When I heard this announcement, it sparked images of cranes popping up across the country in the following days, but it isn’t quite as simple as that. One of the major questions that remains is, who is going to pay for all the development that’s planned, and how is this cash going to be managed? While the government is likely to stump up some money, a large majority of the funding will be through lenders. Property developers, big and small, will borrow the cash, manage cashflow and reap the returns of the building boom. But, again, this is perhaps easier said than done.
Payments can be a great source of controversy in the construction industry for several reasons. Firstly, the sums of money exchanging hands can be huge (easily millions of pounds), projects have a long lifecycle with costs evolving hourly, and there are numerous subcontractors involved at every stage of a build, all of which can change at the drop of a hat. This is without taking into consideration any added complications, such as contractors pricing projects incorrectly or encountering cashflow issues, both heightened risks during these uncertain Covid-19 times, as well as the age-old concern of fraud.
- CrowdProperty nears £100m lending milestone with 'big ambitions' ahead
- SME housebuilders report fall in growth projections, survey reveals
- New PDR challenges: 'It's not as carte blanche as everyone thinks'
The construction sector is no stranger to fraud — quite the opposite. For all the reasons noted above, the sector is appealing to rogue actors looking to pull a fast one. Billing fraud, contract rigging, bribery, phantom vendors, falsifying payment applications and invoices, tax avoidance and money laundering can plague and completely derail projects of all sizes. The result? Incomplete projects, unhappy contractors and out of pocket investors.
With all of this to consider, it’s perhaps no surprise that the ‘build, build, build’ slogan didn’t spark an influx of activity the morning after Boris’ speech. Despite these challenges, developers will press ahead because the sector presents a huge opportunity. But, how can lenders mitigate the payment risks that are rife?
Before a project starts, full due diligence checks must be completed. This involves thoroughly researching contractors, building firms, architects, and merchants; understanding the work they have completed before, whether or not they have a good reputation, if they are part of a subsidiary company or if you are dealing with the principal firm. Any due diligence must also include AML checks, and these should be continued at intervals throughout the duration of the project.
Developers should also adopt technology that makes managing payments easier. In 2019, Shieldpay launched a partnership with OakNorth Bank to enable borrowers to keep track of capital and allow funds to be allocated and disbursed appropriately. It has proven popular with OakNorth’s property developer clients where there are numerous parties involved in a project — architects, project managers, contractors, sub-contractors, designers, etc — to ensure that funds are kept track of, in line with the original lending criteria, and to record that the right parties are paid the right amount at the right time.
Finally, developers and financial controllers must stay vigilant. A momentary lapse in judgement or attention is all it takes for inauthentic companies or individuals to take advantage and cause development delays. In the worst-case scenario, the entire project could be scrapped, so it is worth taking every measure possible to ensure monies are safeguarded until they reach their intended recipient. Only the developers that can get on top of payments will be able to capitalise on this wave of infrastructural investment and development. It is these developers who can demonstrate a lower risk profile through adopting platform-based technologies that improve their systems and process that will ultimately appeal to lenders as safe and reliable prospects.