Starting again, the right way
- Date: 17/06/2010
Estates Review: Chris Loerns explains what developers need to know about mitigating risk in the current commercial building market to avoid making potentially damaging investments.
As the commercial sector takes off again, we need to take stock of what kind of marketplace we’re in - the tough days have changed it. Tenants are more clued up and bargain hard for what they want. Developers are becoming adept in win-win deals to avoid tenant voids and are now more knowledgeable about how they deal with risk – and this latter change is significant.
One of the biggest lessons the recent past has taught us is that cutting corners doesn’t work and having effective risk management on your radar is a must.
A 'wishing and hoping' approach about who is going to take responsibility when there’s a problem is not where it’s at. Experience shows that you can’t rely on your supply chain to cover your back. Companies there can go out of business or deny responsibility when the crunch comes.
So what’s the smart money on now? I believe the best option is to take a developer/owner controlled insurance package. This kind of insurance makes sure nothing falls down the cracks; it will cover your development from start to finish and beyond that as well.
This kind of package protects your assets and your future income stream. It protects your key stakeholders - including your partners and supply chain - in a blame free approach when a problem occurs. This can be expensive, but think of it in terms of how you would insure a new top of the range car. It doesn’t take long to see why a fully comprehensive policy is preferable to third party cover.
To make this work you need to take a systematic approach to risk management using an independent technical appraisal of your building through its key stages - from conception to delivery - along with risk control visits from insurers during construction. This will give you the added benefits of keeping your project on track through risk minimisation while helping you head off potential problems with design, construction methods and materials during the project - and crucially, after completion.
Getting it wrong makes the key stakeholder suffer – and that’s you. Here’s a case in point: a UK landlord is facing repair bills of up to £1m, or a worst case scenario of a total renewal cost of £20m, because a part of the building which was not rigorously appraised during construction was found to have failed. This potentially leaves the building, which is under two years old, unusable.
The figures quoted do not even take into account the cost of business interruption or increased cost of working expenses. No amount of wishing and hoping can put such a development scenario right.
The way forward has to be risk management, technical appraisal and a developer/owner controlled insurance package.
This way, faults in construction can get picked up at the routine inspection and appraisal stage, while risks of potentially catastrophic fires and so on are identified and mitigated early on rather than when it is too late.
It’s a smart best practice approach that does not cut corners and deals with issues before they become crises.
The tips for developers to protect themselves and their key stakeholders are:
- Understand your risks: Get independent experts to advise you at all stages of your project.
- Cover your back: Don’t rely on other people to minimise your risk – look for cover that is blame free and ‘fully comp’.
- Engage with your broker: Be forensic with your questioning about cover. Take the owner/developer route.
- Ask: How will I be covered for loss of revenue/increased costs? Exactly how will my assets be protected? How will my stakeholders be covered if there’s a problem during or after construction?
- Listen to your lawyer: Be relentless with your questioning about asset, revenue and stakeholder protection.
- Listen to your insurer: Once underway with the final stages of planning and while on the project itself, welcome and embrace their visits – they are for your benefit.
Developers should insist on getting full protection for their assets as well as their revenue. You can get that by taking the ‘fully comp’, no blame route where in effect, the technical approach informs the risk management process. This, in turn, secures the right kind of cover for you.