The importance of monitoring projects
The construction industry and the banking sector are two of the world’s oldest institutions, each playing a key part in the other’s growth. But with little common ground between them and a rise in new lending streams, Sean Tobin, Partner at John Rowan and Partners talks about the importance of monitoring projects to help bridge the communication gap and deliver the best for both worlds…
By their very nature banks and lending organisations do not like to take risk, in contrast construction projects are exposed to a wide variety of risk and uncertainty. The list of issues which can befall a construction project is considerable. These range from challenging ground works, project variations, poor weather and force majeure events to planning restrictions and supply chain issues to name just a few.
The construction industry is also incredibly complex and given to disputes, cost over runs and time delays. For any lender without an in-depth knowledge of construction processes, this can be a daunting sector to finance. But luckily help is on hand and the professional practice of bank monitoring can help to limit your risk exposure and ensure that the administration of a loan is kept within the acceptable levels of risk.
New lenders in the market
While Brexit has caused some uncertainty in the market, the advantages of investing in the UK construction industry still remains. According to the Bank of England and De Montfort University (DMU) lending in 2016 by UK banks and building societies to private property companies, increased by 1% to £135 billion, despite the Brexit vote.
We are also seeing a change in who is financing construction projects, with the sector moving towards a more diverse range of lenders. While historically UK banks and building societies have always been the dominant lender, this position has recently diminished and now accounts for around 47% of loans, compared to around 60%,10 years ago.* Today, a broader range of lenders, such as online banks, insurance companies and debt funds, has emerged. These non-traditional lenders accounted for 20% of new lending in 2016, and look set to increase their market share in the coming years.
The principal reason for using a construction consultant to support finance, is to bridge the gap between the needs of the financial lender and the needs of the construction project. It doesn’t matter whether you are a new type of lender or a traditional bank, using an independent expert to monitor your construction project is sound business advice.
For one, most lenders don’t have the adequate in-house expertise or the resource to be regularly on site carrying out project monitoring and reporting, and without forensic knowledge of construction processes, issues may be missed and loans put in jeopardy. At the same time it is often unwise to rely on the developers project manager as there is a potential conflict of interest. So while the role of bank monitoring is complimentary to the traditional project manager, it is advisable to make sure it is independent – ensuring that your financial interests come first.
Using a third party consultant such as John Rowan and Partners means that you can immediately tap into over three decades of construction expertise and experience. For example we have detailed knowledge of cost estimating, contractual matters, programme issues, project bank accounts and the common pitfalls for a lender. All this experience means that we can help to keep a construction project on track, monitor all aspects of the programme and identify any issues which could impact your ability to recover your debt.
No project is equal
Bank monitoring is by no means a new service and it is a common requirement for many lending institutions – but there are ways it can be improved across the sector. All too often project monitoring and reporting is seen as a ‘one size fits all’ approach, however this rarely works and effective bank monitoring should be flexible and take into account the diverse practices within the construction industry.
Every construction project is undertaken differently and every contractor or developer works in a different way. Monitoring needs to acknowledge this and those undertaking it need to understand the implications of different construction methods, its technical complexities and the costs involved.
Communicate well and quickly
For us the role of the Bank Monitor is not one of an inspector, but should be seen as an opportunity to bring in a ‘problem solver’ who can work with all parties to get a construction project completed – maximising the return for all. Key to this is the ability to respond quickly and provide up to date information and solutions to mitigate issues – helping to keep the programme on track without delay from either side.
Our advice is simple, if you are financing a construction project come and talk to us, we can provide you with the very best service and protection. With over 30 years’ experience of managing projects, we can ensure that you make an informed decision at every step.
*reference – PIA-Property-Data-Report-2017.PDF