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By Nick Marston, Director, Project Management | 28 September, 2020

As Covid-19 upends our economy, some projects will fail to complete. Identifying early warning signs and formulating a recovery plan will help you ride the rough seas and stay afloat.

Tough times are nothing new in property development – and there’s no denying that times are tough. A plunge in economic activity and a surge of unemployment will have profound consequences for our industry.

But as billions of dollars of government stimulus and wage subsidies shield businesses from the worst impacts, we have seen a dramatic drop in insolvencies when compared to the same period last year.

The extension of temporary insolvency and bankruptcy protections until 31 December 2020 will provide regulatory relief for businesses. But in some cases, it will mean propping up companies that would have otherwise failed.

Conventional wisdom tells us that, as government support measures are wound back, those teetering on the boundaries will find themselves in trouble.

So how can you identify the early warning signs of a distressed project before it is too late? Here are our three top tips:

 

Onsite

Early indicators that a development is in distress are often in plain sight, onsite. By paying close attention, you can often spot issues before cash flow difficulties emerge. Some of the issues that should raise a red flag are:

  • Progress on site is unusually slow and disorganised – even when considering social distancing measures
  • No clear programme for how works are to be completed and agreed milestones are consistently missed
  • Unexpected delays in the program trigger an increased level of reporting to lenders who are scrutinising projects under stricter criteria
  • The project is not well presented, scheduled correctly or is not pre-loaded with materials ready for installation
  • Materials and temporary equipment are removed from site ahead of schedule
  • The quality of the finished product presented for inspections is low, decreases over time or is non-compliant
  • Evidence of project design and quality records are poor or non-existent, posing issues for critical sign-offs, Occupation Certificates and warranties

 

Contractors

Social distancing measures can make it harder to estimate how many people are on site. But a clear sign of distress is a lower number of subcontractors than expected. Consider:

  • Subcontractors change part-way through the contract, or there appears to be a high turnover of staff
  • Rumours, either directly or on the grapevine, that subcontractors haven’t been paid, are being paid late or receiving reduced payments
  • A head contractor appears more focused on variations and extensions of time in contracts, rather than project completion
  • A contractor exceeds monthly claims without justification, makes requests for payments which are not due, requests shorter payment cycles or seeks irregular prepayment of materials.

 

Cashflow

Cashflow is king in construction, and when it dries up, a project is in distress. Some of the signs include:

  • The rate of sales has slowed, and cumulative sales that are less than current market expectations
  • Leasing is underachieving against the overall program
  • Stock is discounted, or a high level of incentives are being offered to secure sales or tenants
  • Cash flow budgeting and monitoring is inadequate, with insufficient sensitivity analysis allowing for changing market or project conditions
  • A focus on costs incurred and a lack of planning for future costs and potential risks
  • Inadequate contingency funds and planning.

 

By familiarising yourself with the signs and carefully monitoring any changes onsite or to cashflow, you can get ahead of risk and regain control. Where you do identify risks, take immediate action to investigate and formulate solutions.

Understanding why a project has failed or is faltering is easier with the benefit of hindsight. Our team has that hindsight, gained from on-the-ground experience and data-driven insights from industry-leading development software. We have a strong track record of turning major challenges into great successes.

If you have any concerns and need some expert advice, don’t wait until it’s too late to bring a fresh perspective to troubled projects.

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