FACT SHEET 11 - MAJOR BUILDER ELIGIBILITY REVIEWS (effective from 1 July 2014)

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1 FACT SHEET 11 - MAJOR BUILDER ELIGIBILITY REVIEWS (effective from 1 July 2014) The risk management strategy of the Home Warranty (HWIF) for major builders requires that a comprehensive annual review be undertaken of the financial position of large builders as a minimum and that this be complemented by quarterly submissions for major project home builders. Why does SICorp require major builder reviews? 1. To provide the HWIF with a measure of the management effectiveness and financial strength of Major Builders; and 2. Allow the HWIF to implement risk reduction and/or monitoring strategies, if required, in order to reduce the HWIF s insolvency exposure without destabilising the major builder market - such strategies may include strengthening equity, reducing levels of construction, monitoring of work in progress, increased reporting frequency or the appointment of external professional advisors. When are major builder reviews due? The exact schedule for each annual eligibility review will be determined by the HWIF or the Insurance Agent. The builder (via their broker) will be provided with at least 40 business days notice to submit the required documentation. Note: Changes in a builder s choice of Broker or Insurance Agent will NOT change the review requirements or timeframes. Which builders are to provide a Major Builder Eligibility Review? A Major Builder Eligibility Review is required where the builder is: a major home builder, as defined below; a commercial or multi dwelling builder with an annual business turnover of $30 million or above; a swimming pl builder with an annual business turnover of $15 million or above; deemed to be a Major Builder by the HWIF. Annual business turnover covers residential and non-residential work undertaken in and outside of New South Wales and includes: the business turnover of related entities under the same management control or ownership; the business turnover of entities under the control of the same parent entity; and budgeted construction costs for jobs under project management agreements. The definition of related entity and control is to be interpreted in the broadest context so as to cover all building activity, assets, equity and/or liabilities. The following Major Home Builders are also considered to be Major Builders the builder is predominantly a home builder or residential alterations and additions builder with an approved eligibility turnover or annual business turnover of $15 million or above; Fact Sheet 11 - Major Builder Eligibility Reviews - New South Wales through NSW Self Insurance Corporation 2014 Page 1

2 the builder is predominantly a home builder or residential alterations and additions builder with approved eligibility above $5 million per annum who requests an increase in turnover of 50% or more; or is subject to 6 monthly or 3 monthly intensive monitoring; the builder is deemed to be a Major Home Builder by the HWIF. What are the minimum Annual Eligibility Review Submission Requirements? Publically listed companies, trusts and groups will be reviewed on publicly available financial reports and ASX announcements. Private entities are to provide the following information: complete externally prepared end of financial year statements including related companies or controlled entities with substantial financial transactions with the building entity; (Note: Where consolidated group accounts are provided, the individual accounts for each building entity must also be provided.) a detailed breakdown of related party loan balances (both assets and liabilities) and related transactions (such as revenue, management fees, rent, hire fees etc.) at the balance date for each financial period, together with the purposes and repayment agreements; a Business Operational Plan( refer to Notes below); details of any franchise arrangements, brand licensing or group buying schemes and any external marketing operations; The purpose of external funding and confirmation from financial institutions of facilities in place including limits, when facilities mature or are due for renewal and details of any loan covenants together with any breach of covenant and what actions were taken; and details of any claims, Tribunal, court actions and/or other litigation with homeowners, suppliers, sub-contractors or other parties above $50,000. Additional requirements for Major Home Builders: contract Work in Progress Valuation Statement (refer to Notes below); Work in Progress schedule showing for period end reported, all current construction jobs detailing contract price, site commencement date, and stage of progress, cost to complete and undrawn contract value (Indicating each project as either NSW residential, other State residential or commercial); copy of standard residential progress payment schedule in building contracts; breakdown of current working capital (including cash at bank, debtors, creditors and work in progress/unearned revenue valuation) prepared as at a date within 60 days of the submission date; Internal Controls Statement (refer to Notes below); and land holding and display home information including ownership/leasehold/contract terms, address, stage of development, estimated current market value and method of valuation (directors or independent market or sworn valuation) for each property. Additional requirements for builders being treated as Major Builders for the first time due to business expansion or new businesses (including builders with approved Eligibility above $5 million who request an increase in turnover of 50% or more): Fact Sheet 11 - Major Builder Eligibility Reviews - New South Wales through NSW Self Insurance Corporation 2014 Page 2

3 business structure including all related parties, principals, shareholders and holders of builder s licences; concise history of the group for up to 5 prior years and a Comprehensive Business Plan; and the building and business history of directors, key managers including licence holders, and shareholders (with in excess of a 25% shareholding). Notes: 1. A Business Operational Plan is to assist the HWIF understand the nature and maturity of the business as well as future plans, including; current and anticipated total sales turnover; proposed home warranty turn-over and job type requirements for the next 12 months; market segments and geographical regions targeted; current gross margin targets on new sales; staff organisational chart; CV s for all changed key managers; group corporate tree with shareholder details where changes have occurred; and estimating, accounting and site management IT capability where changes have occurred. 2. A Work in Progress Valuation Statement is to be provided by the external accountants or auditors that: the AASB111 accounting standard has been applied to the work in progress and unearned revenue values in the balance sheet; land and buildings for resale or speculative construction WIP is based on the directors best estimate of realisable value or at cost whichever is the lesser amount; and all amounts shown as WIP are current assets 3. An Internal Controls Statement is a director s declaration on the builders letterhead, capable of external testing, that: sales margins that are less than the company gross margin targets are authorised by the business principal or a manager authorised by the principal before tenders or building quotes are submitted; movement to forecast gross profit margin are monitored for individual projects by the management team; at contract signing; prior to commencement of construction following confirmed orders to major suppliers and supply and install contractors; during construction on a monthly basis; and at practical completion; with a control to address systemic margin erosion by amending estimating procedures, master pricing files and standard model pricing as appropriate; estimating master pricing files have a forward pricing contingency based on forecast market conditions; management monthly review of; dynamic cash flow forecast for current year and with a minimum of 6 months into the future; Profit and loss results against the initial budget set and against current forecast with ongoing changes to the profit and loss forecast as required; and Fact Sheet 11 - Major Builder Eligibility Reviews - New South Wales through NSW Self Insurance Corporation 2014 Page 3

4 YTD balance sheet, aged debtors and aged creditors reports. all projects undergo a close out review of gross margin and construction defects at 90 days from handover and controls exist to adjust gross margin targets on future sales estimates. What is the Annual Eligibility Review Process? The builder is to be provided with a minimum of 40 business days notice of a review requirement. The broker is to assist the builder by: providing notice to the builder and obtain confirmation that the timeframes are achievable; requesting instructions from the Insurance Agent if a timeframe variation is requested or key information will not be available; providing all information, as a single package, to the Insurance Agent within the agreed timeframe; and, informing the builder that where the annual review is overdue HWIF and/or the Insurance Agent reserves the right to deal direct with key builder management; An assessment of the submission will be completed by the Insurance Agent with a summary provided to the HWIF within 15 business days of a receiving a completed submission. Delays may occur in concluding an assessment due to key information not being provided. The Insurance Agent will advise the broker of missing key information, or areas requiring further explanation, within 10 business days of receiving a submission. The HWIF will respond to the Insurance Agent within 10 business days of receiving the Insurance Agent s summary of the assessment. Unless a heighted risk of insolvency is identified, the HWIF will support ongoing purchasing of certificates and modest increases in turnover limits during the review period for timely submissions. The builder, via their broker, is able to request a meeting to discuss the outcome with the HWIF and/or the Insurance Agent following the HWIF s eligibility decision. The HWIF reserves the right to make contact with the builder, either directly or through the Insurance Agent, to resolve any identified concerns once an assessment has commenced. The broker will be made aware of the reasons the direct contact is needed. The HWIF reserves the right as part of its review to engage external advisors without notifying the builder or the broker. Where the HWIF deems it necessary to perform a more intensive review requiring further information from a builder, the broker will first be advised and the HWIF or its external advisors will make direct contact with the builder. The Online Quarterly Submission for Major Project Home Builders A Major Home Builder with an approved NSW Eligibility over $15 million that derives the majority of their income from display home or investor market activity (not including multi-unit construction) is considered to be a Major Project Home Builder. The following details are required to be lodged on a quarterly basis, within 60 days of the end of each fiscal quarter, via the HWIF s online Quarterly Survey of Project Home Builders. The survey captures the following information: updated turnover breakdown of HWIF and other activity; summary of residential contracts showing the number of concurrent jobs, the number of projects by stage of completion (deposit, base, frame, lockup, fit out, or such stages as measured by the business) together with the current average time taken in pre-construction and construction phases; confirmation of: Fact Sheet 11 - Major Builder Eligibility Reviews - New South Wales through NSW Self Insurance Corporation 2014 Page 4

5 average actual on-cost gross margin for jobs completed during the quarter and average erosion to budget forecasts; average on-cost gross margins for contracts entered into during the quarter; current on-cost margin erosion; margin commentary as appropriate including measures taken to improve margin where required; breakdown of working capital (including cash at bank, aged debtors report, aged creditors report and net work in progress/unearned revenue); details of any claims, court actions and/or other litigation with home owners, suppliers, subcontractors or other parties above $50,000; and updates to business structure, principals and key managers, shareholders, bankers and builders licenses. The quarterly requirements as set out above are in addition to annual submission requirements; however, at the time of the annual submission the latest quarterly review submission is to be no more than 60 days old. The individual builder and the aggregated results of the survey will be provided to participating builders. Confidentiality & Privacy The NSW Self Insurance Corporation (SICorp), trading as the Home Warranty, is a statutory corporation constituted under the NSW Self Insurance Corporation Act 2004 and is responsible for carrying on the business of providing home warranty insurance for building work done in New South Wales that requires such insurance under the Home Building Act SICorp is regulated by the Privacy and Personal Information Protection Act A Builder Confidentiality & Privacy Notice is available in relation to information and documentation obtained as part the Eligibility review process on the HWIF s website at Making a complaint If a builder is not satisfied with the way a review of their Eligibility has been undertaken or with any decision to impose conditions, cancel, suspend or modify their Eligibility, they can request via their broker that the matter be escalated to the HWIF s Underwriting Committee for review. For further information on making a complaint please refer to the complaints section of the HWIF s website at Fact Sheet 11 - Major Builder Eligibility Reviews - New South Wales through NSW Self Insurance Corporation 2014 Page 5