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When a developer and the head contractor agree on a contract for a
development project, the developer may not realise the impact this
decision may have later in the construction phase.
It is quite common for the signed contract between the developer and
the head contractor to stipulate that payment for materials will be
made to the contractor once materials have arrived onsite. However,
this clause may become a financial burden for the developer when they
in turn attempt to have funds released from their nominated financial
institution.
Most finance agreements between a developer and financier will state
that materials must be fixed to site in order to release payment. This
can result in materials being delivered to site (but not yet fixed or
installed) and the financier not releasing funds to cover these incurred
costs.
From a financiers point of view, this clause significantly reduces
the risk as they have not paid for materials which are not fixed to
site. It also provides the financier
with a more accurate indication of
the cost to complete the
development. Some mechanisms
in place that can remove the
potential out of pocket expenses
for the developer include:
• Completing a Development
Check Estimate report at the
feasibility stage of the proposed
development. This will assess all
proposed contracts and highlight
the potential clauses that may, in
turn, lead to out of pocket
expenses. This may lead to an alternative head contract being
implemented and signed for the development or the negotiation of prior
arrangements being made with the builder in regard to
payment/delivery of materials.
• Conducting Progress Claim reports, to ensure funds are released
on time or milestone based intervals as appropriate. This process
assists in maintaining the cost to complete status and ensures a
contingency is in place for unforeseen circumstances.
• Using bank guarantees as security on items not yet delivered, but
for which deposits have been paid. For example, a written document
outlining the job specification, deposit paid and shipment details for a
transportation system (such as a lift) may be considered by a financier
and subsequently funds may be released prior to installation.
BMT & ASSOC can provide Development Check Estimate reports and an
independent assessment of all contracts relating to a construction
project. Obtaining advice in the planning stage of a project may reduce
the financial burden caused by contractual obligations once in the
construction phase.
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