First steps on dealing with distressed projects

First steps on dealing with distressed projects

POSTED 28 January 2020

Well 2019 has been quite a year and with the holidays now behind us, and having time to reflect, I’m sure we are all looking forward to 2020 and what that may bring…

One theme that saw a steady increase during the year was the number of distressed projects brought to our attention. Not a substantial increase, but a trend nevertheless that has been on the rise when compared to previous years. I recall my first experience of a distressed project some 25 plus years ago, a listed cinema refurbishment in south London. We were brought in as Project Managers to undertake a 360 review of the project as the client was starting to have concerns. Almost immediately the contractor went under and a colleague and I found ourselves on site doing the first thing that is required: securing the site. We successfully completed that, although it did open my eyes to how ‘big’ site operatives were when turning up to retrieve equipment. The whole experience was one very steep learning curve and gave me a huge insight into distressed projects and a sense of things to come. As always, difficult decisions needed to be made but with emotion removed, thankfully, the project was brought to a very successful conclusion for both the client and its investors. However, is this always the case?

Every project is clearly different and the one thing construction isn’t, well not yet and hopefully never will be, is a production line rolling out the same product time and time again. Therefore because of these variations there are so many reasons and influencing factors that can send a project into distress. Having worked in the role of monitoring surveyor for the past 20 plus years, my focus has become more and more concerned with its impact when resulting in the default on a loan.

So, if you unfortunately experience this scenario what should you do? Well, putting your internal procedures aside, first and foremost don’t make any rash decisions! All too often, snap decisions are made due to immediate pressures without allowing time to step back and see the full picture. This is often easier said than done; but rash decisions often cost more in the long run. Some immediate responses are clearly required; but this is too often treated as the default position and not the exception. The worst scenario is throwing good money after bad and to counter this, sometimes a halt to the works to establish a clear and full position of all the facts is necessary. First and foremost, consult with your team of advisors, notably the legal team, valuers and the monitoring surveyor and do ensure all are involved in the decision-making processes.

An assessment of the cost to complete is obviously imperative and this includes establishing any debt profile that exists (this can often take time as various creditors come out of the woodwork!). Experience shows that this is not always a straight forward process. On another project when a contractor collapsed, a sub-contractor confirmed they had been paid up to date, for us to later discover this meant a 90-day payment term. Therefore 3 month’s payments had gone down with the contractor which had not been paid on to the sub - contractor. Not ideal in any way!

Undertaking a detailed survey to establish whether the works completed are fully compliant with no defects is also crucial. This survey certainly needs to be factored into the Cost to Complete. Any response will require consideration of the cause of the default e.g. contractor failure, cost overruns, ineffective management, misappropriation of funds etc., but the initial response will invariably be the same: i.e. secure the site and ensure the works remain insured.

Although a regular occurrence, sometimes calling in a loan is not the answer. Having a known distressed project on the open market immediately affects its value. Sometimes it is better to consider working with the Developer and appointing a Project Manager to put the necessary systems and procedures in place to see the project through to the end.

So, what are some of the options?

It is always worth trying to find a Developer in the market willing to take the scheme forward. Liaise with your advisors as they may know parties that could be interested.

Based on experience, introducing a new contractor and asking them to take on a significant element of the risk is rarely a satisfactory option. Compromise is often needed on all sides, with both parties taking elements of the risk which invariably means we don’t necessarily get the fixed / firm cost to complete we would all prefer.

Keeping sub-contractors and suppliers onboard can be very difficult, especially where some are required for warranties / guarantees. New incoming trades may not warrant the existing work so replacing previous work in order to achieve necessary warranties can be a costly exercise. Also, the incoming contractor may not wish to engage with some of the previous trades.

Another key influencing factor is the stage of the scheme. Again, early advice from a valuation perspective from the valuer / monitoring surveyor is paramount in establishing cost and value. A project nearing completion clearly requires a different approach to a scheme that is still in the ground.

As a last resort, there is always calling in the in receivers / administrators, but I’d see this as the last resort and certainly comes with its own set of issues and considerations.

Paragon offer a wide level of services and support to any fund / bank that finds itself in this situation; ranging from providing a detailed cost to completion exercise through our Cost Management team; a fully detailed survey of the works undertaken via our Building Surveyor teams; assistance with the project through to completion via our Project Management team and of course the services of our experienced Monitoring team. Paragon also has M&E surveyors who can support the Cost Management team on more complicated services projects and has the ability to undertake Drone Surveys in-house if the need arises. With offices in London, Esher, Manchester, Bristol and Edinburgh we are able to provide advice throughout the UK.

If you find yourself in any of the circumstances outlined above and want to discuss your possible options, then please drop me an email at andrewjohnson@paragonbc.co.uk I’d be delighted to chat through your situation and offer up some simple and concise advice based on my experience.

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