What if the Builder Goes Out of Business Mid-Project?

First: determine what has actually happened

The first 24 hours: protect the project without creating a new problem

• Contact an Ontario construction and insolvency lawyer. Contract termination, liens, title, trust claims and bankruptcy stays overlap.
• Notify the lender and project insurer. Ask them to pause unapproved advances and explain the conditions for continuing construction.
• Contact Tarion immediately where the project may be an eligible new home or contract home. Do this before replacement work changes the evidence.
• Document the site. Photograph every room, system, material, deficiency, delivery label, equipment item and weather-protection condition.
• Protect life, safety and the building envelope. Arrange emergency shoring, heat, pumping or temporary protection where needed, but document why it was necessary.
• Collect every document. Contract, drawings, permits, inspections, invoices, payments, change orders, supplier quotes, texts, emails, schedules and insurance certificates.
• Order a title search and identify written lien notices. Do not assume no registered lien means no lien rights remain.
• Identify the trustee, receiver and court file. Direct all insolvency questions and ownership claims to the proper office.

Payments: pause, verify and preserve statutory holdback

Do not release another voluntary payment merely because the builder, supplier or subcontractor demands it. At the same time, do not countermand funds, breach a court order or ignore a proper invoice without advice.

The 10% holdback cannot simply become completion money

Ontario’s Construction Act requires each payer to retain a basic holdback equal to 10% of the price of services or materials as they are actually supplied. Since January 1, 2026, section 30 expressly says that when a contract is abandoned or terminated, the holdback cannot be applied toward substitute completion work or a claim against the contractor until all liens that may be claimed against that holdback have expired or been satisfied, discharged or otherwise provided for.

The homeowner is not automatically liable for every unpaid subcontractor invoice. Where the defaulting payer is the contractor, the owner’s personal liability to valid lien claimants is generally limited to the holdback the owner was required to retain.

Read Construction Lien in Ontario and the current Ontario Construction Act.

Do not terminate the construction contract casually

Stopping payment, removing the builder from the site and hiring a replacement can amount to termination. A wrongful termination can expose the owner to damages even when the builder was experiencing financial problems.

The lawyer should review:

• The builder’s actual default and whether it is material
• Required written notice and cure periods
• Insolvency, bankruptcy and receivership clauses
• Owner suspension and termination rights
• Rights to use drawings, permits, warranties and subcontracts
• Ownership of paid-for and unpaid materials
• Assignment or takeover rights
• Security, bonding and insurance notice requirements
• Whether a bankruptcy, proposal, CCAA or receivership stay restricts legal action

A termination notice should identify the contractual and legal basis, effective date, site-control process, document turnover, material inventory, accounting and continuing obligations.

Tarion protection depends on the type of transaction

Bankruptcy and receivership claims

Find the formal proceeding before chasing individuals. Obtain the trustee or receiver’s website, appointment documents, court orders, creditor notices and claim deadline.

When a bankruptcy or proposal has been filed, a homeowner who prepaid for services may be an unsecured creditor. To participate in a distribution, the creditor generally files Form 31, Proof of Claim, with the Licensed Insolvency Trustee and attaches the contract, statement of account, payments and other evidence.

• Use the builder’s correct legal corporate name—not only its trade name.
• Separate overpayment, completion damages, warranty damages, trust claims and ownership claims.
• Identify any performance bond, labour-and-material payment bond, letter of credit or personal guarantee.
• Do not start or continue collection litigation without checking whether a stay of proceedings applies.
• Notify the receiver or trustee immediately if you claim ownership of identifiable materials or documents in its control.

Official guidance: You Are Owed Money—Bankruptcy and Form 31 Proof of Claim guidance.

Establish the project’s true condition and cost to complete

Do not use the failed builder’s percentage-complete statement without independent verification. The value of work in place is not necessarily equal to money paid, invoices issued or the percentage of time elapsed.

No responsible article can promise that completion will cost 15%, 30% or any other fixed premium. A takeover price depends on incomplete design, quality of prior work, warranty allocation, access, trade relationships, schedule and the replacement builder’s risk.

Permits, inspections, plans and warranties must be transferred

• Contact the municipal building department and obtain the complete permit and inspection file.
• Confirm whether a change of permit applicant, builder, designer or responsible professional is required.
• Obtain stamped drawings, revisions, shop drawings, truss and floor layouts, engineering letters and testing reports.
• Transfer product orders and manufacturer warranties only with written authority.
• Confirm ownership and permitted use of architectural and engineering documents.
• Notify the course-of-construction insurer before work resumes with a different contractor.
• Arrange inspections of weather-exposed or incomplete work before enclosing it.

Choosing a replacement contractor

A replacement builder should not be asked to “just finish it” from a few photographs. Provide a takeover package:

• Independent condition report and deficiency list
• Current permit drawings and inspection status
• Material and equipment inventory
• Remaining-scope schedule
• Known liens, unpaid suppliers and ownership disputes
• Required engineering, testing and opening of concealed work
• Clear warranty allocation between existing and new work

The new contract should state what prior work the replacement contractor accepts, excludes, tests or corrects. It should not accidentally make the new contractor warrant every hidden decision made by the failed company.

How to reduce this risk before signing

Contract Centre and related guides

Frequently asked questions