Builders Are Negotiating Up To 2.5%* Of Contract Value Upfront On New Projects – Here’s How
The recent wave of high-profile builder insolvencies is further proof that the construction industry’s commercial builder payment model is broken. Unfortunately, it’s also made many developers & lenders nervous.
Builders That Can Ease Developer/Lender Fears Have A Huge Advantage in any Tender
If you haven’t already, it’s highly likely that you’ll soon be asked to work under IPEX. IPEX is an online payment platform that ensures progress payments can be used only to pay approved subcontractors & suppliers linked to that specific project. IPEX also provides developers with visibility over who has been paid & when, without sharing a builders’ commercially sensitive information*.
Agreeing to work within this type of payment framework essentially confirms what standard due diligence can’t: that you have the financial capability to complete existing projects without diverting funds from this project – this is fast becoming a primary driver of builder selection for many developers & lenders.
Stop Financing Early Project Work: Start in a Cash-Flow Positive Position
Once a developer can be certain that all payments made are reaching the intended recipients on time & in full, upfront payments become viable. We’re seeing developers agree to initial upfront payment to their builder of between 1% & 2.5% of head contract value** for site establishment costs and/or funding certain long lead time material deposits under IPEX. These payments are allowing builders to lock in material costs early & start the project in a cash positive position.
What Other Options Do Builders Have in an IPEX Builder Contract Negotiation?
Although some developers (& lenders) are now mandating the use of IPEX, most prefer that their builder ‘buys in’. IPEX is not a one size fits all software; developers & builders can negotiate the level of transparency on each project – key points that must be agreed on a project-by-project basis include:
- What can the developer see?
Working under IPEX doesn’t mean the builder needs to reveal subcontract/payment values. There are 3 IPEX ‘versions’ that each provide developers with a different level of transparency: most builders can successfully negotiate to work under the ‘standard’ view, which shows only who has been paid & when – no values.
- Who MUST be paid through IPEX?
Although all project funds run through IPEX, it’s common that only some subcontractors & suppliers are paid via IPEX; developers are often comfortable with either a requirement for top 10 trades by contract value or a negotiated list of trades to be paid through IPEX.
- How does the builder receive their entitlements?
For cost-plus contracts, an agreed percentage is automatically paid directly to the builder as they pay invoices. But for all other contract types, it’s becoming increasingly common for builders to negotiate the release of all funds remaining after subcontractor & supplier entitlements have been paid/accounted for. Of course, there are checks to ensure the amount being claimed is in line with QS approval however, this approach allows builders to hide exact margins & any trade letting wins made throughout the project.
Importantly, you don’t need to wait to be asked; proactively offering IPEX can help you secure contracts ahead of more favoured builders (and helps you get rid of low-ball bids from those trying to ‘buy’ a project in the process).
Fixing The Broken Builder Payment Model
We don’t expect builders to love IPEX. But with so much money at stake & trust at an all-time low, builders’ payment terms are not going to improve without greater practical controls. Whilst IPEX does place limitations on how builders can use funds, it doesn’t really change anything for those who are already doing the right thing – everyone (including the builder) still gets what they’re entitled to.
Builders that choose to embrace the enhanced transparency & offer greater security can clearly differentiate themselves from those in trouble & will be rewarded with more contracts, fairer margins & better payment terms (some already are).
*All contract terms/payment conditions are to be agreed between the developer & builder on a project-by-project basis.