Insuring Against The Uninsurable: The Problem for Developers

You wouldn’t dream of starting a project without insurance against property damage, bad weather or theft, but developers remain unprotected against one of the biggest risks they face: builder insolvency.

Recent, high-profile insolvencies have made many developers and lenders nervous, leading to ever-increasing scrutiny on builder finances. Whilst no developer would appoint a builder they believe is at risk of going under, many have sustained losses despite them reaching a position of ‘comfort’ through extensive due diligence checks. This process is far from perfect.

No Matter How Thorough Your Builder Due Diligence Process, There Will Always Be Gaps

The primary limitation of these checks is that they are all historical, representative of a ‘point in time’ only and rarely provide any real insight into any looming cash shortfalls. Even if available resources appear sufficient at the time of contract award, no audit can predict the terms of any future contracts your builder may sign or cash flow issues they may encounter on another project during your build. As recent events have shown, even builders with great reputations are not immune to external market forces, particularly when operating under onerous contract terms.

What’s worse, DD in its current form places the onus on the developer and lender; it’s your responsibility to review all available data and satisfy yourself of a builders’ financial capacity to fulfil existing contractual obligations. If the information you are basing this decision on is out of date, incorrect, incomplete or worse still, fraudulent, you bear the consequences.

‘Good’ Builders Are Struggling To ‘prove’ They Are Not An Insolvency Risk

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’. But 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.

Only The Builder Knows Their True Financial Position; Why Should Developers and Lenders Be Forced To Guess?

So, you can (and should) keep auditing balance sheets, work in progress/cost to complete and builder track records before awarding a contract but you should also make one fundamental change to your DD process – you need to shift the onus for any due diligence ‘gaps’ onto the builder – make them ‘prove’ their solvency by ensuring that your project is only viable for those that are as financially secure as they claim. How? By mandating that your projects be run under IPEX.

To find out more about the IPEX solution and how it can be implemented on your next project, read “Insuring Against The Uninsurable: The Solution for Developers” or get in touch.