What happens if my builder goes broke mid-project?

This is the situation the insurance exists for, and the order you do things in materially affects whether you are covered.

In the first week

1. 1Stop all payments, including any scheduled progress claim, even if a claim was issued before the insolvency.
2. 2Secure the site. You become responsible for it, including safety and weather protection, and unfinished work deteriorates quickly.
3. 3Photograph everything, comprehensively, with dates. This is what the assessment will run on.
4. 4Notify the insurer and lodge a claim. There are time limits and they are enforced.
5. 5Register as a creditor with the appointed administrator or liquidator, understanding that unsecured creditors usually recover little.

The mistake that costs the claim

Engaging another builder to press on before the insurer has assessed the incomplete work is the most common way a claim is reduced or refused. The insurer needs to establish what was and was not completed at the date of insolvency, and once new work has been built over it, that becomes impossible to determine.

If the contract was below the threshold

There is no insurance, and the position is a general creditor claim plus whatever the consumer guarantees give you against an entity with no money. That is the practical argument for not structuring a project as several small contracts to sit under a threshold, which is something builders occasionally suggest.