Unforeseen Cost Escalations Not Just a Problem for Builders

How will the gap between forecast and actual cost be funded? The most likely answer is that cash from appropriately funded projects will be used to prop up weaker developments.

More money only helps if stays in your project

Fair-minded developers are typically not against (at least partially) funding unanticipated cost variations and/or the inclusion of rise and fall mechanisms in new contracts; the assumption being that they are protecting delivery outcomes.

But additional funding only improves your position if the cash remains in your project.

Unfortunately, industry-standard controls remain ineffective at preventing the movement of cash into other developments.

While progress on site is formally certified by the QS and underpins monthly drawdowns, the actual downstream distribution of progress payments to the subcontractors and suppliers that performed that work is largely assumed.

This “blind spot” means that certified work can remain unpaid without changing the reported Cost to Complete forecast. Your project still appears on budget, even as cash is redirected into other developments to keep those sites progressing.

▲ Industry-leading funds management and development firm WINIM adopted the IPEX payment platform to limit investor exposure.

Once this cash becomes part of the builders’ broader working capital position, it’s unlikely that those funds remain available to your project, meaning that the reported contingency figure likely exists ‘on paper’ only.

It becomes a high-stakes game of pass the parcel; whose development is currently carrying the shortfall?

Control payments without assuming direct obligations

Traditional rise and fall protections are designed to verify the legitimacy of additional cost. But if there is no visibility or control over whether those funds are flowing to the cost-impacted trades, the core exposure remains: capital intended to deliver one project can still be redirected to stabilise another.

Payment transparency has already proven to be an active deterrent to builders ‘borrowing’ against a project to cashflow another under financial pressure.

▲ Balmain & Co proactively offers developers and lenders the option of implementing IPEX on their projects.

But developers can also enable a range of enhanced payment controls specifically designed for targeted payments, ideal for negotiated variations or funds approved under rise and fall adjustments.

Under IPEX, developers can:

• see exactly where variation and rise-and-fall payments are directed, down to the subcontractor or supplier level

• restrict approved escalation funding to the specific trades and suppliers linked to the relevant cost increases

• co-approve payments to relevant subcontractors and suppliers, maintaining control without taking on direct payment obligations

• activate enhanced oversight automatically under predefined financial distress or payment default trigger events.

The principle is simple: if additional funding is being provided under exceptional circumstances, it is entirely reasonable for the developer to ensure those funds are used solely for the project they were intended to support.

Unpaid subs a builder’s problem—until it’s not

Although cross-project cash ‘leakage’ is always a major source of risk for property developers and construction lenders, the potential for loss is amplified during periods of rapid cost escalation.

Whether your builder asks for more money, walks from the project or collapses, any disconnect between ‘Cost to Complete’ and the actual amount of cash required to complete the project will eventually surface, ultimately to be funded by the developer and the lender.

IPEX provides transparency and control over the downstream distribution of additional developer contributions, helping to ensure funds remain in the project they were intended to support rather than being absorbed into the builders’ broader working capital pressures.

Importantly, this transparency also benefits builders acting in good faith.

Where unforeseen market conditions have led to significant cost escalation, builders are able to demonstrate that requests for additional funding are genuine, project-specific and that approved payments are flowing to the relevant subcontractors and suppliers.

That transparency is critical to developer confidence—and confidence that further support will materially improve the likelihood of successful project delivery.

If you want to be sure that all payments are directly supporting the delivery of your project and not funding cash shortfalls on other developments, speak to IPEX.

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