When Due Diligence Fails: How an Overlooked Flood Risk Can Derail Property Development in Spain

With nearly 30 year’s experience as Project Managers in Spain, we have seen first-hand the significant opportunities property development in Spain can offer international investors — as well as the costly problems that can arise when development risks are not identified early.

In this article, we wanted to share a real-life example which illustrates the importance of having a complete understanding of the land, planning position, technical constraints, construction risks and the commercial implications of the proposed scheme. Unfortunately, in this case, effective Spanish property development due diligence was not implemented and they paid the price for this oversight. We hope that by seeing what can happen when technical due diligence, design and construction procurement are not properly connected, you’ll avoid making the same mistakes.

Property Develoment in Spain: Flood Risk Case Study

A development project in Spain involving EU investors ran into serious issues with flooding, delaying the project and incurring significant additional costs in the process.

The developer acquired a riverside site and planned to build villas with underground basement areas on this plot. A geotechnical investigation had previously been commissioned by the former owners for a different development concept, which did not feature basements. When the site changed hands and the proposed scheme changed and basements were added, the existing geotechnical investigation was relied upon, rather than being reassessed against the new development plans.

Unfortunately, the initial investigation did not adequately identify the site’s vulnerability to rising groundwater associated with high river levels during winter. That gap ultimately became a significant construction and commercial risk, which could have been identified with effective Spanish property development due diligence.

Let’s take a look at how this happened in more detail, so other property developers in Spain can learn from this cautionary tale.

The Problem started Before Construction

The issue was not simply that water entered the villa basements. The underlying problem was that the site’s water-related risks had not been sufficiently identified, assessed and translated into the design and construction scope.

The proposed basement areas required a solution appropriate to the site’s groundwater conditions. However, the design and specifications did not adequately address the level of waterproofing, drainage and pumping required. When the project was put out to tender, these requirements were therefore not sufficiently reflected in the contractor’s scope and price. A technical report sitting in the project file does not protect a developer unless its conclusions influence the decisions that follow.

During construction, winter weather brought higher river levels and associated groundwater conditions. The underlying water table level rose, leading to water entering the basement areas. Of course, this caused significant damage, but the consequences extended well beyond the immediate physical damage. Additional remedial works were required, the construction programme was affected and professional and management resources were diverted towards resolving the problem. Questions also arose about responsibility between the various parties involved in the development.

What began as a technical due-diligence issue had become a commercial and contractual problem. This is one of the reasons development project management in Spain should begin well before construction starts.

Who is Responsible for Property Development Risk?

Once a development encounters a serious technical problem, the natural question is: who is responsible? In this case, some big questions needed to be answered:

• Was the original geotechnical investigation adequate?
• Should the investigation have been updated when the development concept changed?
• Was the designer’s scope and responsibility sufficiently clear?
• Should the design have incorporated greater protection against groundwater?
• Was the contractor’s scope sufficiently clear?
• Were the necessary works included in the contract price?
• Could the developer have identified the gap before construction?

In Spain, questions of professional and contractual liability depend on the specific circumstances, contractual obligations, project documentation, causation and applicable law. They should not be reduced to simply identifying which consultant or contractor was involved.

The more important lesson for developers is that risk is easier and cheaper to manage before construction than after a failure has occurred.

Once a problem develops, the parties may need to review technical reports, drawings, specifications, contracts, tender submissions, correspondence and variations to establish what was known, what was required and who assumed each risk. Effective project management is designed to avoid reaching that point.

Why Independent Project Management Matters?

An experienced project manager provides the developer with independent coordination across the development process. The objective is to ensure that information generated by architects, engineers, consultants and contractors is translated into decisions that protect the developer’s investment, budget, programme, quality requirements and risk position.

The process should start with due diligence and the project manager should connect the dots and ensure that project planning, design, cost, procurement, contracts and construction all runs smoothly, to ensure your project reaches a successful completion.

For international investors developing property in Spain, this coordination can be particularly important. A developer based overseas may have excellent professional advisers, but still lack someone locally focused on the project from the developer’s perspective.

The project manager’s role is not to replace the architect, engineer, lawyer or contractor. It is to coordinate their inputs and ensure that critical issues do not fall between professional disciplines. The project manager is the eyes and ears and necessary alert “antennas” working for the Developer. This independent oversight can make the difference between the nasty and expensive surprises that the developer in our example faced, and a project which is delivered on time and on budget.

The Real Cost of Inadequate Project Management

As we saw from our example, the cost of a development problem is rarely limited to the physical repair. Unfortunately, a single technical failure can create a chain of additional costs. You can expect remedial works of course, but these cause delays, which in turn increase your professional fees, financing costs and management time. This often also leads to contractual disputes and potential lost sales. There may also be consequences for completion dates, purchaser relationships, financing arrangements and the developer’s reputation.

For international investors, the consequences can be particularly difficult to manage when the development team is spread across different countries and professional advisers aren’t local and do not speak the language. This is why project management for international investors in Spain is not simply about monitoring construction. It is about providing the developer with a coordinated view of the project and identifying problems while they can still be addressed economically, without delaying completion.

Key Lessons for Property Developers in Spain

The riverside development demonstrates a fundamental principle of property development: development risk needs to be identified and managed before it becomes construction risk.

A geotechnical investigation may contain valuable information, but that does not necessarily mean it is suitable for a materially different development proposal. A well-designed scheme can still expose the developer to significant commercial risk if its technical requirements are not clearly reflected in the contractor’s scope and pricing. And even a comprehensive construction contract cannot protect against risks that were never properly identified, understood or allocated in the first place.

This is where an independent and experienced project management adds real value: connecting the dots between due diligence, design, costs, procurement, contracts and construction.

The cost of appointing experienced project management is visible at the beginning of a development. The cost of discovering that it was needed only after a major problem has occurred can be far greater — through remedial works, delays, additional professional fees, financing costs and potentially costly contractual disputes.

Good project management is not simply about managing construction. It is about protecting the developer’s investment by identifying problems early, when there is still time to do something about them.

You can find out more about MDCI’s project development services on our website, or contact us to discuss your project via email to info@mdci.es or phone at 0034 952 90 69 90.