Before a lender will put up funds for a construction project, it must make sure that everything stacks up and that risks are as low as they can be. That is where the financier quantity surveyor (QS) comes into play says Soben Director, Australia, Kevin Carr.
Financier QSs are engaged to look in detail at a project from a lender’s perspective. They will run their rule over drawings and specifications, approvals and geotechnical information, insurance and construction costs, producing an initial report which summarises the key components of a project and raises red flags about any risks there might be. Most lenders have a list of approved financier QSs and require them to be approved by the Royal Institution of Chartered Surveyors (RICS) or the Australian Institute of Quantity Surveyors (AIQS).
Some developers consider financier QSs as a necessary evil. But they can provide the opportunity to identify gaps or oversights which could have tripped the project up further down the line. Here are a few of the common issues that we have come across while preparing initial reports for lenders.
1. Starting construction without funding
Developers may be tempted to start works on site before they have secured funding from a lender. The upsides of starting earlier could be better market conditions, lower cost inflation and an earlier return on investment.
However, this is a risky approach and one that we would generally advise against. If everything isn’t quite as it should be, the financier QS’s initial report will flag this up, potentially leading to delays and associated costs or even a failure to secure funding.
Employing a financier QS earlier in the process means that potential risks are identified earlier and can be reduced or mitigated. As well as making the funding process smoother, it could cut overall costs for the development. However, note that some lenders require financier QSs to be on their approved list.
2. Insufficient insurance
One common red flag issue that we regularly have to raise in our initial reports is that sufficient insurance is not in place, perhaps because the project start date is a few months away. However, developers should instruct their main contractors to have early conversations with insurers before they approach lenders so that this concern can be headed off at the pass.
A financier QS’s review will look at the main contractor’s insurances and check that they are on par with the contract requirements. For instance, if the project was around $10m but the builder’s regular insurance was only up to $5m, warning bells would sound. Developers should also be aware that some lenders require project-specific insurance.
A financier QS will also look at the levels of professional indemnity insurances of the main contractor and consultants.
3. No funds for unfixed materials
Some developers are unaware that many lenders will not provide funds for materials until they are fixed on site. This is something that financier QSs take note of when visiting site to conduct regular drawdown reports while construction is underway.
This can present challenges with some specialist equipment and contractors. For example, lift manufacturers routinely require an upfront payment of 50% of the cost before they start to manufacture and a further 25% when the products arrive on site.
Such challenges can be overcome. It may be possible to earmark some of a developer’s own funds for upfront payments, to negotiate with the supplier, or some funders may be willing to be flexible, given sufficient information and assurances.
4. Costs don’t stack up
One of the most important parts of the due diligence process for a would-be lender is construction cost verification. In preparing their initial report, a financier QS would prepare a cost verification estimate of the construction cost, working from the contract drawings.
Where the cost verification process does raise questions, Soben’s approach would be to dig down into the various packages to see where there were discrepancies. Current market data is vital for this step, especially now when global pressures mean that costs are changing fast. We would also be looking out for any unusually low bids as this could indicate that the contractor had not understood the scope, specifications or risks of the project.
Given the current geopolitical environment and escalating construction costs, some lenders are paying closer attention to the profit margins that developers are predicting for themselves. Depending on the levels of risk involved, the lender may not provide funding.
Rather than considering the financier QS report as a necessary but bureaucratic hurdle, we would encourage developers to see it as an opportunity to increase cost and schedule certainty on a project. The best financier QSs will provide additional market information and flag up risks that may have been missed by those in the thick of it.
Although financier QSs are conducting a due diligence process from a lender’s perspective, they should have the competence and experience to look at potential red-flag issues in a pragmatic and proactive way.
If you would like to learn more about Soben’s approach to financier quantity surveying, contact Kevin:
About Soben Australia
Soben provides comprehensive Quantity Surveying services. As well as our award-winning Bills of Quantities, we offer access to a suite of specialised services to the Australian market. Our advice service for Contractors covers pricing, escalation and contract types, using the most accurate live database of materials and labour costs in the Australian market. Find out more about our services in Australia.