While the costs of building materials and labour in the construction sector are declining, it is leading to the crystallisation of losses in old contracts, with the economic downturn only exacerbating the stress on many of these businesses.

Future contracts with builders and subcontractors are only going to be negatively impacted by the persisting economic uncertainty. Given this environment, there are several key questions developers should ask of building companies and subcontractors, including non-financial and financial considerations:

1. Are there any outstanding defect issues or legal disputes?

This should be an immediate red flag unless the builder can appropriately explain what the issue is and why it occurred via an independent expert opinion or report.

It would also be worthwhile for the developer to confirm the existence of any disputes or issues with the building commissioner of the relevant state or the fair-trading body in their state.

2. Do you have appropriate insurance?

The builder should be able to show the certificates of currency for relevant building insurances, including warranty insurance, which would protect the developer and subcontractor against breach of warranty.

3. What is the status of your current projects?

It’s always a good idea to carefully examine a builder and subcontractors’ portfolio, including their previous and current constructions.

Developers should also check the status of current projects, including timeline for completion and any security for payment act disputes.

If construction is well behind schedule, a builder and its subcontractors need to be able to explain why.

4. Does the project team have the relevant experience?

Developers should ask for the skills and experience of the building and subcontractor team, especially the person(s) tasked with managing the project.

Do they have adequate experience? How many similar builds have they been involved in? Have these been completed on time and to an appropriate standard?

5. What is your credit quality like?

Before a developer asks this question of a builder and subcontractor, they could do their own research.

Developers should use credit checks like CreditorWatch to assess the quality of the credit of the builder and subcontractor and any credit issues that may arise.

Then the developer needs to have a look at the balance sheet for each key party to ensure they have a sufficient level of capital to fund projects and determine whether they have any related party loans.

Many of these questions, especially the financial ones, can be difficult to ask, especially once the project is already underway.

The best way to communicate financial matters is to build provisions into contracts including monthly meetings to discuss the financial progress Some of the best operators include a monthly update of financial position as a requirement with the physical site progress inspection and drawdown review, however, monthly assessment of the financial position of the project and parties is less common outside of the best operators until issues arise.

First published in Financial Times – Spring 2023 issue.