Insuring Against The Uninsurable: The Solution 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.

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

So, you can (and should) keep auditing balance sheets, work in progress/cost to complete & 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.

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!).

IPEX Solves A Huge Problem For Developers without Sharing Builders Commercially Sensitive Information

Although IPEX is largely an extension of existing risk mitigation processes (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’), 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 this hesitation stems from builders assuming ‘worst case scenario’; that agreeing means giving the developer full transparency & control – this is rarely the case. Practically, the level of transparency provided by IPEX standard portal view should not be of concern to any builder. Once this is understood, most builders are quite accepting of the concept, with discussions quickly shifting to how it’s to be implemented & what they can get in return.

There have however 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 find out if IPEX can help protect your next project, get in touch