In this current economic climate, the identification and management of risk is of prime importance.
Competition is healthy in any market but fierce competition the likes of which has been present in the SEQ market from contractors “buying work” is a leading indicator of risk that we need to be aware of in the market today. Competitive tender prices were gratefully accepted but they came with a heightened level of risk for all parties, and that risk not become evident until the project was well underway.
Contractors that tendered in the past, and are now having to let trade packages, may be finding that they have to pay more than they have allowed.
This leads to cash flow strain and can greatly limit their ability to deal with problems that arise on their projects. As a result the likelihood of projects in this situation becoming distressed is real, and we are already seeing a number of contractors and subcontractors going under.
While it is difficult to identify in advance every risk that may affect a project, staying transparent and exposing, and addressing, uncertainties early could make the difference between a project running smoothly and project becoming distressed.
Darryl Bird, a partner of Mitchell Brandtman 5D Quantity Surveyors, discusses the warning signs for distressed projects:
Mitchell Brandtman 5D Quantity Surveyors Partner Darryl BirdThe Signs
Low activity on site when it should be high - All projects have a rhythm, with different levels of activity during the different stages of construction. Uncharacteristic or unscheduled activity can be an indication of trouble ahead.
Subcontractors and suppliers not being paid. This can be representative of a cash flow problem which can quickly escalated into liquidity issues and financial distress.
Contractors over-claiming - This scenario may be evident through the progress claim process or in the number and value of variation claims submitted. Whilst this can often be seen as par for the course with certain builders, the reasons behind it need to be considered and changes in claiming behaviour interrogated.
High turnover of Site Managers and Staff – Like with any company, any abnormal or noticeable turnover of staff can be an indication of the company having difficulties meeting the demands of it’s projects.
Changes in the Developer and Builder’s relationship. Effective collaboration is the key to a successful project in a low margin environment. While these relationships can often be strained through a project, sudden unexplained changes can be a sign of stress.
Another less obvious issue is where the parties to the contract do not disclose all relevant information and withhold the fact that there may be materially different Side Agreements in place. Often this does not become apparent until the project is underway, and the parties attempt to compensate for the side deal through over-claiming.
Secure the site and ensure any further access to the site is monitored to ensure no further damage or loss is suffered.
Insure the works.
Review the existing contract and seek legal advice in order to terminate the contract, and in preparation for any further implications (ie. termination payments if applicable).
Undertake a dilapidation style report including photographic records of the status of works on site, unfixed plant and materials, etc.
Being a fresh set of eyes on a troubled project.
By organising and recommending completion strategies and recovery plans including appropriate contract advice.
Identifying current deliverables and completion status against the original plan.
Validating recovery estimates, resource loading, budget and schedule.
Establishing monitoring strategies and thresholds for budget and schedule issues.
Identifying any avenues to reduce costs and eliminate scope creep.
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