Every construction project is unique; to some extent a prototype, with its own subtleties, uncertainties and risks. In order to articulate these project-specific risks and demonstrate that appropriate measures and controls are in place, experienced funders will expect to see a professional feasibility report and a coherent project governance regime from developers.
The inclusion of both these in a funding application will be viewed as a key predictor of construction project success or failure. The more robust and clearly explained they are, the smoother the related due diligence is likely to be. But just how should developers go about producing this standard of feasibility report and governance regime in practice? Let’s look in more detail:
The development appraisal and feasibility assessment
A typical development project funding request includes a business case development appraisal featuring, amongst other things, forecast delivery costs, timescales, and risk allowances.
A developer’s successful track record may be a plus when seeking funding but it won’t remove the need for a professional project-specific feasibility study. Admittedly, even a development appraisal based on the most thorough project-specific feasibility investigations won’t be completely risk-free, although it’s likely to be much more secure than one based on generic assumptions, gut feel or experience from previous projects where similarities may be limited.
Now for some specifics. An appraisal that includes a fixed-price, tender-based, budget is most suitable, but funding applications are often made long before a project reaches tender stage. What’s vital is that the basis of the budget is transparent: if not based on tenders, has it been produced by an independent professional quantity surveyor and to what stage have the design and feasibility study been progressed? And, a budget based on a Design & Build main contract is likely to be more readily and positively risk-assessed than one that is centred on a multiple contract cost-plus approach.
That’s why, when presenting a feasibility study, it’s important to clarify the basis and status of the budget and, crucially, to differentiate between elements that are fixed price and those that aren’t. This will help the funder to model appropriate risk-adjusted contingencies, which can be reviewed as the project matures, prior to financial close.
Project governance strategy and structure
‘The rot starts at the top’ is a phrase that isn’t heard enough in project management. Often, funding applicants overlook project governance. But this can cause due diligence to drag on unnecessarily and may lead to more onerous funding terms or even a refusal to offer terms altogether.
To be properly effective, a project governance strategy and structure should clearly explain the top-down organisational, contractual and procedural approach to project decision-making, control and accountability to enable funders to assess governance risk.
Approaches to project governance range from what might be described as ‘full institutional’ to ‘extreme entrepreneurial’. The former, more formal risk-averse and ‘perfect world’ approach is naturally preferred by funders, but comes at a premium that may be prohibitive for many developers. Deciding not to adopt an institutional approach needn’t necessarily be a barrier to funding. What matters most is how comprehensive and clear the structure is, so that funders can easily assess how far removed from the ‘perfect world’ is the developer’s approach to governance.
A simple way to do this is to present the project governance structure at the outset, in a diagram tailored to reflect the specific funding and corporate structures and procurement route, identifying contractual, collateral warranty and instructing-reporting links between key stakeholders.
Of course, funders may consider many other factors when assessing the risks associated with backing a project. However, what is crucial for all projects is the thought and effort applied to the feasibility assessment and project governance. Failure to produce either of these to a high standard is gambling against Murphy’s law - that whatever can go wrong will go wrong - and that’s not in the interest of funders or developers.
This article is for information purposes and no reliance should be placed upon it. Any personal opinions expressed are subject to change and should not be interpreted as investment advice or a recommendation.
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