The (Multi) Million Dollar Question
How do You Get Your Builder to Agree to Transparent and Secure Payments Conditions
Hopefully, most of you have heard of IPEX by now (for those who haven’t, you can read a little summary here). Since our launch, we’ve met with hundreds of developers and lenders involved in residential, industrial, infrastructure and retail developments with values ranging from $4M to $400M. Despite the variation in portfolios, some issues are universal; most have been impacted in some way by builders failing to pay subcontractors and, most are ramping up financial due diligence checks, desperate to avoid being burnt again.
Happily, the response to IPEX has been hugely positive and we’re now working with a range of developers and lenders as a way of augmenting existing due diligence processes and ‘ring-fencing’ funds against any potential cash flow issues their builder may encounter during their project. But predictably, there is one step in the process that causes more than a little angst: “how do I get my builder to agree?”
We’ve now been through a LOT of negotiations between developer & builder (most successful, some not – read on!). In our experience, builder acceptance typically comes down to 2 factors:
- How much transparency & control does the developer/lender want?
- What (if anything) can the builder get in return?
How Much Transparency and Control Does The Developer/Lender Want?
Although some developers (and lenders) are now mandating the use of IPEX, most prefer that their builder ‘buys in’. To this end, we’ve made sure that IPEX is not a one size fits all software; developers can tailor the level of security/control with which IPEX is implemented as they deem necessary based on their relationship with the builder.
Some want full disclosure on contract values, payment amounts and builder margins (full open book access) but most are happy for their builder to keep values confidential and are just seeking to verify who has been paid and when. It will come as no surprise that builders strongly favour 1 approach over the other. We’ve also just released a hybrid view; we can now reveal ‘open book’ contract and payment values for select trades, the perfect solution for visibility across provisional sum expenditures. Of course, no matter what transparency level is agreed, the same restrictions apply to how builders can use project funds.
Practically, the level of transparency provided by our standard portal view should not be of concern to any builder and most agreements are implemented at this level initially. However, our contract templates contain clauses that allow developers to escalate visibility levels should a ‘payment default’ event occur – for example, your builder submits a fraudulent stat dec claiming they’ve paid someone they have not (which of course, you can now see).
What Can Your Builder Get In Return?
Whilst larger developers can often dictate terms to some extent, those with a little less ‘influence’ over their builder may choose to sweeten the deal further. The additional security and transparency IPEX provides not only protects the developer, it also opens up the potential for negotiation around ‘standard’ payment terms to the builders advantage.
- UPFRONT HEAD CONTRACT PAYMENTS: if the builder can’t use project funds for any reason other than to pay approved subcontractors and suppliers, do they need to be paid in arrears? IPEX allows a developer to ease builder cash flow pressures without exposing themselves to additional risk. It’s not uncommon for developers to make an initial upfront payment to their builder of between 1% and 2.5% of head contract value for site establishment costs & certain long lead time materials. Builders can lock in material costs early and start the project in a cash positive position.
- MODIFIED SECURITY REQUIREMENTS: Another standard term increasing liquidity pressure on builders is the requirement to tie up significant cash flow/assets in the form of security for the duration of the contract. Further bank guarantees are typically required to secure payments for material deposits prior to these being fixed to site.
IPEX may help builders to negotiate a reduction in security requirements in 2 ways:
- Builders may leverage the transparency and security of IPEX to reduce/remove the upfront security requirements linked to performance, potentially halving the amount being held against the builder and,
- Given that developers can see when/how much a supplier has been paid, they may have sufficient comfort to release supplier deposit payments without requiring a bank guarantee. If a developer wants to be extra cautious, they do have the option of blocking all payees except the supplier who is to be paid – they can then deposit the exact sum owed into the account with certainty that it can only be used to pay that specific supplier.
- A COMPETITIVE EDGE IN ANY TENDER: Some builders have embraced the concept to the point at which they are now proactively offering IPEX to developers as a means of differentiating their bid from competitors (they’re use IPEX as a sales tool). We’ve already seen builders win contracts that they may not have otherwise been considered for by offering a level of transparency and protection their competitors wouldn’t (or couldn’t). This is also a potential angle for developers looking to find additional margin; do you go with a tier 1 builder and pay a premium, or a solid tier 2 working under IPEX?
Builder Response Tells You all You Need to Know
Although IPEX is largely an extension of existing due diligence and ‘stat dec’ processes, it does restrict what a builder can do with project funds – initial reluctance is not unusual. Having said that, our experience is that much of the hesitation stems from builders assuming ‘worst case scenario’; that agreeing to IPEX means giving the developer full transparency and control – very few developers are asking for this. Critical to acceptance is choosing the right model and every project scenario is different.
It’s important to remember that, in principle, IPEX asks nothing more than that builders pass on the entitlements of those they claimed funds on behalf of – something they already say they do via their monthly ‘stat dec’. For builders who are already doing the right thing, nothing really changes – everyone (including the builder) still gets what they’re entitled to.
If anything, IPEX strengthens the position of a financially secure builder in any commercial negotiation, justifying payment terms that simply would not be feasible without these practical controls. There have only been a small handful of builders that met the request for IPEX with immediate threats to withdraw from the project; we can only imagine each had ‘grand’ plans for the initial progress payments and whilst it may be a coincidence, each has since entered administration.
To view a range of common developer implementation profiles based on project circumstances/builder relationship, click here: https://ipex.com.au/pdfs/IPEX-Implementation-by-Developer-Profile.pdf .