Practical incompletion

Doug Langmead looks at a contractual basis for the rationalisation, hibernation and revival of stalled projects.
Practical incompletion
By Doug Langmead
Sat 11 Sep 2010 04:00 AM

Atypical construction project starts with the contract award, reaches the milestone of ‘practical completion' at the time of hand over, and ends with the conclusion of the ‘defect liability period'.

There are well known forms of contract and project management processes to deal with the construction process, but virtually none to deal with a project that is suspended for long periods. For most stalled projects in the region contractors have remained on the job, but with little or no cashflow.

Few companies had contingency plans for the downturn and the response to the drying up of both funds and demand was to cease activity, in the hope that the crisis would be fleeting.

Normality is nowhere in sight, uncertainty prevails, and the status of many contracts is compromised. Most contractors have notified intent to claim, but few have done so. Many projects have stalled completely, many more are on trickle-feed. The consequences of this ‘do nothing' approach have yet to be fully realised. What is lacking is the ability to rationalise and understand the present situation, and thereby develop strategies to hibernate projects until they can be effectively and profitably revived.

In the absence of effective hibernation strategies, incomplete or unoccupied buildings are at severe risk. Contracts have lost their validity, warranties have been voided, information is at risk of being lost, and many elements and components of stalled projects run the risk of losing value.

What's more, there are no real contractual measures to deal with the situation. Langmead Associates has developed a corporate governance process, branded as Hybern~8, to deal with the period from when a project stalls, to its eventual restart. As the duration of hiatus is unknown, a three step approach is recommended: rationalisation, hibernation and revival (RHR).

The RHR concept deals with the hibernation period as a subset of a typical contract. It starts with ‘practical incompletion', but in the case of hibernation, the project is handed over, not to an end user, but to a caretaker - this could still be the contractor, or it may be a facility management company.

All the processes and mechanisms of ‘practical completion' need to be observed, so that an interim ‘practical incompletion certificate' can be issued and the original contract can be  wound up or suspended.

On the basis of this information, the status of the project at the time of suspension can be rationalised. Information can be captured and stored, the status of contracts, orders, warranties, insurances, materials stored on and off site, local authority permits et cetera, can all be rationalised so that the developer understands its current situation practically, legally and commercially, and the contractor has a clearly defined role.

With this information, Hybern~8 can then model the consequences of doing nothing, and compare a variety of what-if scenarios, based on identification of elements at risk, determine cost-effective stasis management strategies for the project, and implement all the elements of a typical facility management contract. The possibilities for recommencement or redevelopment can be periodically assessed, and the project can be revived when conditions are right.

During hibernation, all the checks and balances of a typical maintenance contract will apply, with a defined scope of works, assignment of equipment and resources, benchmarks for quality and safety, security, et cetera. The hibernation period would end with ‘project revival', a milestone where the hibernation contractor would hand over to the main contractor, following renegotiation or a re-tender of the construction contract to complete the project.

The benefits of the RHR approach to stalled projects are risk mitigation for owners, and effective management of stalled projects, giving credibility to developers and a clearly defined and properly managed role for contractors.

Douglas Langmead is managing director of Langmead Associates, Business Consultants.

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