You Can’t Insure Against Builder Insolvency, but there is Another Way to Protect Your Project

February 20, 2023 by admin

You can insure yourself against many risks when it comes to property development, but builder insolvency is not one of them.

Nevertheless, smart developers are always taking steps to reduce their exposure, exclusively engaging builders with a proven track record and conducting detailed financial due diligence checks before awarding the contract.

Yet despite such scrutiny, many have still suffered significant losses. There is a huge gap in this process.

Audits can’t predict risks that may arise during your build

The limitation of these checks is that they are all historical, representative of a ‘point in time’ only and rarely providing any real insight into any looming cash shortfalls.

Even if available resources appear sufficient at the time of contract award, no audit can forecast factors that may negatively impact a project linked to your builder during the construction of your project.

As recent events have shown, even builders with great reputations are not immune to external market forces, particularly when operating under onerous contract terms.

It can be difficult for builders to ‘prove’ that they are trouble-free

Builders are also dealing with the fallout of insolvency; the issues of some causing all to be tarred with the same brush.

Even those in a great financial position are in a constant battle to ‘prove it’. Without transparency over how client funds are being managed, developers can never be sure.

As tricky as it is, the cost of getting it wrong can be immense.

It’s not just having to pay subcontractors and suppliers again; reconciling transactions and substantiating creditor claims is a painstaking task and with every month that passes, holding costs compound and developer equity diminishes.

Reducing risk means appointing a solvent builder and protecting project funds during your build

No one can predict what future challenges your builder may encounter, so the objective must be to: 

  • Appoint a builder who is financially secure now, and
  • Protect your funds against any potential builder cash-flow issues for the entire duration of your build.

Enter IPEX. 

IPEX is an online payment platform that secures funds intended for a specific project, ensuring that progress payments can be used only to pay approved sub-contractors and suppliers linked to that project.

IPEX provides developers with visibility over who has been paid and when, without sharing a builders’ commercially sensitive information.

Given these restrictions, any builder willing to operate within the IPEX framework is essentially confirming what the audits can’t—that they have no intention of using your money to pay other developers’ bills.

Even if your builder did experience cash-flow issues post-contract award, your funds remain secure as an IPEX account can’t be ‘borrowed’ from.

And should they become insolvent before practical completion, the impact is minimised as:

  • Any progress payment made via the IPEX platform has either been distributed to approved parties or remains in the account, and  
  • The developer may replace the builder as trustee of the project funds, gaining full visibility of all previous transactions and the ability to make payments directly to suppliers and subcontractors, reducing construction delays, and holding costs.

IPEX solves a huge problem for developers, but what do builders think?

Although developers (and lenders) can mandate the use of IPEX as a condition of winning the contract, most would prefer that their builder also buys in.

Whilst some financially secure builders are proactively employing IPEX as a means of differentiating their bid from competitors, the additional security and transparency IPEX provides has also created an opportunity to revise several ‘standard’ payment practices to the point of mutual benefit.

So, you can either wait for someone to invent insolvency insurance, or just start protecting your project funds. 

To find out if IPEX can be implemented on your next project, get in touch: https://ipex.com.au/ipex-sign-up/ipex-developer-eoi/ 

You can also check out developer and builder case studies here: https://ipex.com.au/case-studies/

CASE STUDIES