A Watchmen’s Compass

Lending institutions often do not have the formal knowledge or capacity to analyze and track the construction process for multiple projects, which can create potential vulnerabilities due to a lack of transparency and increased risk. This is where an effective project monitor should step in: they are the ones that increase transparency and reduce risk, and in the process can help identify potential issues with contract compliance, schedule and budget earlier in the process, protecting the lending institution’s position in the project. One challenge in the marketplace is to ensure that when a lending institution employs a project monitor, they are working to standard terms of engagement, covering all the key risks and following appropriate due diligence.

In Canada the industry has been seeking assistance with this challenge for some time, with the need for guidance identified through discussions with leading quantity surveyors (who deliver project monitoring services) and construction finance heads from Canadian banks. They collectively identified that across Canada there was no accepted standard of practice for independent project monitors undertaking oversight of commercial construction loans. As a result, the Royal Institution of Chartered Surveyors (RICS) and the Canadian Institute of Quantity Surveyors (CIQS) have developed a guidance note, to be launched later in 2015.

“As the Canadian real estate industry seeks global lenders and developers, it is of paramount importance for project monitors to conduct the appropriate level of due diligence in a consistent manner with the highest standards,” says Naren Chande, senior executive vice president for cost consulting at Toronto-based Altus Group, and chair of the working group that is developing the guidance. “Our goal with the guidance is to establish a standard within the industry so that lenders can be confident they are receiving a high-quality project monitoring service, and better understand what to expect from RICS members and other service providers.” When the guidance is published, “project monitors will have a common platform that can be used as reference for their work,” says Chande. “This document will act as a definitive resource to help lenders and project monitors better service the requirements of the development industry.”

CIQS’ lead representative on the working group says the guidance should boost both consistency and quality in project monitoring. “In recent years in Canada, we have observed substantial variations in the level of detail and quality of project finance monitoring among different quantity surveying firms,” says Matthew K. Weber, vice president of the Concosts Group of Companies in Burnaby, B.C. and CIQS’ current vice chair and treasurer. “This has led to clients being uncertain about the level of service they will receive when they engage a professional quantity surveyor or chartered surveyor to monitor a real estate development. Furthermore, this has resulted in inconsistent proposal bidding and a race to the bottom on fees for professional services, which directly impacts the quality of deliverables. When owners, lenders and developers experience a lack of quality – real or perceived – our legitimacy as a necessary and respected part of the industry is eroded.”

A senior official with a major lender cites several reasons project monitors are valuable, and not just to the bank. “On a project of just about any size, we like to have a project monitor,” says Rod Hunt, managing director for real estate lending with the Royal Bank of Canada. “In addition to protecting the bank, project monitors are valuable to the client: they’re another set of eyes to make sure that the budget and schedule are reasonable, and that a project is being carried out per the planned budget and schedule from month to month.”

“If there’s a problem (such as a cost overrun, for example), a project monitor can identify it early and give the client a chance to remedy it sooner rather than later and hopefully keep it a small problem,” Hunt continues. “In addition, project monitors will see an item in a project budget that doesn’t make sense – for example, the cost listed is too low or high – and question it if necessary. Then, the developer can go back and question his contractor to make sure that the costs are in line.”

“Project monitoring is part of due diligence expected of us internally and externally, and it’s just good business to get a hopefully objective third party opinion on the status of a particular project. As confident as I am in lenders, they’re not engineers or involved on day-to-day basis in construction projects, so we want to get an assessment from an expert in that field,” says Garth Stoll, vice president of HSBC’s Real Estate Group in Vancouver.

Core project monitoring services

After providing background information as well as key elements of a project monitoring contract, the guidance defines the scope of the core services a project monitor should provide, divided into three categories: Regulatory Review, such as verifying permits and regulatory compliance and checking for factors such as easements; Financial Review, including analyzing, reviewing and monitoring financial aspects such as the loan agreement, purchase agreement, leases (if applicable), budget and budget variances, construction schedule, site progress (verified by site visits) and change orders; Technical Review, which includes the consultant’s quality control reports, commissioning reports, geotechnical and environmental reports, and the project manual.

RICS’ Canada chair, who is a developer and has a significant track record in project monitoring, believes the guidance should help considerably. “After nearly 19 years of undertaking project monitoring in Canada on behalf of lenders and now being in the position of hiring project monitors as a development manager, I am very happy that the industry has collaborated to undertake and complete this guidance document,” says Steve Elias, managing partner with Vancouver-based redM Group.

“For such an established process in Canada, the lack of uniformity in the requests for the scope of work and cost consultants from various lenders has been challenging at times over the years,” Elias adds. “This document now clarifies the scope of work for the cost consultant, the lender and the developer who is paying for the service. The guidance will minimize disputes and allows all three parties to know exactly what is being reviewed during the project to facilitate the flow of construction funding each month.”

The development of this industry guidance has been directly related to the relationships, input and feedback from the lenders — the ultimate clients of the profession. This initiative will provide a step forward in terms of industry benchmarks, but this is perhaps not the end of the campaign. In Washington D.C. earlier this year, a group of key construction industry associations from around the world gathered together to discuss the need for International Construction Measurement Standards. Representatives from these organizations are continuing discussions on global industry standards that would normalize the understanding of key cost factors in a construction project, enabling more accurate cost measurement, and further developments are expected to be announced later this year or potentially into 2016.

RICS and CIQS will issue the final guidance, “Project Monitoring for Real Estate Lending: Canada,” later this year, and will be available online at rics.org and ciqs.org


Tom Pienaar leads the RICS Corporate Affairs Team in the Americas, headquarterd in Washington D.C., focusing on developing mutually beneficial relationships with industry stakeholders. During his six years with RICS, Tom has worked in Europe, China and Brazil. He can be reached at [email protected]

 

 

 

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