How to spot the signs of a distressed project

With the economy in its current state, it’s of utmost importance to be able to identify and manage risk.

A certain level of competition is healthy in any market but when it gets too strong, as we have seen in the SEQ market with contractors “buying work”, it could be a risk indicator that we need to take notice of. Competitive tender prices may be happily accepted, but they bring with them an increased level of risk for all parties, the full extent of which may not become apparent until the project is well underway.

In some cases contractors who won past tenders are now having to let trade packages, often realising too late that they need to pay more than they budgeted for.

This puts a strain on their cash flow and can lead to limited ability to deal with any problems that crop up along the way. Projects in this situation stand a real risk of becoming distressed, and we have already seen a number of contractors and subcontractors go under.

Although not every risk can be identified in advance and mitigated, it’s important to stay transparent and address any uncertainties early on to give a project the best possible chance of running smoothly.

Warning signs of a distressed project
Some of the warning signs that you should never ignore include:

  • Unexpected levels of activity – if not much is going on on-site when the project should be at its peak (or vice versa), this could be an indication of trouble.
  • Unpaid bills – a sure sign of cash flow problems is subcontractors and suppliers not being paid, and this can quickly lead to liquidity issues.
  • Contractors over-claiming – whether this scenario materialises through the progress claim process or in the quantity and value of variation claims submitted, changes in claiming behaviour shouldn’t be ignored.
  • High staff turnover – Although some level of turnover is inevitable, if it seems abnormally high it could mean the company is having trouble meeting the demands of its projects.
  • Changes in the developer/builder relationship – it’s important to stay open and maintain a collaborative approach if you want a project to be successful, especially in a low-margin environment. Although it’s natural for this relationship to feel some strain from time to time, any sudden and unexplained changes could be a warning sign.
  • Hidden side agreements – if a contractor has not been up-front about any side agreements they have in place, this may only become apparent part-way through the project and could result in over-claiming.

There may be perfectly genuine reasons for any of the above signs, so avoid jumping to conclusions but aim to keep a good, regular line of communication going with all parties involved.

Dealing with a distressed project
If you do reach the stage where the contractor enters liquidation, you should take some immediate action to protect the project from further risks:

  • Secure the site and monitor or restrict any further access to avoid suffering any further damage or loss.
  • Insure the works.
  • Review your contract and seek legal advice with a view to terminating the contract (including working out any termination provisions).
  • Complete a dilapidation-style report, which includes photographic evidence of the status of works on site, unfixed plant and materials, etc.

You will then need to consult with appropriate experts to draw up a detailed situation-specific plan, which will identify the best way to proceed with the development.

A quantity surveyor can help in a number of ways, from providing an independent review of a difficult project, through to a full development audit and subsequent plan for managing and completing a distressed project.

It may be that all that is needed to get through a difficult phase is a fresh set of eyes from someone with experience.

Other times, the situation may call for a dedicated team of construction experts to comprehensively analyse the project and provide proactive advice and innovative solutions to get the project back on track.

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