Ward Williams Associates is a leading professional construction cost consultancy providing a range of innovative client focused services for building and civil engineering projects across all sectors of the industry. Established as a partnership in 1974 and incorporated in 1989, WWA now has offices across Southern England and in the Kingdom of Saudi Arabia, with an extensive network of clients and a track record of successful projects in both the UK and overseas. We take great pride in the fact that in excess of 80% of the company's turnover is accounted for from either long established clients or ongoing framework/partnering relationships.
Rob runs the London office of Ward Williams Associates which he took over in early 2008. The London office workload is predominately with speculative developers ranging from the provision of a 'one stop shop service' to that of Project Manager or Quantity Surveyor or even just providing CDMc or perhaps Asbestos surveying or Party Wall surveying services. In addition the practice undertakes a significant amount of Project Monitoring work for a number of banks and funders.
With a portfolio that includes iconic award winning projects, the practice has the experience of being teamed with and advising some of the worlds foremost Architects and Engineers. Our projects range from complex multi-million pound developments, through to far more modest refurbishments and maintenance undertaken to individual properties.
James Thomlinson: What is your forecast for build prices over the coming 12 months?
Rob Carey: In London we are seeing an increase in orders in the development sector, whilst the general forecast is for tender prices to increase at a lower rate than build costs, the official BCIS tender price increase 1st quarter 2012 to 1st quarter 2013 is a rise of 1.8% with general building costs forecast to rise by 2.56%. We see a narrowing of that gap, specifically in the development sector. The gap being narrowed by tender prices increasing due to increasing pressure from input costs and the noted increase in development sector workload.
JT: What proportion of development schemes are being financed privately versus those funded by banks? Do the majority of your instructions come from High Street banks or niche development lenders these days? Where do the lenders focus most of their attention with regards to the monitoring of schemes?
RC: Our current Project Monitoring workload in London is split 35% private funders and 65% banks. So there is a majority of funding from the High St, however we are seeing an increase in funding from the niche lenders and we forecast this to continue to grow. Lenders are initially concerned about the construction costs and then as a development gets off the ground, the costs to complete come to the fore, both are coupled with an assessment of a required level of contingency. It is also critical to get the collateral warranties sorted at the front end together with; the pre-commencement planning conditions, building warranty, building control, programme and the procurement methodology. In addition we are increasingly being asked to provide a commentary on the chosen design team and the main contractor.
JT: How are you seeing the banks reacting to stalled development situations? Are they generally prepared to step in and help finish the works or are they seeking swift repayment via the administration process?
RC: Our experience is that the banks are preferring, in the main, to help finish the works rather than seeking repayment via the administration process. As you know the banks, at the development phase, are insisting that the borrower's contribution is put into the development first, they are putting a greater emphasis on the regular review of the programme and the forecast of out-turn costs, all coupled with a review of the ongoing sub-contractor and supplier procurement against the costs to complete.
JT: What type of asset classes are you currently consulting on? Are you noticing a general bias towards residential or commercial?
RC: There is a predominance of residential development with a smattering of commercial but mostly within multi use schemes rather than in isolation. We have a good cross section of high end to mid range houses, flats and HMOs albeit the flats and HMOs are almost exclusively within the M25. So the bias is certainly residential, having said that we do have a number of care homes and a couple of hotels; one budget and one high end.
JT: What are the most common pitfalls that developers suffer from when embarking on a development project?
RC: Providing an accurate construction cost budget reflecting the chosen method of procurement and including an appropriate level of contingency in the development appraisal. The construction programme can often be an issue that is not properly researched and assessed. We are also finding developers that embark upon obtaining planning without the requisite appointment documentation of their consultants and without a proper understanding of professional indemnity insurance or indeed insurance of the site and works. Where developers use the Design & Build procurement route a number of the risks are transferred to the Contractor, however often not enough time is input, prior to entering into the contract, to fully understand and define these risks so developers often pay an additional and unnecessary risk premium. We find that managing; the planning process, the discharge of the planning conditions, the requirements of section 106 agreements and the like, is not given the right priority / allocation of resource within a developer's organisation that it should be. Of course there are notable exceptions and these companies do reap the benefits in terms of known risks and programme savings.
Often the services contained in the standard forms of appointment do not marry up fully and there can be gaps in the services that are to be provided. I detail a few examples that need careful consideration:
- All the appointments should be executed as a deed - this means that the liability of the consultant will generally be 12 years from practical completion and not 6 years if the appointment is executed under hand.
- There must be an obligation to provide warranties with appropriate step-in rights in favour of the lender/investors. There must be a clearly defined and adequate standard of skill and care required.
- There must be an obligation not to specify prohibited materials.
- There must be a copyright licence in favour of the employer.
- There must be a requirement to maintain professional indemnity insurance cover for 12 years.
- The appointment should be assignable to the investor/lender.
- Most important of all, there should be no net contribution provisions or other unacceptable limitations of liability. This applies particularly when standard industry forms are used.
- The professional should be required to provide collateral warranties in an acceptable form in favour of the lender/investor.
JT: Doesn't the British Property Federation produce its own standard warranties? Can these be used?
SR: James, the BPF has published forms of construction collateral warranties for many years but has stopped printing its current forms and says it has no plans for a new edition. Even if they were still available there are still issues with the warranties and in particular the inclusion of net contribution clauses and limitations on liability. Even if they do re-introduce the warranties, it is important to check that these provisions are still not in place.
JT: I appreciate that that's fine for the professionals, but how about the contractor?
SR: Well James, similar issues arise with the contractor. Again I turn to Professor Duncan-Wallace where in 1999 he stated:
"In my own view, there is currently no standard form available in the building of civil engineering industries which affords adequate protection for the legitimate interests of client owners and indeed many of their current provisions are so directly inimical to that interest, and in so many ways, that any professional adviser, whether lawyer, architect or engineer, who permits a client to make use of them without substantial and radical amendment, or at the very least calling attention to the dangers of doing so, must in my view risk the charge of professional negligence."
The borrower is confronted with a dazzling array of various standard forms of contract but in choosing them he must proceed with caution. The borrower may be confronted with advice from a project manager or a quantity surveyor who suggests using the industry standard forms without amendment as "they have been produced by an industry standard body and the contractor fully understands the contracts". I detail below some of the points that the borrower needs to be looking to in the building contract as follows:
- As with the professional appointments, the building contract must be executed as a deed.
- There must be an obligation to provide warranties in an acceptable form with appropriate step-in rights in favour of the lender/investor.
- It is important that specialist subcontractors provide warranties in the appropriate form with step-in rights in favour of the bank. Often this step is forgotten with reliance being placed totally on the contractor. Often a contractor will not have any design responsibility for certain parts of the work but his subcontractors may.
- There must be an obligation not to use or specify prohibitive materials.
- There must be a copyright licence in favour of the employer.
- The necessary insurances including professional indemnity insurance must be in place. Professional indemnity insurance must be in place for 12 years following completion.
- The contract must be capable of charge/assignment to the lender without the contractor's consent. The standard forms of contract do not permit assignment without the contractor's permission. Later on during the project this is unlikely to be given.
- It is important the lender has at least 28 days' notice for the contractor exercises any rights of termination. There must also be an entitlement for the lender to step-in during this period.
- It is important that the bank has the right to terminate the contract and to step-in and take control of the project if there has been a material breach by the borrow under the facility agreement.
JT: We've looked at the appointments and the building contract. What other crucial issues do you feel should be addressed by the borrower?
SR: Yes, particularly with new build projects, environmental/geotechnical/remediation works are particularly important. Often investigations will be carried out at an early stage and it is important that the reports are addressed not only to be borrower but to the lender also. The lender may not be known at this stage so it must be a requirement of the geoconsultant's appointment that the report can be addressed to the lender. Where remediation work is required, again, warranties will be required in favour of the lender. The lender will be seeking proper professional appointments covering the points I detail above.
JT: Often the drawing down of money will be set by various milestones during the project. One of these important milestones can often be practical completion. However I am told that the standard UK forms of building contract do not contain a definition of practical completion. Is this so?
SR: Yes, I'm afraid it is. Often agreements will be drafted on the basis that certain events will occur once practical completion has been certified by the building contract administrator. People are not aware that there isno definition of practical completion. So when is it complete? As part of our standard modifications to building contracts we always include a definition of practical completion so that the contract administrator is under no doubt whether or not he should certify practical completion. Often developers carrying out work for the first time will be unaware of all of these points so it is important that at the very beginning of the project they use the checklist to ensure the correct documentation is in place.
JT: Sorry Stephen, but isn't this just a "make work" scheme for lawyers?
SR: No, not at all! I want to reduce the client's legal spend! The main reason high legal costs are incurred is because borrowers haven't thought about the practical points I detail above. If all the correct documents are in place you will hear very little from me and the legal costs will be commensurately lower.