult owner who refuses to pay, there’s little recourse but to take them to either adjudication or NCAT?

While you could always contractually ‘suspend’ work on-site, there are no means of recovering lost costs except through legal battles, which can drag on for months or even years.

These are the issues not many people are talking about.

Unfortunately, only those who have experienced this first-hand can truly relate and often only discover these challenges when it’s ‘too late’ in most cases.

What’s worse is that some owners deliberately wait until the project is nearing completion to instigate these non-payment issues, knowing it would often cost the builder more in legal fees than simply walking away and cutting their losses.

In an ideal world, there would be greater transparency, not just for builders with checkered pasts, but also for owners who are repeat offenders, deliberately refusing payment to hard-working builders and subcontractors.

With the forecast for the residential construction sector looking grim, it’s no wonder that many builders have decided to call it quits.

It’s simply becoming too hard, and good people are being taken advantage of.

Here’s hoping that the HBC review will bring about positive changes to support the building industry.

In an ideal world, this review would not only result in greater coverage for homeowners but also consider extending the insurance coverage period to accommodate longer projects. This would enable builders to grow their businesses organically with a roll-over insurance cover.

Book a free call with our team today and get expert guidance from a licensed and qualified builder.

Halloween Horror Story - Magico ConstructionsMagico Constructions

Halloween Horror Story

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A Cautionary Tale

In tribute of Halloween that is coming up, I thought I’d share a horror story of how our company narrowly missed a disaster.

*Begin suspense/horror music*

We had a lead come through for a three-storey boutique development project with commercial fit-out works to be completed for the ground floor level. On the surface, the location and scope of works of the project were perfect for our company.

However, things took a quick turn for worse…

First, we received an email from the supposedly ‘project manager’ Morris (not the real name) that is meant to be representing the client and running the project. What set off alarm bells for me was that in his email, Morris’s signature stated that he was a licensed builder and a member of the MBA (Master Builders Association).

Upon further digging, I found that out that not only was the MBA membership inactive, Morris is NO LONGER a licensed builder as his license had been revoked due to prior dodgy practices.

A bit more digging on the internet and it turns out that Morris used to operate a builder company which had scammed several clients.

Online reviews of Morris’s company described the experience as ‘the worst nightmare imaginable’. One review even went on to say that they had failed to take out Home Building Compensation Fund (previously known as home warrantee insurance), and there were several defects on for the work conducted. Another review said that ‘they were cheapest (sic) for a reason’.

With the worst review saying that ‘funds were withdrawn without authorisation’!

Obviously, we ended up politely declining the project and walked away from the inevitable disaster.

However, the moral of this story is that you should ALWAYS do your own investigative research.

If something doesn’t feel right, take action and do a bit of research yourself.

Courtesy of the internet, most things can be found these days through a quick google search. At the very least you should always been researching the company to see if their licenses are in place and valid

More importantly than that, as a consumer you are protected by the Home Building Act 1989.

As there have been recent changes made to HBCF (Home Building Compensation Fund), there is now only one provider which is iCare. This means that it is now easier than before to check whether HBCF has been taken up by the builder.

For any building works over $20,000 the builder or contractor must obtain HBCF cover for the project and provide the client with evidence of their cover. To check the validity of cover you have received, visit:

https://www.icare.nsw.gov.au/builders-and-homeowners/certificates-of-hbcf-insurance/certificates-register/

Book a free call with our team today and get expert guidance from a licensed and qualified builder.

 

Happy Halloween!

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