Insuring Against The Uninsurable: The Problem for Developers

January 31, 2024 by admin

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 & 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 & 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 If the information you are basing this decision on is out of date, incorrect, incomplete or worse still, fraudulent, you bear the consequences.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 & suppliers again; reconciling transactions & substantiating creditor claims is a painstaking task & with every month that passes, holding costs compound & 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.

IPEX impact pre-contract award: reduce the risk of appointing a builder that is already in financial distress. 

IPEX offers a ‘real world’ test of builder DD. It doesn’t matter what their bank statements say or how creative they’ve been with their accounting, by offering the contract under the condition that all progress payments are ‘ring fenced’ to your project, you get to the truth: which of your prospective builders are financially sound & which are intending to use your funds to cover cash shortfalls on other developers’ projects.

IPEX impact during your build: protect against cash flow issues on any other project linked to your builder

Even if your builder did experience cashflow issues once appointed, your funds remain secure as an IPEX account can’t be ‘borrowed’ from. And should a ‘payment default’ event occur before practical completion, the impact is minimised as 

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

To find out if IPEX can be implemented on your next project, get in touch