Costs going up mid project?
Ok, so you are halfway through a project and your builder starts asking for payments to cover cost increases outside of the contract terms. Let’s assume that either they are legitimate costs that fall to you as developer or that despite them being the builder’s responsibility, the only pragmatic solution to keeping the project on track is to cut a deal with the builder and share some of those unforeseen cost increases.
Ways to minimise the pain.
In most cases the financier expects you to meet costs that are not part of their budgeted contingency allowance and typically the current cost increases we are seeing in the market fall outside of those allowances.
So what other options are available short of writing a cheque? There may be potential to do a deal with your builder whereby he agrees to cover the cost of some of the materials until completion in return for small premium. This is a common means of laying off a cost but it is critical to advise your financier of the arrangement to avoid being in breach and to ensure that they are satisfied with the costs and risks involved.
As mentioned earlier you can also look at utilising any surplus contingency. Once the project is ‘out of the ground’ thereby minimising a key cost overrun risk, there may be flexibility to secure access to additional surplus contingency provided all other facets of the project are either on or ahead of target.
Depending on how advanced the project is there might be an option to recut the existing facility to take advantage of a situation where the gross realisation values have increased over the course of the development, or you are substantially presold at higher values and the lender is prepared to increase their exposure against this increased realisation value.
As noted earlier, by ensuring that you keep your lender in the loop on a regular basis you build trust which like any relationship, is critical if you are going to ask for a concession.
To discuss your funding requirement contact Dan Holden on 0401 669 502 or [email protected]
