Transparency & oversight can be varied greatly, & builder payment can also be directly linked to rightful payment of all subcontractors & suppliers.
As you’d expect, builders on distressed projects tend to be managed with higher levels of oversight/control, while those willingly accepting IPEX terms on a new project tend to get more ‘builder-friendly’ set-ups.
The high value, low margin nature of construction means that very little needs to go wrong for a ‘healthy’ builder to suddenly find themselves under significant financial pressure – there is always a level of risk.
On ‘standard’ risk projects, developers typically run IPEX in a ‘builder-friendly’ mode; contract values, payment amounts & builder margins remain confidential. These developers’ just want to confirm that subcontractors & suppliers have been paid in line with expectations (QS assessment) before they approve further claims.
Practically, the level of transparency provided by IPEX standard portal view should not be of concern to any builder & most (~80%) agreements are implemented at this level. Developers also have the added protection of being able to escalate visibility levels should a ‘payment default’ event occur (as defined by the contract).
*Contract contains provisions which allow escalation to visibility/control over project account under payment default event.
In higher risk instances, developers and/or lenders may wish to link payment of builder entitlements to the ‘on time & in’ full payment of subcontractors & suppliers; this can be automated – the builder may receive an agreed percentage (prelim & margin) on every dollar paid out of the account – or, via a developer approval process.
In these scenarios, the builder is required to pay all entities linked to the previous claim before they can access their own payment. As you can imagine, subcontractors & suppliers tend to be paid VERY quickly under this model (typically within 24 hours of progress payment landing) which not only reduces developer/lender risk, it also keeps those onsite extremely happy.
Most builders have endured a series of loss-making projects of late, Many are taking on new projects while already in significant trouble, while even the ‘healthy’ ones are often only a bad contract or a missed payment away from being in distress. As a result, developers are frequently being asked to support builder cashflow in the form of a loan or worse, some are being hit with requests (read: demands) for significant additional payments outside of the contract to stop their builder from walking off the project.
In addition, these builders are typically working on multiple projects at various stages of completion (& likely, distress), which makes it critical to ensure that project funds aren’t immediately being shifted into the builders’ other projects. To this end, IPEX not only ‘ring-fences’ funds to a specific project, it can also allow developers to isolate individual subcontractors or suppliers for payment.
Not only will developers tie payment of builder entitlements to the ‘on time & in’ full payment of subcontractors & suppliers, in extreme cases, a joint-approval process may be mandated; subcontractor & supplier payments continue to be made from the builders account however, the developer checks & approves the payment file before it is processed.
Cost-plus contracts are easily managed via IPEX; these are run under the open book setting which makes validation of costs/payments simple & is not controversial for builders given they’d need to provide evidence of costs regardless.
Typically, the builder receives an agreed percentage on every dollar paid out of the account (they have to pay their subcontractors & suppliers to get paid).
Once a developer can be certain that all payments made are reaching the intended recipients on time & in full, upfront payments become viable.
Developers may choose to make an initial upfront payment to assist their builder fund site establishment costs and/or certain long lead time material deposits under IPEX. Payments can even be ‘ring-fenced’ to a specific supplier to ensure only they can receive these funds.
These payments are allowing builders to lock in material costs early & start the project in a cash positive position.
IPEX ‘hybrid’ view allows certain trades to be set to open book for full transparency, whilst the rest operate under standard view with concealed contract & payment values.
This is perfect for provisional sums; costs likely to change after the contract is signed can essentially be handled under a cost-plus arrangement, with the rest of the project running at the agreed fixed price.
