Conflict of Interest in Building Management & Construction
Should the builder who constructed your apartment building also manage it?
When a new apartment building reaches handover in Sydney or Melbourne, responsibility shifts from the builder to the Owners Corporation, and the Defects Liability Period (DLP) begins. This is a critical transition point, where early decisions can materially affect the long-term performance, value, and risk profile of the asset. One of the first and most consequential decisions is the appointment of a building manager. A common industry practice is to engage the same construction company that delivered the project to also manage the building. While this approach may appear efficient and logical, it raises an important governance question for strata committees: should the party responsible for rectifying defects also be responsible for identifying, reporting, and escalating them?
Common Industry Practice — and Why It Makes Sense (at First)
Across Sydney and Melbourne, it is common for the builder to be engaged — directly or indirectly — in a caretaker or building management role following completion.
The rationale is understandable:
- the builder knows how the building was constructed
- services, plant, and infrastructure are familiar
- subcontractors and suppliers are already known
- there is an existing working relationship with the committee
- the builder understands compliance obligations
- the company is assumed to be financially stable
- there is experience with apartment developments
On paper, the logic is sound. It feels efficient, familiar, and low-risk.
However, this arrangement introduces a structural problem that committees should not ignore.
Practical Completion
When a new apartment building reaches practical completion and is formally handed over, the Defects Liability Period (DLP) begins. In simple terms, this is the warranty phase, where the builder remains responsible for rectifying defects in the works.
At the same time, the Owners Corporation assumes responsibility for the building’s operation and presentation. That responsibility includes appointing a building manager, cleaners, and maintenance contractors to protect the asset and ensure compliance.
This is where the dilemma begins.
Common Industry Practice
It is common practice for the construction company that built the apartment building to also be engaged — directly or indirectly — in the building management or caretaker role.
On the surface, the logic appears sound:
- They understand how the building was constructed
- They know where services and infrastructure are located
- They know the subcontractors and suppliers
- They are experienced builders
- They understand statutory compliance requirements
- They are (presumably) financially stable
- There is an existing working relationship with the committee
In many ways, it feels similar to servicing your car at the dealership that sold it to you.
So what’s the problem?
The Core Issue: Conflict of Interest
The conflict of interest is simple but significant.
The construction company is:
- responsible for defects under warranty, and
- financially motivated to minimise the cost of rectifying those defects.
If that same construction company is also responsible for identifying, reporting, and escalating defects during the DLP, there is an inherent tension between duty of care and commercial self-interest.
This is not a question of integrity — most builders are not dishonest — but of human nature and commercial reality.
No one enjoys doing work twice and being paid once.
A Practical Example: Balcony Water Ingress
Consider a common defect in new apartment buildings: balcony drainage failure.
The building looks perfect. The tiles are new. The views are spectacular.
Then heavy rain arrives.
Water does not drain as designed and instead migrates beneath the balcony slab. The result appears on the ceiling of the balcony below — peeling paint, staining, rust marks, and concrete degradation.
This defect is fixable, but the remediation is invasive and expensive:
- Tiles must be removed
- Waterproofing inspected or reinstated
- Concrete penetrations rectified
- Finishes reinstated across multiple balconies
Under the DLP, the builder is liable.
But who has the obligation to:
- identify the issue early?
- document it properly?
- escalate it to the Owners Corporation?
The answer is the building manager.
If the building manager is employed by — or financially dependent on — the construction company, the incentive to escalate that issue aggressively is significantly reduced.
In an ideal world, the defect is reported immediately, resolved at no cost, and everyone wins.
But we don’t live in an ideal world.
The Building Manager’s Perspective
Now consider the situation from the perspective of the on-site building manager.
If the manager is employed by a third-party building management company, reporting defects is straightforward — it is part of their duty of care.
If the manager is employed by the construction company, reporting a defect that could trigger hundreds of thousands of dollars in rectification costs becomes… awkward.
The issue may be minimised.
Deferred.
Or quietly “monitored”.
Not because the manager lacks ethics — but because employment, loyalty, and commercial pressure exist.
Loss of Negotiation Power
There is also a governance and commercial downside for the Owners Corporation.
When the builder is appointed as building manager immediately at handover:
- Are you receiving market-tested pricing?
- Is the scope of services truly fit-for-purpose?
- How do you benchmark performance?
- Where is the leverage if service levels drop?
Without competitive tendering, the Owners Corporation effectively gives away its strongest position of influence at the very start of the building’s operational life.
The “Middle Ground” Model
Some large construction companies attempt to address this by appointing an external building management firm to represent them on site.
This is an improvement — but it is not a complete solution.
There remains a financial relationship between the builder and the management company, meaning a technical conflict of interest still exists, albeit reduced.
The key advantage is that building management staff are no longer employed directly by the builder, reducing personal conflict and improving defect reporting integrity.
Best Practice: Separation of Roles
The strongest governance position is clear:
- Construction company builds the asset
- An independent building management company manages the asset
Preferably, that management company:
- understands construction and defect management
- has no financial dependency on the builder
- reports issues factually and transparently
- acts solely in the interests of the Owners Corporation
Building management is not construction.
It is operations, compliance, maintenance planning, contractor control, and asset protection.
These are different disciplines.
Conclusion
Engaging the construction company to manage a new apartment building during the Defects Liability Period introduces avoidable financial and governance risk.
This is not an accusation against builders.
It is recognition of commercial reality.
Best practice in asset protection relies on:
- separation of responsibilities
- transparent reporting
- and aligned incentives
For Owners Corporations serious about protecting long-term value, independence in building management is not a luxury — it is a safeguard.