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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

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.

 
  • I am reading this article as I finalise a submission to the Senate Economics Committee Enquiry into non-conforming building materials and products containing asbestos, and wonder if the Quantity Surveying Industry will ever be up for the job that they hold out they do. In the case of this article lets look at Draw Down Reports. Construction contracts entitle a contractor to be paid for work completed in accordance with the contract. The role of the Certifier who ever that is – sometimes a Quantity Surveyor, others a project manager and alas rarely an architect or a Clerk of Works. In the instance of this article, one check to be done by the valuing QS is to witness 'letters of construction compliance from the developer’s consultants' Apart from ticking a box, what other benefit can be held out here? Construction contracts make it clear that progress payments are on account and in no way indemnify either the client or the contractor that the work or materials for which payment is being sanctioned is compliant. The industry knows the weakness and risks that this process is throwing up. In the case of a QS, a project manager or consultant, their seperate engagements will contain further contraction of their obligations. So what does this mean? Firstly, financiers ought to consider that all non-conforming work and materials should in effect be regarded as a loan impairment. These impairments at the very least will effect the long term performance of a building and directly the quality of the security. The financial industry is so keen to loan out money, for now this 'dirty little secret' gets swept under the carpet. Secondly, the process reinforces the decline in building standards. Watch this space for more on this subject.

  • Hi Peter
    Your article is quite accurate in describing the "Payment Process" required by the lenders.

    I would however point out that such a "Payment process" frequently places the developer in breach of the building contract. Particularly when the payment provisions of the building contract are typical conditions which provides for builders to be paid for work completed. This entitlement to payment for work performed (irrespective of cost to complete) is further supported in the various State Security of Payment legislations.
    The potential breach commonly arises if the QS values on a basis contrary to what the building contract & security of payment legislation requires (I.e such as a contrary cost to complete basis).
    Payment certification shortfalls do arise frequently because of a number or of reasons including unapproved variations and other claims and it is the builder (and his subcontractors) who ultimately bear the resulting cashflow burden.
    This is an important issue that Security of Payment legislators need to pay close attention to when reviewing current legislation.

  • I agree with David. The lack of regulatory enforcement in building and construction is the critical issue, and any finance attached to fund building projects should be dependent on developers and builders meeting compliance at least to minimum building and safety standards. No more so than dangerous non-conforming products that impact the health and safety of workers, owners/residents and users of buildings. The current system seems is very weak in this area and it could be an instrument for tightening up and at least improving the quality and safety of future buildings.

  • David, the points you raise about quality are valid. The aim of the drawdown report is to certify & provide confidence to the financier that to the extent reasonably possibly each month that works are completed in accordance with the contract and that any significant project risks are identified.
    If there are non compliant materials being installed in a project this may be identified within the report if the issue was raised and if considered a financial risk to the project.
    To that end then the QS is reliant on the project consultants to provide certification each month and certify that this is the case. The project consultants are required to carry professional indemnity insurance to alleviate the risk of faults in their design.
    Your point about non-compliant materials is very valid but is more a question of who is responsible for the installation of non-compliant materials the developer, the financier or the project consultants who specified and or approved the product in the first place? Generally the banks interest in a project ends once the finance has been repaid & in a project such as an apartment block the banks role in the project is completed once the apartments are are built. The developer and hence the consultants would be the ones who would carry any long term risks associated with non-compliant materials on their projects and in the event an issue arose after PC then that may fall under the consultants Professional Indemnity insurance.
    The responsibility for whether materials that are being specified and approved for use within in a project that are non-compliant with Australian Standards, BCA & other standards should lie with the consultant that specified them in first place and not the with QS.

  • Hi Peter,
    Great article thank you. As a QS I always feel that I am a bit of a security blanket for the Financier in carrying out these due diligence tasks. First question from the Financier to the QS, even to get on to these Financier QS panels of approved quantity surveyors, is usually how much is your PI cover? Quantity Surveyors should be aware of the comments made by His Honour Justice Ball in "LM Investment Management (In liquidation)(Receivers Appointed) v BMT & Associates Pty Limited [2015] NSWSC 1902"
    Good luck!

  • noting the comments below in terms of the potential conflicting payment regimes (ie. bank cost to complete v's building contract), i cant seem to find a clear outline/description/definition of the often referred to term of "funded by the bank on a cost to complete basis".
    For example. The bank has approved a facility of say $20m and has already drawn down $5m for the land. There has been a further $2mln of construction work completed under the terms of the contract but the cost to complete is now $14m. So there is a $1m shortfall (putting aside the reason) between the remaining facility availability $13m (excluding interest) and the cost to complete. How is this normally dealt with ? (if there is normal these days).

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