You would be amazed by how many development proposals have inadequate or no contingency, claims QS

Last week, Development Finance Today teamed up with Adair and FRP Restructuring Advisory in a live event to discuss what to do when things go wrong in development and how to avoid the pitfalls.

As part of its weekly virtual roundtable series, Medianett’s editor Beth Fisher – along with Richard Payne, director of project monitoring at Adair, and Phil Reynolds, partner at FRP Restructuring Advisory — hosted an hour-long debate on what developers should be preparing and including in their proposals when seeking funding for their schemes; the key issues to look out for in development contracts before and at the end of a development loan; and what legal complexities developers should be aware of if they need to secure additional funding.

The panel also included John King, senior lending manager at Commercial Acceptances; Alexander Pelopidas, partner at Rosling King; and Trevor McClymont, development director and head of residential development at Ktesius Projects Limited.

Despite current high levels of liquidity in the market, there are elements that developers now need to include in their proposals that they might not have had to 18 months ago. Phil highlighted the requirement for a robust and credible proposal with a realistic timeline and appropriate contingencies in place for cost inflation, material delays and staffing issues.  

“I want to see that developers have thought of those issues and have factored them into the proposal,” he said. “The more that’s included, the more confident I am to say to the lender that it looks like a robust proposal to lend on.” 

He added that sometimes the quality of proposals is “really poor” and developers don’t help themselves. “A lot of the time, we see what almost looks like cut-and-paste proposals — [as if] they’ve changed the name on the top of the one they’ve done before and re-submitted it.” 

John agreed that, in the SME developer space, the quality is “variable”. He referenced that a good builder may not be as knowledgeable when it comes to the paperwork. “When someone turns up and asks for build costs, programme and your documents, they look at you with a blank face,” he divulged. “On the other hand, you’ve got people who are fantastic at the paperwork side and can’t really build!”

Anticipating what the lender is going to ask is key. “You would be amazed how many [proposals] come forward with no or inadequate contingency,” Richard claimed. However, this could be caused by finance providers compensating for this from the start. “Lots of lenders, by default, will build in a 10% contingency, [according to] their own risk margin — and that’s a very sensible approach. They will always have it in the facility, whether the developer wants it or not, and it will still have to work with that 10% contingency assumedly spent.”  

To impress the lender, he says developers should know how they will deal with a scenario if the costs go up, and who will pay for it. “If the developer has all these things lined up in the proposal as to what they are going to do, then that will be an impressive start to something which is invariably not covered until the lender asks the questions.” 

He emphasised the scrutiny on the various insurances at play in a deal, such as the development cover and the PI of the consultants — and the soaring costs of the latter.  

Within the development contract itself, Alexander stated that the main legal pitfalls are around the title, indemnity insurance, right of light, and tax. “These are little things before you even get going that you need to make sure you understand.”

He also talked about being specific on what your liquidated damages are, the step-in rights and collateral warranties, and involving the funder as soon as possible so there are alignments. “The other thing we can't avoid is the impact Covid can have on terms,” he highlighted. “Things like relevant events under the JCT and a right to delay things.” 

Alexander said he is seeing contractors trying to sneak in Covid as something to be used to ask for loss and expense.  He stressed that as we come out the other side of the pandemic, how much a contractor can rely on these things is “questionable”.  

Trevor believes contractors are much more savvy and contends that they have as much legal understanding of the JCT as most lawyers. “They know how far to push the boundaries and when to escalate and retreat. All of this just means that contractors are feeding on developers’ profit.” 

When discussing the use of personal guarantees, Trevor argued that they are a “last-century mechanism” . In addition, he feels that the legal piece traps all the parties and enables conflict to manifest while the work onsite is suffering, and is in dire need of an overhaul. 

“As a sponsor of a project, you’re having to marshal not just resources, but ideas, consultants — you’re having to manage the whole piece. I don’t think developers are given enough credit.” 

The full roundtable can be viewed below.

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