Despite what has appeared to be a flourishing market for constructors with cranes dominating the horizon and construction vehicles lining the streets of our cities and neighbourhoods, the construction game has not been a happy hunting ground for all over the past couple of years.
The contracting market has been bolstered off the back of declining infrastructure and mining sectors and the recent success of contractors overcoming the challenges of geographical boundaries. This in turn has fostered fierce competitive market conditions for head contractors well into the buoyant development conditions experienced over recent times. Consequently, margins for most have remained particularly tight in the face of margin eroding challenges such as rising wages, volatile subcontract pricing, a declining availability of labour to meet programme, and interstate competition.
Whilst these market conditions are not new to the industry (nor should the associated challenges be considered unexpected) the constant pressure on margins and the resultant reduced ability to absorb project specific problems means the likelihood of a development project becoming distressed is real. We have, consequently, continued to see contractors fail through the recent development boom in South East Queensland.
So how can we best address this risk?
“The old saying 'Prevention is better than the Cure' comes immediately to mind,” said Darryl Bird of Mitchell Brandtman.
“And whilst there is no guarantees of avoiding this risk completely, being diligent in setting up a development for success from the very start is vital, whether it be selecting a suitably experienced and qualified development team, compiling comprehensive design and contract documents or selecting the right contractor to partner with to deliver a project.”
Whilst price is a significant factor in the selection of a contractor, it must be said that price can also be a major factor in adding risk to a development. A diligent process of selecting the most appropriate contractor will look far beyond price and consider factors such as experience, capability and capacity of the business as well as those within it responsible for project delivery to provide a more holistic basis for contractor selection and addressing the associated risks.
Despite best intentions in selecting the most appropriate contractor, it is possible that things may still not go to plan. Bird states that there are some signs to watch for during construction that may provide hints to a project heading for distress:
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 escalate into liquidity issues and financial distress.
High turnover of site managers and staff
As with any company, any abnormal or noticeable turnover of staff can be an indication of the company having difficulties meeting the demands of its projects.
Changes in the relationship between the developer and builder
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.
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.
It is important to note that even when the above signs are evident, communication is key.
“There can be valid reasons for what appear to be troubling signs...and it is important for all parties involved to communicate clearly and regularly,” said Bird.
If, however, a project suffers a situation where the contractor enters liquidation, there are some immediate steps to take to limit further risks:
- insure the works immediately
- secure the site and ensure any further access to the site is monitored to ensure no further damage or loss is suffered
- undertake a dilapidation style report including photographic records of the status of works on site, unfixed plant and materials and other assets
- review the existing contract and seek legal advice in order to terminate the contract, and in preparation for any further implications (i.e. termination payments if applicable)
A detailed project or situation specific plan will then need to be established by appropriate experts to identify how best to proceed with the development.