Helen Garthwaite

Last month property consultancy Cushman &Wakefield revealed research showing how rising construction costs in the lead up to the 2012 Olympics were undermining development deals in the City of London.

While that may be true in part, there are several other factors combining to make life difficult for developers and their financiers: lack of resources as construction firms are stretched in a buoyant construction market, increased risk due to changes in the way projects are being procured, a cautious insurance market and the credit squeeze.

For contractors, life is good: it’s a seller’s market. But perversely busy times can also be danger periods when it comes to delivery, risk management and administration of finances, especially for smaller and specialist contractors.

Over the past 12 months there has been a trend towards forms of procurement which lock in contractors earlier in the process. Contractors are being asked to undertake pre-construction services or work on a two-stage basis. We are seeing a resurgence of construction management, which can facilitate early letting of specific trade packages for enabling work or orders for items with a long lead-in period and allow fast-tracking of the design and construction process.

This change is being driven by the need to secure resources for a scheme at an early stage. In turn, the specialist package contractors and manufacturers are being involved earlier and may dictate terms such as payment up-front for supplies ordered ahead of a start on site.

For developers not experienced in construction management, there are risks. Yes, you can start building before the design is adequately scoped with a perceived time advantage, but that means the design integration between all the specialist contracts and components may not have been tested. Gaps in the design interface between trades can arise and costs can also be more difficult to control. And remember, there is no single overall rate of liquidated damages recoverable from the contractor if the project is late.

Contractors that are not experienced in construction management should beware too. It’s fine to respond to the change in the market, but are you geared up to manage all those trade contract packages and the interface between trade contractors and the design team? Good project management, particularly of design development and cost, is essential.

Banks that are cautious due to the current credit squeeze may be more reluctant to fund developments with procurement routes that have contractor involvement without other security. They are more used to fixed or guaranteed maximum price contracts and happier to finance projects procured this way because of the perceived greater certainty over the end cost and the time for delivery.

Insurance companies are also becoming more cautious. There are some significant insurance claims on the horizon. The insurance market is hardening with resulting high premiums and limitations of cover to be anticipated which may further contribute to the difficulty in getting developments started.

It all adds up to a market which is treading very carefully in contrast to six months ago. While London’s City market is a specific one, major cities outside the capital will be experiencing similar effects. The impact of these factors will be felt everywhere. The Olympics, although concentrated in London, will suck up resources, leaving less for elsewhere.

For the construction industry there’s a lot of opportunity. But contractors need to be careful: in particular those operating in the mid and specialist markets. Check your clients. Check when and how you are being paid. Check your lines of credit with the bank. Be aware that insurance premiums may go up and that cover may not be as wide. Often when companies are very busy delivering projects they take their eye off the ball on these issues.

My advice to contractors is to look further ahead than the next six months, and take steps now to manage the risks.

Helen Garthwaite is head of construction and engineering at law firm Taylor Wessing