T8. DUE DILIGENCE Flashcards
What is due diligence?
- Thorough evaluation and analysis of a construction project to assess risks and verify its viability.
How can you use benchmarking to exercise due diligence in the early project stages?
- Benchmarking helps determine whether the contract sum and duration are realistic.
- A low contract sum may lead to contractor difficulties, such as disputes or claims for variations, increasing project risk.
Why is it important to evaluate the financial stability of a supplier?
- To ensure the supplier can meet contractual obligations and adequately resource the project, reducing the risk of delays or non-performance.
How have you assessed the financial stability of a supplier?
- By reviewing the supplier’s accounts via Companies House or checking their credit rating through agencies like Experian or Dun & Bradstreet.
- However, I would always recommend to the client that they seek advice from a specialist.
If you had concerns regarding the financial stability of a supplier, what would you do?
- Inform the client about the financial risk and recommend mitigation measures, such as requiring a parent company guarantee or performance bond.
How can using frameworks mitigate a client risk exposure?
- Frameworks vet suppliers, ensuring their financial stability and performance.
- Frameworks like P23 also monitor contractor performance through KPIs, offering added assurance.
What is a cost to complete assessment and why do lenders take this perspective?
- A cost-to-complete assessment estimates the remaining project costs. Lenders use this to ensure that the funding provided will cover the completion of the project.
What is the RICS LIMS Process Map?
- Provides framework for performance of monitoring surveyors duties.
- Details milestones at each stage of a project throughout the appointment.
What are the stages of the LIMS Process Map?
- Appointment: Agree scope of services, fees, etc.
- Due diligence: Review technical risks.
- Financial close: Complete initial report.
- Construction: Undertake drawdown reports.
- Completion: Ensure statutory and contractual obligations are met.
- Exit: Minimal involvement, but may include retention release or defects period.
What are the advantages of following this process map?
- Ensures consistency across projects.
- Provides a clear framework for risk identification and management.
- Promotes best practices in project monitoring.
How would you analyse the risk profile of a project preconstruction?
- Review the contract documents and assess if the contract sum is adequate.
- Benchmark the construction programme to ensure it is realistic, achievable, and has sufficient float.
- Review geotechnical surveys to understand any below-ground risks.
- Analyse pricing documents to identify cost risks, including Provisional Sums.
- Check contractor insurance to ensure it is up to date and meets contractual requirements.
- Review non-standard contractual terms and ensure provisions for extensions of time (EOTs) are adequate.
What information would a geotechnical report provide from a risk perspective?
- It provides details on below-ground conditions such as groundwater levels, soil types, and the presence of rock or other potential hazards.
What would be the risks of proceeding without defined start and completion dates?
- Without defined start or completion dates, time would be at large, meaning that the contractors obligation would therefore be to complete the works within a reasonable time.
- This would also be the case if the construction contract did not include a mechanism for adjusting the completion date and an Employers breach caused a delay.
What would be the risks of proceeding without a rate for LD’s?
- If rate is specified as £0, this means that LD’s cannot be levied.
- If the provision is left blank then unliquidated damages would apply (i.e. client would have to demonstrate actual damages).
- Disadvantages are that the contractor would not know risk profile when entering into contract, may price in additional risk premiums. Client would have to seek recourse through courts.
What would be the risks of proceeding without provisions for retention?
There would be less incentive for the contractor to return and correct defects, potentially compromising the quality of the work and leaving the client exposed to long-term costs.
What would be the risks of proceeding without appropriate insurance provisions?
Without the correct insurance, the client and contractor could face significant financial exposure in case of damage, injury, or other unforeseen incidents that should be covered under the policy.
What would be the risks of proceeding without change control provisions?
Without change control provisions, there would be no formal mechanism to manage changes to the scope, quantity, or methods of work. This could result in disputes, as any changes made by the employer would likely be considered a breach of contract, potentially leading to delays, cost overruns, and claims.
What would be the risks of proceeding without payment provisions?
The construction contract would therefore not comply with the construction Act.
The Scheme for Construction Contracts would apply.
On Project Martin Street, how did benchmarking help from the perspective of due diligence?
Benchmarking helped ensure that the contract sum and duration were reasonable, identifying any potential under-pricing or schedule compression that could lead to project risk.
What is front-loading?
Front-loading is when a contractor allocates a higher proportion of costs in the early stages of a project, often in an attempt to secure higher payments early on, which can create cash flow issues later in the project.
What is the risk of front loading to a lender or developer?
Front-loading increases the risk that funds are spent prematurely, leaving insufficient cash flow for later stages of the project, which may lead to project delays or financial strain.
What is a drawdown report?
A drawdown report details the amount of funds requested and released at each stage of the project.
Provides a record of how the project funds are being spent and ensuring that expenditure aligns with the project’s financial milestones.
How did you go about carrying out a drawdown report on Project Martin Street?
Assessment of Drawdown:
* Desk review of drawdown details, including arithmetical checks and addressing queries.
* Attended site with the borrower to review the drawdown request and interim payment valuation.
* Took photographs for progress documentation to include in the report.
Drawdown Report:
* Finance: Key commercial aspects, including cost to complete and reporting against cashflow forecast.
* Programme: Status of project progress, risks, and likelihood of achieving key dates.
* Design: Design development, planning consents, and statutory approvals status.
* Construction: On-site technical delivery, compliance sign-offs, and health & safety considerations.
* Contract: Key contractual issues, including insurances and other relevant matters.
