Adam Shaw, WT Partnership’s Executive Vice President explores an age-old question – how do you select the right Contractor for your project? The answer lies in Due Diligence.
This article discusses what due diligence is, and why it’s critical to the success of any project.
From banks and institutions through to mom and dad investors, it is essential to undertake adequate due diligence on your potential developer/general contractor prior to contract.
All too often, price takes precedence. However, this can lead to a nasty (often costly) shock when things go wrong. As a technical advisor to international banks and investment firms, my job is to be a ‘technical translator,’ assessing project risk on their behalf.
Don’t rush this. Due diligence is necessary.
The assessment of project risk doesn’t happen in a color-coded spreadsheet or a workshop; it’s a detailed assessment of all aspects of what it takes to get a project from inception to completion. Key areas of focus can be defined as follows:
Project Team & Capability
Although the financial sector is often seen as mercenary, lenders place a lot of emphasis on the softer side of corporate relationships. Typically, the term ‘partnership’ will apply to whether there has been a historical relationship between the key parties (i.e. general contractor and developer) – do they have similar corporate values, financial strength and experience? The theory of balance is key in this area. An inexperienced developer needs an experienced general contractor, but an accomplished developer may be able to upskill a less experienced contractor without substantially increasing risk.
Or in the case of a direct appointment to a client, has that general contractor served similar clients for equivalent scopes of work? Do they have written letters of recommendation? Where a history of working together can be evidenced, typically a lot of early issues can be avoided such as protracted commercial negotiations, misalignment of expectations and lack of trust. Collective success on prior work will count significantly more than separable experience, and so this should be conveyed. If you are the developer, this partnership concept could equally apply to the general contractor and their sub-contractors or design consultants.
2. PROJECT TEAM AND CAPABILITY
“I have a good feeling about this contractor, and I believe they’ll do a great job for us”
He or she might, but then again, he or she might not. Leaving the success of your project to ‘the gods’ will inevitably leave you disappointed. Projects and people need to be driven to success. Construction should not be a gamble.
Remember, you are a customer buying a service.
The construction industry, like any other, has those who are keen to serve and provide a high-quality product, and a minority who appear preordained to disappoint. Hold people to their commitments – including yourself.
Just as general contractors place parameters on their price, you must place reasonable parameters on the performance of their work. Setting out start and completion dates and conditions such as removal of waste, car parking and reasonable working hours will avoid some of the most common issues which arise on domestic and commercial projects.
3. CONSTRUCTION METHODOLOGY
Taking a moment to step into the general contractor’s shoes is important to identify whether their planned approach is actually going to work. Aspects such as overly ambitious access assumptions or an inconsistent approach to tenant management can create pinch points and project stress. In order to avoid potential for delays and increased costs, it is important to ensure the construction methodology is consistent with the client’s expectations and constraints.
The key point of reviewing this aspect is to test the validity of assumptions and the level of risk associated with each. Often through engaging in this dialogue, a range of assumptions can actually be tested and verified before commencement to mitigate construction phase risk and potentially to identify opportunities to the benefit of all parties.
Cost is a tricky area to step into for many as the desire for ‘best price’ is often seen as conflicting with ‘least risk.’ However, there is a structured way in which a contractor’s price can be tested to achieve comfort prior to contract execution.
Typically, this involves undertaking an independent cost estimate (often termed a ‘pre-bid estimate’) to define, based on the scope, the market price to carry out the works – normally priced by a cost consultant.
This sets expectations upon which bid returns can be assessed. Typically, bid returns should fall within plus or minus five per cent of the pre-bid estimate (PBE). If costs are substantially lower and the PBE has been verified as accurate, it is a warning sign that the market price has been artificially reduced to win the work. If this is the case, it is prudent to retain the difference between the bid price and the PBE, as in most cases, the project costs will escalate (at least) to the PBE level.
From a due diligence point of view, a price which is in excess of the PBE will mean (based on the independent PBE) that the likelihood of contractor default on the project is somewhat reduced.
A complex and often subjective topic, schedule reviews can often be daunting and limited to a cursory look at total duration. This can, however, neglect more important aspects such as what are the critical activities (meaning there is no flexibility as to when these can occur) on the project? And, how easily will these be affected by external factors?
Typical issues with contractor’s schedules can also be that they are reverse engineered to a prescribed client time frame. This can mean that contractor simply ‘draw a pretty picture’ to suit the client’s need without applying the systematic and detailed approach to defining the logic, sequence and time frames associated with each task on the project. Seeing granularity in the schedule can be taken as a further validation of the construction methodology as this should be solidified by both the schedule and the cost.
If in doubt, consult a professional schedule reviewer. Technology today can allow schedule consultants to quickly provide a key health check of your contractor’s schedule based on industry standards for logic, sequence and detail.
6. WHAT IF?
A key part of any due diligence is also to continually ask ‘what if?’ This includes assumptions made in any area of the project, in order to develop from the earliest stage, an appreciation of the project variables, risk and contingency plan.
Ultimately, the what-ifs should be covered off in the general contract between the parties to include consideration of (not least) the following areas:
Due Diligence – the process of evaluating all aspects of an acquisition, contract, investment, project or all the above – and provides all parties with a base-level of assurance
Avoid the Ticking Time Bombs!
Do not accept ‘per hour’ labor
Do not use contractor generated construction contracts.
Do not pay for materials deposits or other cashflowing activities. Unless specified and agreed in the contract.
Do not allow GC Fee and General Requirements payments to exceed the proportionate value of work-in-place.
Do maintain daily records of activities and quantities of labor on-site.
Do ensure that insurances and bonding are current and in place.
Do not rely on verbal communication or instruction. ALWAYS follow up in writing.
Do engage a professional owner’s representative.
WT Partnership is one of the fastest growing advisory firms in North America. WT was founded in Australia back in 1949, WT is known as the oldest start-up in the industry and has been a force in North America since 2015. Ranked in the Top Two Global P3/PPP Technical Advisory Firms by Inframation in 2017/18 and WT currently manages $6.5 billion dollars of active mega projects across North America.
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