All developers, and to some extent owner builders, that require finance for their proposed developments come across the same conundrum: the finance institution requires an approved qualified quantity surveyor to carry out a ‘due diligence’ test on the costs associated with the project and the ‘parties’ involved in the delivery of the project.
This rule holds true whether these developments are high density multi-residential, retail, commercial or simply a single residential property.
Most finance institutions have similar requirements – an initial assessment report and ongoing drawdown recommendations during the construction phase.
This poses a conundrum for the developer, as evident by the following facts:
- the new developer generally only becomes aware of these requirements just prior to finance approval
- the new developer is completely unaware of the amount of detailed information required by the quantity surveyor for preparation of the initial assessment report
- even though the quantity surveyor is preparing the reports for the financial institution, it is the developer who pays the quantity surveyor fees
- the developer often has a perception that the quantity surveyor is going over ‘old ground’ and often views the whole exercise as a waste of time and money.
It is important to note that the initial assessment report and drawdown reports exist to protect both the financial institution and the developer, though this is a concept that some developers struggle with.
Initial assessment report
Financial institutions do not claim to be experts in construction costs or in the processes that lead to a project being delivered. As such, approved quantity surveyors are asked to step in and provide an independent due diligence assessment on the project as a whole. This provides certainty to the financial institution and also highlights any ‘gaps’ that the client may not be aware of in terms of documentation, approvals, or even something as simple as the fact that the quote provided by the contractor may not be adequate to complete the works to the standards required.
So how is the initial assessment report beneficial to the developer? Often, a developer has been closely involved with a project for a considerable period of time, getting over hurdle after hurdle to get the project finished. As a result, the developer can be to close to the project to see potential pitfalls that could affect the success of the project.
By carrying out an independent review of the project, ideally just prior to construction commencing, the quantity surveyor can identify factors that may affect the project being successful completed, such as:
- the type of building contract – is it applicable to the project type?
- onerous contract clauses
- the ability of the contractor to successfully deliver the works
- the construction programme – is it realistic for the scope of works?
- a query particular of trade costs, and a request for evidence that a particular trade’s costs can be achieved.
Ironing out all of the above and any other ‘gaps’ at this stage can potentially save the developer thousands of dollars during the construction phase by alleviating potential variations and potential time delays.
Drawdown reports see the quantity surveyor independently assessing the value of the construction works completed on a ‘cost to complete basis’ rather than on the value of the works actually carried out.
This is to ensure there are always sufficient funds available to compete the project.
In order to expedite the issuing of the initial assessment report and drawdown reports, certain information should be readily available.
Typically, the initial assessment report will review and comment on the following:
- an independent cost estimate prepared by the approved quantity surveyor
- endorsed construction drawings, stamped with council approval
- a list of project consultants, including evidence of current professional indemnity insurance
- a signed building contract
- the builder’s registration details, including details of previous experience
- the builder’s insurance details
- the builder’s cost trade breakup
- the builder’s cashflow during construction
- statements from consultants confirming that the structure, design and siting of buildings are in accordance with all local and statutory requirements
- a full set of consultant documentation
- authority approvals, planning and building permits
- overall project development expenditure (total project development costs)
Once all this information is received, the quantity surveyor can then complete their initial assessment report with all recommendations and project risks identified.
Typically this process generally takes two to four weeks, depending on how quickly all the information is made available.
For the ongoing drawdown reports, the quantity surveyor is required to visit the site for each drawdown assessment and ascertain the costs to complete the works.
To assist in the drawdown reports, the quantity surveyor will also require the following:
- a progress claim from the contractor
- a statutory declaration from the contractor stating all payments to sub-contractors and suppliers have been paid within the terms of their contracts
- a list of development payments by the contractor
- letters of construction compliance from the developer’s consultants
- advice on any approved variations
- updated cashflow if applicable
- updated programme if applicable
- an invoice from the contractor once value of works has been agreed between the quantity surveyor and contractor
The drawdown report can normally be prepared within two to three days of visiting the site, provided all information is provided in a timely manner.
Hopefully that demystified why financial institutions required independent reports form quantity surveyors when making a finance facility available to prospective developers.
The process is relatively simple provided both the developer and the contractor understand what information is required and why, to assist in the timely preparation of each of the reports.