If there is one thing that has been psychologically rammed down my throat on countless occasions, it’s this: you need to deal with problems pronto. On just about every development project (whether resurrected from a past failure or not) I have been involved in, where an issue is allowed to linger, the issue inevitably gets bigger.
Time is not the developer’s friend. What on the surface can appear to be a minor issue, given enough time could affect the critical path of the project timeline and end up costing a lot of money. Further, issues rarely act in isolation. A problem with one thing can easily create problems somewhere else, and they all take time to resolve. You may not even realize this until you have tried to solve the initial issue. Even worse if you are doing multiple units (like 200 apartments) then you may have a little issue suddenly amplified (by two hundred!).
To illustrate:
The background. A new home buyer after signing a sale and purchase agreement, but before going unconditional, requests and is granted (by the previous developer) a variation. This is for an additional bathroom on the ground floor of their new two-level home. This variation is kept at the lawyer’s office. Before anything is done to ‘action’ this new bathroom, the project fails. The financier takes over managing the development, appointing you in charge. They request all copies of the original sale and purchase agreements to understand what has been agreed to. This variation is on the lawyer’s file but since it is not in the original contract it does not make its way to the financier or to you. You assume everything you have seen is full and final. All current agreements with purchasers are to be honored, so the bathroom must be built. The issue is obvious, you don’t know about this new bathroom and now you are going to build the buyer’s house without it.
The ramifications. It will depend on when you find out about the bathroom and how long it takes you to resolve.
If you find out whilst architectural plans are still being finalized then the cost will be an amendment to the architect’s plans, the engineer’s foundations (to allow for pipes) and that’s about it. Say $1,000 for those fees and another $9,000 for the additional construction costs to build the bathroom. This is a $10,000 issue, now resolved.
However, what if you don’t find out or do anything about it until after building consent has been issued and you have already signed a fixed price contract with a builder? Then you must amend the architect’s and engineer’s plans ($1,000); make an application to modify the building consent with council, requiring a fee plus documentation ($2,000); and get a price from the builder to make this variation. While it would have only cost $9,000 if originally designed for and competitively tendered, now you have a fixed price contract and the builder has little incentive to sharpen her price. She goes back to all her subcontractors (with their fixed price contracts) and everyone charges you full price plus margin. It now costs $14,000. The total issue, now resolved, costs $17,000.
Wait though, consider if your assistant project manager was only first alerted to this problem at the start of construction. He sent it to the architect to make modifications, but it was low on the priority list (i.e. lots of other issues to sort out). Unfortunately, weeks pass without follow-up. Eventually the architect sends your assistant a revised plan who in turn sends it to the builder to implement. The builder replies, “Well, because we have already started construction, we need to realign in ground wastewater pipes that are in place, plus we will need a building consent amendment. But in waiting for that we will not be able to get the council inspector to sign off on the slab inspection. That affects critical path for the whole house, so construction will be delayed by two weeks — and I will need to cover that.”
The assistant runs the numbers.
$1,000 Architect & engineer
$2,000 Building consent fees
$14,000 New bathroom works
$1,000 In-ground wastewater changes
$2,000 Builder’s extension of time ($200 per house per day for two weeks)
$600 The additional interest payable to the bank while you wait for the house to be complete
The total cost is now $20,600.
And then let’s say you leave it even longer. The buyer asks for an early inspection to see their just about complete home. Your assistant shows the buyer around and they comment on the missing bathroom. The assistant, a diligent person, immediately goes into overdrive to find out if the buyer is correct and why there is no bathroom. It takes a week, but the missing correspondence trail is tracked down. Not good, a new bathroom must be installed. Unfortunately, the ground floor has a large bedroom space already carpeted and walls painted ready to go. The carpet will need to be cut back and thrown away, a wall will need to be removed, the ceilings repainted, and new walls built. The concrete slab needs to be uncovered so a new wastewater pipe can be installed. Not only that, but one of the walls that needs to be changed is a structural wall, so extra bracing must be added to other walls. The builder tells you it will take three weeks to do this work and another week to get council sign off. Plus, it is now going to slow them down finishing another house in the project by two weeks as they need to move trades to re-prioritize works. The list of things to be done grows[1]:
$1,000 Architect & engineer
$2,000 Building consent fees
$14,000 New bathroom works
$1,000 In-ground wastewater changes
$8,000 Rework, demolition, modifying existing, cutting slab, making good.
$4,000 Builder’s extension of time ($200 per house per day for this house, four weeks)
$2000 Builder’s extension of time ($200 per house per day for the other delayed house, 2 weeks)
$1200 Interest payable to the bank while you wait for both houses to be complete, four weeks.
That’s a whopping $33,200 for a bathroom! More than double if it had been sorted out earlier.
Now assume the buyer is a hotel operator and you have 500 bathrooms to sort out! Do you see why now you should get onto issues as early as possible?
Let’s stress the point: get onto
issues immediately, get the problem resolved, uncover the source and find a
solution.
[1] I could go on and on with this — it’s by no means an extreme example.
Andrew Crosby
+64 21 982 444
andrew@xpectproperty.com
Buy the book from Amazon: https://www.amazon.com/dp/1790590884?