Subcontractors: Is Your Builder Protecting Your Payments?
When a builder submits a progress claim, they are not only asking to be reimbursed for costs incurred by their business, but also on behalf of the subcontractors and suppliers that have performed work on and/or provided/ paid for materials for the project with their own cash- only a portion of the progress payment is actually the builders money. The problem is, some builders continue to treat the entire progress payment as their own, risking subcontractor entitlements to cash flow other projects.
Can Developers and Lenders Spot Builders Who are in Trouble?
Unfortunately, the financial due diligence process is far from foolproof: even if you ignore the potential for a builder to misrepresent their current financial position, no audit can predict the terms of contracts a builder may sign or any resulting cashflow issues that may impact them during a project – no builder is immune to market conditions.
Current Project Trust Legislation Won’t Stop Non-Payment Of Subcontractors
The QBCC has introduced legislation which mandates that project funds be ‘siloed’ into dedicated trust accounts with the aim of protecting subcontractor payments. While positive in intent, the legislation is extremely complex and ultimately, flawed; any legislation that permits builders to withdraw project funds from these accounts legally (let alone the opportunity for the builder to access these funds outside the law) leaves subcontractor payments exposed.
The NSW and WA Governments have also adopted trust account regimes aimed at protecting subcontractor retention funds, a move also being considered in Victoria. Whilst these rules are far easier for builders to comply with, they only protect 5% of project funds; what about the other 95%?
The various trust account models that have been proposed to ‘fix’ this broken payment model so far all have one clear weakness – the builder can still access the funds if they really want (or need) to and doesn’t ensure subcontractors are paid. Compliance isn’t an issue when the builder is cashflow positive, but will a builder continue to follow the rules if it means watching their business go under? Doubtful.
Project Trust Accounts + Technology = Subcontractor Payment Protection
Property developers are now turning to technology for a solution. Rather than ‘trusting’ that their builder will do the right thing, they can now specify software that ensures there simply isn’t an option not to.
Technology like IPEX makes it possible to place practical limits on how a builder can use progress payments; only the subcontractors and suppliers linked to a specific project can be paid out of the account with builders only able to access the portion of the payment deemed by the QS to be ‘theirs’. Importantly, developers are no longer forced to rely on the largely ineffective ‘stat dec’ process – they can now confirm that the subcontractors linked to any claim have been paid. Ultimately, the IPEX platform allows non-payment to be picked up immediately.
It also seems that by removing a builders’ ability to use subcontractor entitlements as day-to-day cash flow, you also remove their motivation for delaying payment. IPEX reports that builders are typically distributing progress payments to subcontractors and suppliers in full within 48 hours!
IPEX is already in use on various private development projects nationally. Discussions are also underway for trial projects with several Government departments and local Councils across Victoria & NSW.
How Can I Protect My Payments In The Event Of Builder Insolvency?
Of course, no solution can prevent a builder from going under, but IPEX does offer subcontractors protection on 2 fronts:
- By reducing the risk of a contract being awarded to a builder that is already in trouble – those with existing cash flow issues are unlikely to bid on any project that requires funds to be ring-fenced
- By ensuring that funds can’t be ‘diverted’ in the period prior to a builder entering administration; progress payments made to the builder have either been distributed to approved parties or remain in the account
What Measures Is Your Builder Taking to Protect Your Payments?
Many builders manage funds responsibly, it’s just not always easy to tell who they are. Builders that are willing to operate under the condition that funds be ring-fenced to a specific project’ are lowering developer, lender and subcontractor risk while essentially ‘proving’ their financial health.
For builders, proactively offering funds security and transparency to developers not only differentiates their bid from competitors, it also helps them to negotiate better commercial terms. Paying subcontractors quickly and reducing their risk of non-payment can’t hurt to attract key trades in this current labour market either!
IPEX is an industry leading financial technology platform currently protecting subcontractor payments on residential, industrial, infrastructure & retail developments with values ranging from $4M to $200M.