Paul Heming

Missing the boat: are lenders miscalculating construction risks to their detriment?

For most, when it comes to construction, the preferred ‘low-risk’ route is for the property developer to employ a design and build main contractor.

Fundamentally, a lender cannot, and does not, want to step in and rectify a site that’s gone wrong. Replacing a single main contractor rather than multiple subcontractors appears more straightforward, and the need for development finance to analyse the risk profile of development based on the project team is correct. 

However, the finance world does need to reconsider the balance of risk in the case of project failure where the contractor goes bust and the funder must step in.

In this case, many assume that it's simpler to replace a single main contractor rather than multiple subcontractors. While that could be the case, it wouldn’t be in many scenarios. For example, if the main contractor goes bust at the end of the scheme, you only have a handful of trades left to finish but, by replacing the main contractor with another, there are more contractors to manage as first you must remove all the subcontractors and then you must return with multiple main contractors to tender and, after that, numerous new subcontractors. 

This is not only time-consuming, but it is also more expensive and almost always leads to a reduction in the quality and warranties provided.

Construction management is a unique procurement route that could be viable as an alternative to lenders.

Using this method, a property developer directly employs multiple subcontractors instead of a single main contractor. The single feature that makes construction management distinctive is that it is the developer who places individual subcontracts with separate specialist subcontractors themselves. 

Construction management has been around for some time but, in recent years, it has evolved, with many developers now employing new, intelligent tactics to maximise profits.

In contemporary construction, developers are starting to deliver their schemes on a quasi-construction management basis, effectively employing a construction manager in-house, in the form of a project management team. With this approach, the developer must have the infrastructure to procure and administer subcontracts. The critical success factor includes a dedicated project manager to manage delivery and the construction programme. 

Effectively, the developer is creating a virtual main contracting capability in-house, and the advantages of doing so are immense.

This procurement route brings many benefits: 

  • shorter construction periods
  • closer access to specialist trades and therefore, a higher quality
  • a reduced cost.

Consequently, construction management is often more attractive than design and build. 

In the event of project failure, lenders can still appoint a single point of contact. Rather than a design-and-build main contractor, they can employ an external specialist construction management firm.

A construction management firm will enter the project, likely manage the existing supply chain and ensure the project concludes successfully. 

In the alternative, a design-and-build main contractor could:

  • charge more
  • require a longer competitive tender period
  • replace all the trades on site, resulting in lower quality, long completion dates and higher costs.

All of this is to the detriment of the project’s commercial success.

More and more developers understand the benefits of a construction management style approach to building. Finding simple, risk-reducing remedies on these projects will open the sector to quicker, better quality and more economical construction for lenders.

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