BlueScope and Frasers Property Engage IPEX to Reduce Insolvency Exposure

Original article posted 10th December 2023, The Australian Business Review.

Major developers and businesses are taking extra measures to reduce the risk of financial loss and exposure to a soaring number of builders going bust every day across Australia.

ASX-listed BlueScope and real estate manager Frasers Property have moved to protect hundreds of millions of dollars in funds set to be spent on upcoming projects behind the IPEX payments platform, to ensure they are not exposed if a builder goes under.

The IPEX framework ring-fences funds so they’re used only for the intended project, guarding against insolvency, minimising the impact of non-payment to subcontractors and supporting builder liquidity.

There has been a 72 per cent increase in insolvency claims for the construction sector in the 2023 financial year compared to the previous period, according to data from Australian Securities & Investments Commission. The numbers are up a further 37 per cent to the end of October.

Frasers Property Australia general manager development, Victoria Sarah Bloom, said that the preventive measure would protect project funds and offered payment security to each investor, builder, subcontractor, supplier and customer it worked with.

“The framework provides us with the security that payments are used for their intended purpose and there is full accountability and transparency over the budget for a project,” Ms Bloom said.

The framework will be used by Frasers Property on a major redevelopment of a Melbourne property that it owns and operates. BlueScope has enlisted the online payments platform as part of the $415m expansion of its western Sydney service centre at Erskine Park, which is expected to be operational by 2025. It will increase its capacity to manufacture critical steel building and construction products.

IPEX strategy and operations head Paul Reid told The Australian that the company had been working with a growing number of developers and lenders who were looking to reduce the exposure to insolvencies in the construction sector.

“We try to be neutral and not be anti-builder with this system. We have not a single developer or lender who is not interested in taking extra steps to protect themselves and the current climate has never made it more important.It does shine a light on the builder, on what they are doing and how they are using the funds, but for a good builder it really makes no difference to how they run their business and we find many are using this as a marketing tool to win more contracts.”

Builders have lost money because of industry standard fixed-price contracts, which proved untenable as the cost of construction materials soared. A number of large operators collapsed in 2023, including Porter Davis, placing 1700 projects in jeopardy, and apartment giant Crown Group. Intellibuild Constructions and National Projects and Maintenance collapsed in October.

Australian Restructuring Insolvency & Turnaround Association chief executive John Winter said that insolvencies were likely to increase in 2024 as builders continued to face inflationary pressure, but overall numbers were likely to remain around pre-Covid levels.

“It is a matter of being alert, but not alarmed. What is unusual is that construction is taking an outsider role, with a third of all insolvencies being a builder. Because margins are low in the sector they are always having to keep cycling job after job to make enough money to stay afloat – they have to keep pushing to get new high-dollar contracts that will help to relieve the pressure.”

ASIC data shows that more than 1022 construction firms have collapsed in the four months to October.

The rate of insolvencies in October was more than double that in the same period in 2022 with 908 failures, including 237 building groups.