Let me start by sharing a recent event that I was party to. A large international bank with representation in the GCC had financed a Qatar-based construction project for a property development company, and was caught unawares when the bank’s officials decided to make an unannounced visit to the “completed project” site. The last finance disbursement had just been approved for the developer, and they were astonished to find an incomplete concrete structure at the project site and also no construction activity. It transpired that the bank’s officials had only visited the construction site once, and that was at project commencement.
The bank had relied on the monthly progress reporting from the developer’s project manager. The issue was that the project management consultant was in fact a sister company to the developer. These are the risks typically faced by banks when funding such projects, and risk processes should cater for stronger controls to validate the stage payments made for drawdowns of funding on capital projects. The way the banks validate stage payments can be numerous. Either they can validate the physical completion through regular site inspections to corroborate the progress certificate received, or they can use third party consultants who are quantity surveyors and who can give the banks comfort around the physical completion and value of the stage of construction in relation to the progress certificate submitted for drawdowns.
There have been several incomplete projects around the region since the downturn that banks have funded, resulting in the banks consequently having to assess the recovery of their loans against these incomplete projects, which form all or part of their collateral.
It is not unusual for projects in the region or in Qatar either to be delayed or to have exceeded allocated budgets, or both. In fact this is often the case with a majority of projects and is typical of the construction sector in the GCC, as most owners and contractors will testify. Some of the delays and budget overruns are discovered by the project owner’s decision-makers when it’s too late to provide any meaningful mitigation assistance. In most instances, project owners would not necessarily be equipped with the relevant technical construction or project management background to proactively identify these issues themselves, either. This often translates into significant cost overruns, which potentially impacts the original feasibility of the project and could also result in several other risks that need to be understood and assessed as a project owner.
Stakeholders and owners often instruct changes to ongoing construction projects, as designs are often not complete at the commencement of construction, and simply do not understand the impact these changes may have on the cost, timeline and quality of the project. The majority of projects are typically delayed because of incomplete designs at the start of the project. In some extreme instances, the construction costs and project duration have both doubled as a result of these unplanned and unbudgeted changes.
Independent expert project monitoring from financially-focused, experienced and qualified professionals is, therefore, recommended to clients who have an interest in construction developments. This would be an integral part of the owner’s risk management programme and should create an awareness of risk, programme clashes on projects, potential cost overruns and plans for how to proactively mitigate these issues that typically occur on projects in the region. This type of proactive risk management from owners will also assist owners in ensuring that their capital projects achieve the planned returns on their investments.
The Royal Institution of Chartered Surveyors (RICS) defines project monitoring in its guidance notes as “protecting the client’s interest by identifying and advising on the risks associated with acquiring an interest in a development that is not directly under the client’s control”.
When a project monitoring engagement is undertaken by a competent and well-qualified independent professional, the following task stages are usually undertaken:
1. Analysis of the project owner
Every project owner has different requirements, strategies and risk appetites. This information is vital for client risk profiling.
2. Initial report
This document should be a detailed actual status report of the project, focusing on cost, time and quality. This initial report should also flag owner’s risk and propose solutions for mitigating the flagged risks.
3. Periodic progress reporting
Where risks identified are medium to high, periodic reviews should be undertaken more frequently than when the risks are considered low. Progress reports should focus more on risk items.
4. Close-out report
This completion report should detail remaining risks and other outstanding issues that require finalisation and/or further monitoring by the owner.
The effectiveness of project monitoring and the success of recommended risk management and mitigation solutions will not only depend on the experience, thoroughness and professionalism of the engaged professionals, but also on the willingness of the owner to make some very tough decisions on their projects. Source: Qatar Today Magazine