Ways in which a development can overspend and overrun
Today we are looking at ways where a project can run into trouble and recommending ways to avoid this for your project. This was a recent case where a foreign developer had purchased land to build and sell villas. They called us in to support them as their Project Manager in Spain, and we uncovered a host of unforeseen and unplanned issues, which were seriously affecting profitability and timescales.
If you are experiencing any issues with your project and need support, we have project rescue services as well as project management to get you back on track.
Issues with the plot
The first issue arose from the plot selection, which led to significant costs which had not been budgeted for.
They had bought land adjoining a winter “flood-river” that was overpopulated with trees, including the bothersome Eucalyptus. In addition to needing to deal with the trees, which is highly regulated, they lost part of their plot, due to the flood-river’s course needing to be left free. Ceding part of the plot, also meant they needed to build a stone supporting wall. This cost tens of thousands of euros to build, which had not been budgeted for, and reduced the plot size for the project.
Find out more about how to select residential land and build a property in Spain
Building with an Open Book Contract
The second issue was his builder selection and contract choice.
Firstly, he selected a builder without a competing bidding process, so he was not able to compare prices or terms.
Secondly, the builder selected insisted that the type of contract to be used was to be an “Open Book”. This system means that the builder gets on and builds and gets paid for everything he does, without much discussion. Clearly this is preferred by the builders, but can be very detrimental for the client – particularly if the technical information he has been given is not “watertight”.
The normal system is that one negotiates a competitive price during the open market bidding process, where each building company must audit the project and cost up all elements of it to ensure everything is included in their offer. When you review all the prices and select the builder, a client should “close the contract”, based on the price which was given during the bidding process, less any negotiated reductions achieved. This protects the clients from having to pay for things that were not budgeted and would lead to a shortfall in funding and is clearly disadvantageous for the client.
Find out more about the importance of a good contract when building in Spain
No Development Schedule in place
The third issue was that the project had begun without any development schedule being drawn up and agreed. This is an essential document with a timeline that the builder is tied to. It ensures that the builder is held to a certain monthly productivity targets and keeps things on track. It is the only way that one can be assured that the dwelling will be built on time and delivered without delay to the purchasing owner.
Not only do these schedules help to plan and keep things on track, but they also offer protection to the client in the case of overrun. If your project is not built according to this schedule, then this would permit the Developer to apply certain penalties to encourage completion on time, or receive money to compensate the new owner if the delivery had been late.
Inconsistencies in billing
The final issue that we uncovered was worrying inconsistencies with billing.
We were concerned that there hadn’t been a thorough costing per unit to enable the sales price to be accurately established to include a good profit margin. While calculating the potential development costs, we asked for the bills paid to the builder. To our surprise, we were presented with two versions – one that the builder passed for payments and another one that the builder produced to enable the Developer to obtain the finance to pay the bills. This meant that more funding was being sourced than was being paid to the builder and the client was exposing themselves to many potential problems with taxes, VAT and legal issues.
As the Client wasn’t able to justify this, or empower us to help them get the project back on track in any meaningful ways, we left the assignment, however we wanted to share the experience to highlight ways where things can go wrong and how much you need to dig into each aspect of the process and protect your interests every step of the way.
A Project Manager is your eyes and ears and an experienced pair of hands who can guide you and ensure the systems are in place to ensure your project will be a success. As you can see from this example, they are a key member of your project team and should be brought in from the start to help you protect your interests and make a good profit.