Ian Pert is a National Director of Colliers International Project Leaders, who provide Project and Cost Management Services through Australia.
This paper has been prompted by the impact of COVID-19, which has created a large amount of speculation in the construction market about the potential for construction projects to fail.
As construction projects slow, due to loss of productivity on site and new commencements are either pushed out or postponed, cashflows will be squeezed.
Distressed projects can arise from the failure of developers, developer/builders, builders and even Funders as we saw in the Global Financial Crisis. This article summarises of what to do when a builder fails and how to mitigate risks, including cost and time.
Early warning signs
Keep your antennae up. Look for the signs of changes in personnel and possibly more junior staff being employed by the Contractor.
Progress on site will start to drop as cashflow dries up and subcontractor payments are pushed out. Delivery of materials will also slow as the builder exhausts credit from suppliers.
You need to be regularly walking the site. Listen to the subcontractors on site. If they are not being paid they will let you know, provided they feel comfortable with you. You therefore need to be on site regularly and chat to them.
If possible, check on payments to subcontractors. Ask for evidence of payment. Also ensure that payments are correct. The Builder will try and ramp progress payments however, you need to ensure your cost to complete is tight.
Also, review any mechanisms\clauses under the contract to validate payments to subcontractors and suppliers and is a ‘show cause’ applicable? Do notices need to be given about progress against the program?
Be prepared and have an action plan ready for implementation. Do not get caught cold, as that exposes you to the potential for the project to go backwards.
What to do if the Builder fails
Secure the Site:
Immediately lock the site up and lock everyone out. This is to prevent the removal of materials, fittings and fixtures. Unpaid subcontractors will salvage whatever they can, even if those materials are fixed in place.
Locking up the site will also prevent sabotage of works. Unpaid trades people will be rightly upset. Often damage or sabotage to the works will take place. For example, cutting of electrical cables, filling drains with concrete. This will only be exposed later when a full inspection is carried out and increases the cost to complete.
Is there any security held under the contract? Who holds it and do you have access to it?
Immediately insure the project. With a builder in liquidation all insurance policies will no longer be valid.
Once you have stabilised the situation the next step is to accurately establish the project’s status.
A detailed dilapidation report is required to establish the status of works, defects on site and any non-complying works. This dilapidation report will also be fundamental to creating a scope of works to complete the project.
Prepare a matrix of approvals that are required to complete the works and also any approvals that may have lapsed. Establish a priority of when these approvals are required.
There is progressive certification of works under construction. It needs to be established what certifications you have and what is not in your possession. Often sub-contractors who have not been paid will withhold certification.
Cost to Complete / Payment Status:
Based on the scope to complete, a Cost to Complete needs to be estimated. This needs to incorporate requalification of defective works, non-compliant works and damaged works.
It is common that the actual cost to complete will be more than the original remaining funds due to:
Cost associated with warranting works previously completed;
Holding costs (e.g. scaffold, fencing etc);
Less competitive pricing due to partially complete works;
Deterioration during stoppage;
Works carried out at day-work rates.
There also needs to be an investigation to establish payments certified and actual payments made to sub-contractors.
Licences / Authorities:
Review if and when the builder’s licence lapsed. Is there any un-licenced work? Also review all authority approvals and their status.
Completing the Project
The approach to completing the project will be heavily dependent on the percentage complete. If the project is almost complete and there are four to six weeks left, the outcome may be more of a construction management solution.
On the other hand, if the project is for example, nine to twelve months to complete, this may lead to more of a re-tender situation. It may also, depending on the asset class of project, result in a review of original specification. Does the project need to be re-positioned? Has the target market/buyer changed?
About Colliers International Project Leaders
At Colliers International Project Leaders, our experienced team understand the pressures, stresses and actions that need to be implemented to mitigate losses on distressed projects. We offer a diverse range of in-house skills including Development Managers, Project Managers, Quantity Surveyors and Engineers to manage and deliver distressed projects.
If you wish to discuss how we can help please contact:
Ian Pert, National Director QLD Ian.Pert@colliers.com
Gavin Baxter, Director Gavin.Baxter@colliers.com