How Builder Reputation Impacts Contract Wins and Insolvency
How Much Longer Will Reputation Alone Be Enough To Win Contracts?
In the construction industry, understanding the risks of builder insolvency is crucial for long-term success.
Frequent, high-profile insolvencies continue to make developers and lenders nervous, with the solution for many being to pay a premium for a bigger builder and rely on the ‘safety’ that comes with reputation – “I just give all my work to <ENTER BIG NAME BUILDER>”.
Whilst there’s clearly some logic to this approach, it’s not exactly foolproof – there are multiple examples of large builders going under and plenty of evidence to suggest that most are under some degree of financial pressure. Unfortunately, no one is immune to external market forces, particularly when operating under onerous contract terms on slender margins.
THE SHIFTING LANDSCAPE OF BUILDER REPUTATION VS SECURITY OF FUNDS?
So, while reputation alone may be carrying big name builders into regular contracts at present, there are early indications that this may be changing in certain market segments.
There is a new strategy emerging amongst builders who recognise that they simply can’t compete on track record alone; one that’s arguably more secure (and more profitable) for a developer. We’re now seeing builders successfully offset their lower profile by offering a level of funds security that competing tenderers won’t (or can’t). These builders are winning contracts that they would not have otherwise been considered for by proactively offering to work under IPEX.
LEVERAGING SECURITY TO BECOME THE PREFERRED TENDERER (WITH BETTER COMMERCIAL TERMS)
For those who aren’t yet aware, 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 and suppliers linked to that project. IPEX provides developers and lenders with visibility over who has been paid and when, without sharing a builders’ commercially sensitive information*.
Builders that are able to accept a contract under the condition of ‘ring-fenced’ funds are not only ‘proving’ they’re not an insolvency risk (something due diligence can’t do no matter how detailed), they’re also leveraging the additional developer transparency and control into better commercial terms to improve liquidity, including modified security requirements and payments in advance for site establishment and certain supplier deposits.
Not only is IPEX proving to be a bid differentiator, it’s also facilitating a change in developer payment behaviour to the builders’ advantage.
IPEX IS LEVELLING THE PLAYING FIELD FOR TIER 2 and TIER 3 BUILDERS
IPEX is making the developers decision a little less straight forward; do you continue to pay a premium for a larger builder, or appoint a solid builder that might be that next tier down but is willing to work under IPEX? There’s also a very good chance that you won’t know that you’re competing against a bid that includes IPEX until the contract is awarded.
Of course, if you’re one of the ‘bigger builders’, there’s no need to lose contracts you’re in the box seat to win. Most large builders tell us they already silo funds by project and do not use subcontractor entitlements to cover loss making projects, which makes the selective use of IPEX to win a bid a bit of a no-brainer (and when you bring IPEX to the developer rather than the other way around, you get to dictate terms).
IPEX FOR BUILDERS: A HUGE COMPETITIVE ADVANTAGE WITHOUT ANY REAL CHANGE IN PROCESS
In principle, all IPEX asks nothing more than that builders pass on the entitlements of those they claimed funds on behalf of (something all builders already agree to do and confirm via your monthly ‘stat dec’). Importantly, the level of transparency provided by IPEX standard portal view should not be of concern to any builder.
There is no change to the subcontractor or builder progress claim process, no change to the QS approval process and no need to change accounting software; your process is essentially the same; IPEX just ensures that everyone (including the builder) gets what they’re entitled to. The ability to attract subcontractors is a huge benefit to any builder in this current market.
As the industry evolves, the significance of builder insolvency education becomes increasingly clear. Builders who invest in understanding and managing financial risks will be better positioned to secure contracts and ensure long-term stability.
