Supplier insolvency insurance ?

[SteamyTea]

1 hour ago, saveasteading said:

but I estimate their price increasing 5%, maybe 10% for taking the Escrow option.

Why that much, isn't the financial risk basically the price of materials.

If the supplier tries to insure is running costs as a risk, then they should not be in business, and they are probably already having trouble getting credit.

[Alan Ambrose]

The economic price is the cost of the extra admin plus the cost of the extra finance they have to raise plus whatever the supplier thinks they can gouge from the customer for the service minus a portion of whatever extra business they think they can get by offering the service.

 

They can't really insure because of asymmetric information - this it, they'll know they're going bust long before an insurer catches on. 

[saveasteading]

13 hours ago, Kelvin said:

Yes would be interested. 

OK. Somebody said similar above, or elsewhere, but I can't find it again.

 

It was basically a question of understanding the supplier's risk position, and finding a compromise.

Firstly, their accounts were reasonably solid compared to most in their business.

They were pushing through a couple of units a day for a big housing contractor so were used to slow payment OR a special agreement. Their payment structure was very front loaded, with little left for site works.

Total about £200k.

 

So we just talked about a balance of risk. 

Yes we would pay for design when it was done.

Yes to a deposit, but just in time for materials purchase, not with order.

Delivery in 3 stages, a week apart, so 3 payments, made same day by transfer.

Erection in 4 weeks. Paid at 2 weeks, without any delay. Ditto at 4 and 6 weeks.

A small retention.

 

Thus they were being paid very promptly and at very small risk. We were exposed to a smallish risk at any one time  

Our client was paying fortnightly and  after 7 days, so again reduced exposure.

 

Everyone was happy as the exposure was shared and minimised. 

 

But presumably they had checked us out too. Plus we were very hands on at design, working together on innovation, so perhaps some bond formed.

Mostly they knew we only wanted reduced  exposure, and would pay quickly.

 

Would this work for a one-off self build? It will be down to the charm of the self builder. There must be some balance. Paying quickly changes everything.

 

 

 

 

 

[Kelvin]

That wouldn’t work with Heb Homes if you also take their planning and warrant service. They way they operate is you pay 10% of the total  kit price before they start on the warrant pack. Another 10% at completion of the warrant. 20% to order the windows (still 13 weeks minimum to kit delivery). 40% to commence kit fabrication. Then 17.5% just prior to kit delivery with the final amount after kit erection. You’re exposed to a minimum of 40% of the total cost for at least 4 months. In our case it was almost 8 months from the first 10% payment to kit delivery. To make matters slightly worse we didn’t get the final kit price until 5 months after we had paid the initial 10% due to delays in getting the SE design pack. The risk is entirely with their clients. To make matters slightly worse they sub out the kit fabrication who they pay in arrears (according to the owner of that company) 

Edited October 24, 2023 by Kelvin

[LnP]

@ToughButterCup posted this advice on supplier due diligence, which is very good, but I think there's probably more to be said regarding timber frame kit suppliers ....

[Alan Ambrose]

>>> That wouldn’t work with xxxx ... They way they operate is ...

 

I think saveassteading has demonstrated above that it is not impossible to negotiate terms that suit all parties. The formal escrow route btw actually gives the supplier an advantage in that it demonstrates up-front that the customer has full funds to complete the contract.

 

I think it would be interesting to hear more payment terms from some of the main players.

[Kelvin]

14 minutes ago, Alan Ambrose said:

>>> That wouldn’t work with xxxx ... They way they operate is ...

 

I think saveassteading has demonstrated above that it is not impossible to negotiate terms that suit all parties. The formal escrow route btw actually gives the supplier an advantage in that it demonstrates up-front that the customer has full funds to complete the contract.

 

I think it would be interesting to hear more payment terms from some of the main players.

That’s much easier when you’re acting on behalf of a company which is what he’s describing. When you’re a self-builder doing a one off build it’s not so easy plus you have next to no leverage. I even took their contract to a solicitor to get their opinion and they said it’s typical for the industry, very much favours them, and, as it was written, she wouldn’t sign it. I could have paid the solicitor some money to try and vary the terms but decided against it. Believe me I tried every which way to reduce my exposure with HH from very early on but it was either accept the terms or walk away. We very nearly did walk away but decided to plough on and accept the risk. 
 

HH understood there was a risk as they suggested other clients were raising similar questions. What I don’t quite get is those clients building with a mortgage as I can’t believe the lender would be so relaxed about the exposure. 

Edited October 24, 2023 by Kelvin

[Kelvin]

The key thing I read on the other thread is someone bought a kit from a German company and it was subject to Escrow. It prompted me to ask my wife’s uncle about his German kit house and it was also subject to Escrow. He built it 15 years ago. 

[LnP]

I got a quote from Fleming last year and the (structure only) terms were 10% on acceptance of the quotation and the balance 14 days before delivery. But:

"The Company reserves the right to revise the Price in respect of any factors which affect the Project, including, without limitation i) local authority delays, ii) Purchaser delays in providing instructions or details , iii) increases in the cost of labour or materials, or iv) any action of the United Kingdom or Scottish Government."

They quoted for erection as well but didn't specifically mention different payment terms, so I'm not sure how the erection costs would have been handled.

[saveasteading]

It surprised me how cheap the setup was for timber kits. The only technology was a computer driven machine which printed part marks and cutting points onto the timbers.

They were then taken to a big bench and nailed to similarly marked osb sheets.

Then felt pen to show the part number.

 

All this in a cheap old industrial unit.

6 workers doing an easy thing.

 

Meanwhile in a nicer office, quite a few clever techy and sales  types  and possibly a very busy accounts office watching the cash.

 

Theoretically I reckon we could have kept taking away several panels and paying them a few thousand, and bringing in some more timber, in real time.

[Alan Ambrose]

>>> It surprised me how cheap the setup was for timber kits. The only technology was a computer driven machine which printed part marks and cutting points onto the timbers.

 

That's an interesting thought - there's plenty of CNC companies that will cut boards to a CAD file. Some of them are very reasonably priced. Then you need I-joists and fill. You also need some big tables and a bunch of storage and probably a travelling crane and a 'cad monkey' 

Edited October 24, 2023 by Alan Ambrose