Why do I need a Quantity Surveyor (QS) for my construction project? | CRE Finance

Core to the financial success of any development project is its feasibility. Given the current global inflationary & geopolitical environment, there is no time like the present to be across construction costs.

Simply, for a project to be feasible, the Gross Realisable Value (GRV) of the finished apartments, warehouses, land lots etc shall be be greater than the Total Development Cost (TDC) to produce them.

Cost per basic brick laid are up some 250% over last 24 months, much more for artisanal Italian varieties.

When seeking construction finance a lender will always use third party validation of a developers two key assumptions, GRV and TDC.

The GRV (the Valuation) is completed by a panel firm able to assess the value of the project as if it was complete. The valuer will compare against other projects in the market place both complete and in development to reach conclusions.

The second key developers assumption is Total Development Cost (TDC), a major component of which is construction cost and a lender looks to a Quantity Surveyor (QS) for validation in two areas.

1. Financier Initial Report , is an upfront independent review of The Master Build Contact with a focus on some of below items, many of which absolutely critical for successful delivery.

• Summary and appropriateness of the builder

• Summary of the contract sum and scope of works

• Compliance with Australian Standards

• Compliance of the building design with the plans and permit

• Compliance of builder licences and insurances

• Proposed build program and completion dates

• Assumptions of trade and sub-contractor pricing

• Provisions for liquidated damages (LDs) and performance bonding

• Responsibility of risks of latent ground conditions, value management & delays

In this example feasibility a 15% increase in construction cost significantly reduces profitability.

2. Ongoing Progress Reports - once finance is approved and building is underway the funds are released by the lender for actual works complete on site on a cost-to-complete basis.

In practice this means the QS will frequently attend site to verify the builder progress claims once the work has been completed against various cost buckets.

Example cost buckets include completion of basement works, completion of slabs, floorings, kitchens & bathrooms among a myriad of other elemental costs.

The lender looks to the QS to verify performance of the build with a particular focus on;

• Has the work actually been done on site to the level being claimed?

• Is the progress in-line with the proposed time schedule?

• Is there adequate loan balance in the bank facility to complete the project?

• Are there any other issues presenting on-site that may not have been disclosed?

Ultimately the lender is mitigating against the risk of funds shortfall to complete the job in the event of cost or time blow out.

Importantly the upfront cash requirement to supply and complete the works on site lies with the head-contractor / builder and sub-contractors, who under this system are not paid until some 60-90 days after bank releases funds......

....naturally builder and sub-contractor solvency is a hot topic as inflationary and other pressures affect the market. See media coverage The real reason construction giants Condev and Probuild collapsed

KEY TAKE AWAY - there are highly capable and solvent builders still out there, you just need to make sure you have engaged one, a QS can help.

Tim Allen - Director

Commercial Real Estate Finance Pty Ltd

tim@crefinance.com.au

0422043443