Quantity Surveyor Instructions and Scope: A New Approach to Contractor Failure and Property Scope Expansion
|By Development Finance Partners / Matthew Royal|
The question of the scope of works, and the level of due diligence required by a financial organisation as defined by a quantity surveyor’s instruction letter has been the source of significant discussion in previous years as a result of perceived inadequacies in information provided, particularly when a development project has come under stress due to contractor failure or other problems.
HOW THE GLOBAL FINANCIAL CRISIS RELATED TO CONTRACTOR FAILURE
The GFC saw numerous failures of building groups across the spectrum, both small and large, and the subsequent independent external appraisal of the project status inclusive of costings and completion programme has in many instances thrown up clear shortcomings in operational costing and cost control, which has often resulted in material cost overrunning.
It must be pointed out that it is inevitable that when a contractor failure occurs mid-development, there will be negative consequences for costs going forward. Such costs are numerous and unavoidable and relate to 1) time delays, 2) holding costs, 3) project review, 4) appointment of a new head contractor, 5) re-tendering for trades, 6) negotiating with existing subcontractors, – and the list goes on. An additional complication is the builder warranty issue which is a whole separate area of potential difficulty given the reservations a new contractor may have towards onboarding the work of the original failed group. This has potentially significant cost considerations for building companies.
In addition to the inevitable costly consequences caused by contractor failure, there have been many instances where the then-current information provided by QS overviews regarding construction progress and/or costings, up until builder failure, were severely deficient in providing a robust account of progress and true cost-to-complete analysis. Therefore, the inevitable costly consequences of contractor failure are exacerbated by material cost overruns that have not been detected and reported by the quantity surveyor.
A REVIEW OF AREAS WHERE DEFICIENCIES AND CONTRACTOR FAILURES HAVE ARISEN:
- The veracity of information regarding subcontractor contracts and rates
- Inadequate monitoring of movement in major trade rates for key trades which have not yet been locked in
- Less than optimal critical analysis of actual percentage of work complete and specific tie back again to costings of individual contracted trades
- Totally insufficient oversight of builder and failure to detect “front loading contracts’’
- Failure to confirm sub contractor payments are current – this being a major indicator that the Head Contractor is under financial stress.
In addressing perceived deficiencies in reporting project status, it is held that historically, the scope of standard instructions and the terms of engagement of quantity surveyors has been a major contributing factor in overall performance and information quality.
In common with the relentless drive for cost efficiencies, there has been a general acceptance of the minimalist approach to quantity surveyor instructions and the consequent engagement cost, applied to the property scope.
It is held that a significant expansion of both the property scope instructions, coupled with far more rigorous and specific reporting requirements, will substantially reduce the actual and perceived shortfalls in information, particularly when either builder failure or other significant problems occur in the development phase, which triggers a complete project review.
Increased rigour in the scope of the quantity surveyor brief should also highlight potential Contractor stress before a complete failure occurs.
RECOMMENDED SCOPE EXPANSION IS SET OUT BELOW.
- Certification re capacity to set contracts which are unlet at current industry rates.
- Certification that existing major contract rates were in line with original allowances
- Certification that sub contractors have been canvassed to confirm their payments are current – if necessary, the right and capacity for QS to speak direct to sub contractors needs to be embedded into the building contract.
- Specific instructions requiring greater commentary surrounding cost to complete certification, and specific detail on any element where costings/time or critical path issues are materially jeopardising the approved schedule.
- Highlight early concerns re unlet major trades where price increases are coming through.
- Closer supervision of timeframe and critical path issues generally.
It is acknowledged that the diligence and scope of work required from a quantity surveyor, is a material expansion on the current “standard requirements” and it should therefore be specifically acknowledged that such increased scope needs to be reflected in the negotiated engagement costs.
If the level of supervision and reporting is commensurate with the required standard, the additional cost will be very wisely spent.
The whole philosophy behind the protocol is to ensure strict controls over the construction process to ensure: 1) contractor behaviour is appropriate, 2) early identification of cost overruns which will mitigate costs and consequences going forward and 3), reporting of any critical path or other issue which could have an impact cost or otherwise on the construction progress and cost .
As indicated, in light of the additional rigour in the control and reporting aspects, and the contingent benefits that accrue, the additional cost is of little material consequence.
Learn more about construction development finance and how DF Partners work with quantity surveyors to provide advisory services at both a project level and a group level.
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