Due Diligence We Recommend You Conduct Prior to Inviting Any Builder To Tender.

Over the past 12-36 months, the development industry has been grappling with the repercussions of construction cost escalation due to material price increases and labour shortages. These issues have created significant challenges for both Developers and Builders. In particular, these market conditions have resulted in a notable rise in insolvency events, with several high-profile Builders going into liquidation, often while projects are in the mid-construction phases.

The consequences of a Builder’s insolvency during construction are not only stressful but also highly costly for Developers. Such situations can lead to substantial setbacks, increased holding costs, budget hikes for finding a new Builder, expenses for site mobilisation, and risks related to sales and settlements. These risks encompass compromised product quality and the expiration of sunset dates in Contracts of Sale due to considerable project delays.

Given the heightened risks brought about by these conditions, reputable Builders have proactively adjusted their pricing. This is done to protect their interests and ensure they can meet high standards of project delivery within specified timelines. Some high-quality Builders are also opting to refrain from participating in competitive tenders and are instead focusing on Early Contractor Involvement (ECI) arrangements. However, these arrangements may not always yield the best financial outcome for Developers.

In an ideal scenario, every Developer would prefer to collaborate with top-tier Builders known for their exceptional quality and extensive track records. However, practical considerations often make it challenging to opt for this ideal choice, which is becoming a bit of a luxury due to budget constraints. Consequently, the need for competitive tenders arises to secure a construction budget that is both fair and appropriate. Given the current market conditions characterised by rising costs, this necessity has led Developers to extend invitations to submit tenders to Builders who may have less experience but offer more competitive pricing.

When this situation arises, thorough analysis and due diligence become paramount to ensure that the selected Builder is not only financially secure but also capable of delivering quality work. This realisation has prompted Hub to revise its due diligence processes when considering Builders for tender invitations. In collaboration with private financiers and major banks, we’ve compiled a comprehensive set of recommendations for all Developers to incorporate into their due diligence checklists when engaging a Builder:

Financial Stability: Evaluating a builder’s financial stability is often left to financiers, where applicable before formal contracts are executed. However, after consulting experts at private and major banks, we’ve identified straightforward checks that Developers can employ to gauge potential risks tied to a builder’s financial stability. ANZ’s Property Finance team recommends a practical assessment: compare the builder’s tangible assets and cash holdings to their ongoing workflow value. For instance, if a builder has $10 million worth of projects under contract but only $800,000 in tangible assets, they might struggle to manage unforeseen price hikes or construction-related risks. Typically, banks expect a builder’s project portfolio to be around 10-15 times the value of their current tangible assets. This approach provides both Developers and lenders with confidence that the builder has the capacity to address potential cost overruns during construction, ensuring they can successfully complete the projects.

Character Assessment: Similar to conducting interviews when hiring employees or engaging new consultants, evaluating character values, resourcefulness, and past performance is vital. Before inviting a builder to tender, it’s crucial to thoroughly investigate their background. During the interview process, pay particular attention to assessing their character, values, ongoing projects, and past project completion records. This scrutiny aims to determine if they possess the qualities and experience necessary to effectively navigate and oversee the construction phase of your project.

Site Visits of Current Projects: Conducting on-site visits to the builder’s ongoing projects holds significant value in the due diligence process. While accompanying the builder on site walks can provide valuable insights, we also recommend performing your independent drive-by site visits. This approach allows you to assess the level of activity on their projects. If you observe poorly maintained sites, minimal subcontractor presence, or a lack of ongoing work, these indicators might suggest potential issues with the builder.

Subcontractor Relationships: Establishing direct communication with subcontractors whom you have pre-existing relationships with can also aid in assessing a builder’s capabilities. By inquiring whether the builder is meeting payment timelines and effectively managing subcontractors on site, you can gain valuable insights into the builder’s financial standing and their competency in managing construction activities.

Key Personnel Evaluation: It’s crucial to verify the expertise of the builder’s key personnel, including nominated site managers, contract administrators, and project managers for your project. Specifically, you should ensure that the primary point of contact on the construction site (typically the project manager) possesses extensive experience in overseeing construction projects of similar value and specifications as your own. This step guarantees that the team overseeing your project is well-equipped to handle its specific requirements.

In light of the circumstances, it’s clear that conducting meticulous due diligence on potential Builders has never been more crucial. As such we recommend you undertake and consider the above recommendations whenever considering a potential builder.

If you have an upcoming construction project or require guidance on Builder due diligence, tendering, contract negotiations, or any other construction-related matters, feel free to reach out to the Hub Delivery team. We’re here to assist you in achieving efficient and cost-effective project delivery while mitigating key risks.