Are Builder Cash Flow Issues Impacting Your Project?

March 7, 2024 by admin

No One Wants Their Builder To Go Under, But There Are As Many Risks To Helping As There Are To Holding Firm

Whilst ideally used as a preventative tool to test prospective builders’ financial position before contract award and then ring-fence funds once the construction begins, ~30% of the time, IPEX is engaged mid-project – we are being brought in to help developers/lenders manage a project that is already in trouble.

Best case scenario, the builder is up to date with payments but has realised that they can’t finish without help (read: more money). Far worse is when a ‘payment default’ event has already occurred, the builder has not been paying subcontractors and in some cases, has already accessed subcontractor retention cash to fill gaps. In all cases, the developer has a decision to make; do they give the builder the extra money they need to finish?

WHAT ARE THE CONSEQUENCES OF NOT HELPING?

It’s a tricky situation with no real winners (builders really don’t want to be asking either); leaving them to their own devices means risking they go under, whilst terminating the contract and engaging a new builder is expensive, likely costing far more than what they’re asking for. All options considered, helping your builder out is often the most practical way forward.

HOW DO YOU MAKE SURE YOU’RE NOT BANKROLLING OTHER DEVELOPERS’ SHORTFALL?

Whilst the rational response may well be to agree, you want to be sure that if you do make an additional payment, the entire sum is required for your project. Unfortunately, this can be very difficult to establish. But even if you are able to satisfy yourself that the request is genuine, how do you ensure the additional funds reach the intended subcontractors & suppliers without taking on the responsibility of paying them directly?

TRANSPARENCY & CONTROL ARE CRITICAL TO SUCCESSFUL RE-NEGOTIATION 

When you’re asked to contribute large sums of money outside of the original agreement, it’s only natural to question how your funds have been managed to date & want greater visibility over how all future payments will be spent. 

Conversely, such requests are not necessarily a sign of builder mismanagement; costs can escalate quickly in the current market with cash shortfalls impossible to avoid for even the most financially responsible builder. A request to renegotiate that includes enhanced transparency and control over how any additional funds are used can significantly increase the probability that a new agreement can be reached.

YOU’VE DECIDED TO HELP: THE STEPS YOU NEED TO TAKE TO ENSURE YOU’RE NOT RISKING MORE MONEY

Making any agreement to contribute additional funds conditional on the use of IPEX is the safest way forward. By agreeing, builders are confirming that their request is genuine (a payment through IPEX doesn’t help their position on any other project), whilst developers/lenders gain transparency and control over how funds are spent for the remainder of the project. 

With IPEX: 

  • Funds are ring-fenced from any other project & can only be used to pay approved subcontractors & suppliers on your project 
  • Each builder-nominated payee must be onboarded through IPEX which includes identity & bank account verification, with all those approved for payment visible to the developer/lender/project manager
  • Developers can verify who has been paid, when & how much* before releasing further funds (in cases where risk is higher or greater control is deemed necessary, the developer can ‘isolate’ a specific subcontractor or supplier for targeted payment)
  • Developers may elect to hold final approval rights over payments until all nominated subcontractors and/or suppliers linked to the ‘variation’ request are verified as paid
  • Developers may also elect to link payment of builders’ entitlements to subcontractor/supplier payments – an active incentive to distribute funds quickly & in full

BALANCING DEVELOPER & BUILDER NEEDS TO FINISH A TROUBLED PROJECT WITH MINIMUM RISK (& MAXIMUM PROFIT)

Whilst re-negotiating previously agreed terms is never pleasant, it is sometimes necessary. IPEX makes additional contributions far more palatable to developers, providing control over who can be paid and assurance that funds can only be spent on their project. Similarly, IPEX can assist builders that find themselves in a difficult position to prove that their request is genuine, increasing their chances of securing the funds they need.

Developers: If you’ve been asked for an additional payment by your builder, talk to IPEX before you agree. 

Builders: if you legitimately need additional funds to complete a project, talk to IPEX about how to increase your chances of re-negotiating successfully

About 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 subcontractors & suppliers linked to that project.

*Open book view allows developers to view subcontract/payment values – must be agreed with the builder. Standard view shows percentage of builder-entered contract value paid but conceals actual values.

CASE STUDIES

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