Should A Builder Need Access To Subcontractor Entitlements?

Leading Commercial Builder Balmain & Co Weighs In… 

For every developer that is mandating the use of IPEX on their projects, there is another that would like the additional protection, but doesn’t think that their builder would agree.

Is it unreasonable to ask a builder to operate under the condition that they can ‘only’ access their own entitlements
and not those of their subcontractors and suppliers? Our position is fairly obvious, but it’s important we get a leading builder’s perspective.

A Massive Game Of Pass The Parcel

Balmain & Co is an established commercial builder operating in both the Victorian and Queensland markets,
collaborating with industry-leading developers and consultants on high-end residential and complex commercial
developments, education, civil and infrastructure projects.

While some builders continue to fight the additional transparency and subcontractor payment protections, Balmain & Co has worked under IPEX on 11 projects ranging from $20M to >$100M. Not only that, Balmain & Co proactively offers developers and lenders the option of implementing IPEX on their projects. Why such a contrasting position? We asked Balmain & Co Director, Ken O’Connor:

Balmain & Co: “We know how big the insolvency risk is to our clients. There are so many builders fudging their way through due diligence and ‘buying’ projects at impossible margins just to keep trading. We know it’s tough to get projects to stack up at present but as attractive as these bids might be, developers really are rolling the dice – those first few payments are almost certain to be used to finish existing contracts – it’s a massive game of pass the parcel! 

The problem is that every builder looks pretty good ‘on paper’; it really is difficult for any developer to know which builders truly are in a healthy financial position through due diligence alone. We offer IPEX because it allows us to prove our balance sheet is strong & differentiate us from those who might be ‘misrepresenting’ their current financial position.” 

IPEX: Are developers justified in asking their builder to operate without access to subcontractor entitlements? Is there a reason that any builder should find this difficult or dare we say, offensive?

Balmain & Co: “I think there’s more than enough evidence to suggest that non-payment of subcontractors is a problem in our industry. It shouldn’t really come as a surprise to any builder that a developer or financier would want to be sure that progress payments are reaching subcontractors and suppliers. It’s probably fair to say that a stat dec doesn’t quite cut it either!

I do understand some initial hesitation from a builders’ perspective as there’s obviously an element of change – builders have always had access to the full progress payment, so it does take a moment to get your head around. Having said that, all any builder really wants is to get paid what they’re entitled to, and IPEX doesn’t affect our payment. Yes, it puts subcontractor entitlements off limits but that has no practical impact on us as we’ve never relied on that money – we always pay our subcontractors on time. 

It’s also tough to attract subbies in this market so removing their risk of non-payment doesn’t hurt either. Unless a builder is already in a fair bit of trouble, I can’t see why a request to work under IPEX would be an issue.” 

IPEX: Balmain & Co has worked under IPEX on a number of projects now; in some cases IPEX is developer-led and others where you have volunteered to work under the framework. How does an IPEX project differ from a non-IPEX project?

Balmain & Co: “Well for one, as soon as IPEX becomes a condition of winning the contract, there’s almost always 1 or 2 builders that withdraw from the tender process! That certainly helps level the playing field for us, but we’d argue it’s a huge plus for our clients too -they’re potentially dodging a pretty big bullet. When we put IPEX forward, we really encourage our clients to ask all prospective builders whether they’re also willing to work under the framework; you quickly get a clear insight into where we all stand financially.

Having to front substantial costs has always been part of the game but it is a big source of risk (and cost) to us. We’ve found that when a developer knows the money can only be spent on their project, they’re far more likely to relax certain payment terms to our advantage; it’s not uncommon to get an initial head contract payment to help with site establishment costs or similar so it’s a bit of a win: win really – client risk is reduced and we get to start each project cashflow positive.”

SUMMARY: IPEX ‘FINDS’ THE HONEST BUILDERS

Whilst many builders manage funds responsibly, it’s not always easy to tell who they are. 

Ken’s feedback around builder due diligence certainly mirrors what we’re seeing play out at IPEX. Despite financiers ramping up builder due diligence requirements, we continue to see builders enter administration having only recently won new contracts, suggesting that builders are somehow managing to satisfy DD criteria despite serious (often terminal) cashflow issues.

Balmain & Co is one of a growing number of builders who are not just accepting of IPEX, but proactively using it to differentiate their bid from competitors and ‘prove’ their strong financial position. They also know that builders in financial trouble will fight the use of IPEX which is critical – it helps developers ‘find’ the honest builder.

If you want to talk to Balmain & Co about an upcoming project, please reach out to Jess Jones: Head of Strategy and Business Development jj@balmainandco.com.au or to find out if IPEX can be implemented on your next project, get in touch.