Build delays hammer Modco

SONJA Van Woerkom signed with Modco Residential to build her dream home in June 2021.

Nearly two years later, she is still waiting for the house in Perth’s eastern suburbs to be completed and is uncertain how long it will be until she finally gets the keys.

Ms Van Woerkom doesn’t think she’ll be living in the house by Christmas, describing the ongoing hold up as “ridiculous”.

“The house has still got no end date,” Ms Van Woerkom told Business News.

It’s been a stressful, and financially challenging, two years.

A similar story has played out for many Western Australians wading through lengthy building delays, with 21,500 houses unfinished by builders across the state as at December 2022, according to the Australian Bureau of Statistics.

In addition to the ongoing cost of the build, Ms Van Woerkom is dealing with the financial impact of remaining in her existing house longer than anticipated.

“If it was built on time, [we] never would have been in this position,” she said.

“I never thought we’d still be in this [existing] house when the baby came.”

But the frustrations don’t end there.

Ms Van Woerkom said Modco issued a $57,000 increase on the price tag of the house in December 2022, a 20 per cent rise in the cost of the build.

Ms Van Woerkom challenged that major lift in the construction bill in the Building Commission.

In a proposed contract remedy order obtained by Business News, the state government’s Building and Energy regulator recommended the increase be disallowed.

“Building & Energy’s view is that a price increase can only be passed on prior to the commencement of works,” the proposed order, which will need to be signed off by the commissioner before becoming final, says.

While this battle has played its way through the state’s regulatory system, the house remains unfinished.

Ms Van Woerkom’s future home reached lockup stage in mid-November 2022, the phase of the construction process where windows and doors have been installed, and utilities are in place.

Five months on from that milestone, plenty of work remains unfinished before handover can take place.

“I don’t think they realise how much this impacts people’s lives, with what they’re doing,” Ms Van Woerkom said.

The first sign of delay was in the weeks after the contract was signed.

The building permit for the house was issued by the relevant local government in December 2021, about 10 weeks after the land was titled.

Insurance 

Not all building delays are equal.

The industry has been beset by shortages of trades and materials, contributing to frustration for homeowners.

Riviera Homes and Modco Residential are listed as the builders on this site. Photo: Matt Mckenzie

For some Modco customers, however, the setbacks started before the first workers appeared on site.

Builders need to secure indemnity insurance for each home before obtaining a construction permit.

The indemnity system is designed to ensure customers receive up to $200,000 to finish a house if their builder disappears, dies, or their business goes under.

But communications from Modco staff show the company struggled to secure sufficient insurance to cover its enormous contract pipeline.

That has left some customers waiting between six months and nearly a year from the signing of their contracts to the approval of their insurance.

Modco was waiting for a green light from its insurer and an “official conclusion” of its insurance status, employees told clients in recent weeks, according to an email sighted by Business News.

There’s evidence of insurance frustrations much further back.

In a 2021 email sighted by Business News, Modco told a customer it was waiting to receive its next insurance quota before the company could submit plans to the local government.

A builder is not limited in the number of construction contracts it can sign with customers. It is limited, however, in the value of indemnity insurance it can secure to start the work.

QBE, the approved insurer for the industry in WA, allocates an insurance cap for a building company based on its capacity to build, experience, risk, its assets, and ability to meet contract obligations.

Business News understands a builder of Modco’s size could access indemnity insurance for construction work on new home builds valued at up to about $5 million.

That compares to the giant order book for Modco, which industry sources estimated exceeded 130 homes.

For context, using recent Australian Bureau of Statistics numbers for the average cost of erecting a house in WA, 130 homes would represent about $50 million of work.

One Modco salesperson had signed on as many as 84 new home contracts in a single month in late 2020, Business News revealed earlier this year.

That was just months after the company was registered with the Australian Securities and Investments Commission, in August 2020.

At the time, Modco had claimed on Facebook that the new contract bonanza was an industry record number of sales.

But the company has struggled to keep its claim of a 20-week build guarantee, and many of the projects are still incomplete.

In February, Modco told Business News it had completed more than 20 homes.

Some customers are still waiting on insurance, according to documents sighted by Business News.

The delays have left customers frustrated.

A Modco customer, who spoke to Business News on condition of anonymity, said they had been living in a caravan while awaiting completion of their house.

It’s understood the state government regulator – the Department of Mines, Industry Regulation and Safety – has made inquiries about Modco’s insurance position.

The department said it could not comment on investigations that may be in progress.

Modco did not respond to multiple requests to comment for this article.

However, director Damien Clancy has previously responded to questions regarding the business’s insurance cap in 2020.

“I can confirm that we had adequate insurance coverage to take on the signed contracts from 2020,” Mr Clancy said.

“However, we did experience some challenges with QBE, our insurance provider, during this period. 

“Their approval process added to the delays caused by other external factors.”

QBE did not respond to requests for comment.

Regarding delays and price rises, Mr Clancy has previously said Modco proactively informed clients of potential price increases before work began. 

“The industry climate at the time, and ongoing, has resulted in supplier and material costs increasing, which has had a domino effect on the rest of the industry,” Mr Clancy said.

“However, we are optimistic that the industry is starting to see stability in pricing, which is a positive sign that these challenges will soon be behind us.”

Riviera deal

Modco has also forwarded contracts to Riviera Homes WA Pty Ltd, which is led by John Italiano.

Business News has obtained one home contract which was novated from Modco to Riviera, and a second contract direct with Riviera, both from 2022.

But both customers, who were aware of Riviera’s involvement, were still liaising with Modco regarding their builds as recently as this year, emails sighted by Business News show. Any contracts, permits or insurance policies were issued in Riviera’s name.

Mr Italiano confirmed the arrangement.

“They’ve just obviously given us jobs through their overflow,” Mr Italiano said.

He said Riviera Homes had not “lent” its indemnity insurance cap to Modco.

“We’ve just taken on their contracts. At the time, there wasn’t a lot of work around,” Mr Italiano said, adding the arrangements were made a couple of years ago.

He said Riviera was a completely separate company from Modco (ASIC documents show the two businesses have different shareholders).

Modco is owned by Cynthia Lu, through Ms Lu Holdings, and Damien Clancy’s Clancy Property Consulting.

Previous directors have included Ismail Khan, who held a role until October 2020, according to ASIC documents.

Ms Lu Holdings also part-owned the now-deregistered company Modco MC with Opulence Property Group, an entity owned by Yusuf Khan.

Reform

A spokesperson for the state regulator said a builder’s details must be the same across the contract, permit and insurance policy.

“[A] registered building service provider must not engage in misleading or deceptive conduct in connection with a building contract or service,” the spokesperson said. 

“This conduct could include entering into a contract with a homeowner using another builder’s information.

“The builder named on the contract is responsible for ensuring the proficient management and supervision of the building service. 

“Anyone who believes that the builder carrying out the work is not the builder named on the building permit or HII policy can report their concerns to Building and Energy.”

HIA executive director WA Michael McGowan said processes with the insurer and the permit authority made it difficult for a builder to start work beyond its insurance cap.

Speaking generally about home indemnity insurance, he said HIA recommended builders assess their capacity to carry out the work before signing contracts.

Builders needed to provide the insurance certificate to the homeowner before taking money or starting work.

“The delay in construction times and cost escalations have certainly caused challenges for builders managing their home indemnity cap,” Mr McGowan told Business News. 

“That said, once the contract is signed, both parties are obliged to deliver their side of the bargain; for builders, this means they must be able to obtain home indemnity insurance.

Mr McGowan said the home indemnity cap had likely saved many businesses and consumers from further challenges by limiting the amount of builds that could be taken on.