Many developers are experiencing market conditions that they haven’t had to face before, and some will probably find them quite challenging. Obviously, the prevailing inflationary conditions has been well covered in the mainstream press, but we believe the potential impact on development requires a more detailed examination so that appropriate strategies can be implemented to minimise any negative impact.
Construction going longer than projected.
We are all seeing cases of construction delayed for a multitude of reasons; rising cost of materials, supply chain delays, and rising labour costs all disrupt the builder’s ability to coordinate onsite works and meet deadlines. Even prior to commencing work there are likely to be difficulties getting trades and suppliers to quote which in turn is adding to delays in finalising contracts.
What to do if your project is affected?
Firstly, if you are about to start a project in the current market and your feasibility is based on past experiences you are asking for trouble. Smart developers plan for the worst, and you need to allow for delays.
Don’t just select the cheapest quote.
Do your homework, have your own QS assess the costs and choose a builder who can deliver on time and on budget and won’t leave you with a massive problem mid project because they have underquoted or are undermanned.
Select the right form of contract.
There is no point entering into a contract that is overly onerous on the builder only to find that they walk away when the going gets tough leaving you in need of a replacement and all the costs associated with that process. You may win the battle, but you will likely lose the war and your profit with it. The contract should be fair but keep both parties honest.
Be vigilant on variations submitted by the builder and even more so if they are not being submitted.
Your supervisor and the certifying QS should identify and resolve them between the parties immediately they are identified so that they are dealt with appropriately, either as a cost to borne by the builder as part of his contractual responsibilities or as a genuine cost overrun such as a developer-initiated change or an oversight that is outside the builder’s obligations. Carefully drafted contracts should minimise the latter and ensure that only developer-initiated changes are a cost to the project.
Talk to your financier and keep them in the loop.
The negative impact on finance arrangements resulting from not keeping them in the loop can be catastrophic, with potential increases in interest costs, variation fees and possibly default interest. Remember, the lenders contingency is there to meet unforeseen costs, but they will require you to maintain a buffer of between a 5 to 10% measured against the cost to complete. This means that provided the financier is comfortable with how the project is travelling and your management of it, there may be potential to utilise the contingency if the buffer is preserved but you can’t count on it. In most cases any cost exceeding that buffer, including projected future interest must be funded by the developer as soon as they are identified, so getting it wrong will have serious consequences!
‘But I’ve got a Liquidated Damages clause’!
Good for you, but in most instances, this will amount to a very small daily levy that will not even come close to covering all the financial costs incurred because of falling behind the budgeted project cashflow.
Stay on top of sunset dates.
This is particularly relevant where you are building to satisfy purchases made off the plan. Many lenders require presales and will look to have a minimum 6-month buffer between the projected completion date and the contract sunset dates, but this can quickly be eroded by delays on site, variation disputes etc., so it’s important to ensure that your builder can deliver on time as well as within budget and that in the event of any unforeseen time blowouts, you have the resources to deal with them.
Remember, if your lender is forced to step in it comes at a premium cost, both financially and from a credit perspective that could be life changing.
To discuss your funding requirement contact Dan Holden on 0401669502 or dh@hcp.fund