PRACTICALINCOMPLETION

AContractualBasisforRationalisation,HibernationandRevivalofStalledProjects
24July2010

Atypicalconstructioncommenceswithcontractaward,reachesthemilestoneofPractical Completionatthetimeofhandover,andendswiththeconclusionoftheDefectLiability Period.Thereareverywellknownformsofcontractandprojectmanagementprocessesto dealwiththeconstructionprocess,butvirtuallynonetodealwithaprojectthatis suspendedforlongperiods.Inmanycasesthecontractisdeterminedandwoundup, leavingtheactualsiteandbuildingsinlimbo.FormostofthestalledprojectsintheUAEthe contractorshaveremainedonthejob,butwithlittleornocashflowworkisontrickle feed,progressingslowlyifatall,andinsomecasesactuallygoingbackwards. Theconstructionsectorhasbeenhit,andhithardbytheworldeconomicrecession, nowheremoresothanintheMiddleEast,wherealessregulatedenvironmentwas unpreparedforthepossibilityofdisruption.Fewdevelopersorcompanieshadcontingency plansforsuchasuddenanddramaticcessationofeconomicactivity,andbyandlargethe responsetothedoublewhammydryingupofbothfundsanddemandwastosimplycease activityanddonothingmore,inthehopethatthecrisiswouldbefleetingandthatnormalcy wouldsoonberestored. 18monthslater,areturntonormalcyisnowhereinsight,uncertaintyprevails,andthe statusofmanyconstruction,developmentandinfrastructurecontractsisseverely compromised.Mostcontractorshavenotifiedintenttoclaim,butfewhavedoneso,as thereisnowhereelsetoturn.Manyprojectshavestalledcompletely,manymoreareon tricklefeed,withminimummonthlyspendthatkeepsactivitybarelytickingover.The consequencesofthisdonothingapproachhaveyettoberealised.Whatislackingisthe abilitytorationaliseandunderstandthepresentsituation,andtherebydevelopstrategies tohibernateprojectsuntiltheycanbeeffectivelyandprofitablyrevived.

Do Nothing

RHR Savings
Copyright Langmead

Associates 2009/2010 2009

Theunknownsarealmosttoonumeroustolist,andtheramificationsmoredirethan investorsarelikelytorealise.Intheabsenceofeffectivehibernationstrategies,incomplete orunoccupiedbuildingsareatsevererisk.Contractshavelosttheirvalidity,warranties havebeenvoided,informationisatriskofbeinglost,andmanyelementsandcomponents ofstalledprojectsruntheriskofunnecessarilylosingvalue.Whatsmore,therearenoreal contractualmeasurestodealwiththesituation.LangmeadAssociateshavedevelopeda corporategovernanceprocess,brandedasHybern8todealwiththeperiodfromwhena projectstallstowhenitevenuallyrestarts.Asthedurationofhiatusisunknown,a3step approachisrecommended,Rationalisation,HibernationandRevival. TheRHRconceptdealswiththehibernationperiodasasubsetofatypicalcontract.It commenceswithPracticalIncompletion,butinthecaseofHibernation,theprojectis handedovernottoanenduserbuttoacaretakerthiscouldstillbetheContractor,orit maybeaFacilityManagmentcompany.AlltheprocessesandmechanismsofPractical Completionneedtobeobservedpreparationofoperationandmaintenancemanualsand asbuiltdrawingsthataccuratelyreflectthedegreeofpartialcompletion,afinancial summaryofthevalueoftheworksthathavebeencompletedandalistofworksthat remainstobecompleted,sothataninterimPracticalIncompletionCertificatecanbe issuedandtheoriginalcontractcanbeeffectivelyeitherwounduporsuspended.Onthe basisofthisinformation,thestatusoftheprojectatthetimeofsuspensioncanbe rationalised.Informationcanbecapturedandstored,thestatusofcontracts,orders, warranties,insurances,materialsstoredonandoffsite,localauthoritypermitsetc.canall berationalisedsothatthedeveloperunderstandshiscurrentsituationpractically,legally

andcommercially,andthecontractorhasaclearlydefinedrole,eitherasacompleted contractinDLP,orwithanongoingmaintenancerole.

Typical Contract Construction Hibernation Completion Stalled Project DefectLiability Period

20

40

60

80

100

120

140

Figure1:ComparisonofaTypicalContractandaHibernationContract Withthisinformation,Hybern8canthenmodeltheconsequencesofdonothing,and thencompareavarietyofwhatifscenariosbasedonidentificationofelementsatrisk, determinecosteffectivestasismanagementstrategiesfortheproject,andimplementall theelementsofatypicalfacilitymanagementcontractwhichwillensurethatthevalueof thepartiallybuiltprojectispreserved,possibilitiesforrecommencementorredevelopment athighestandbestuseattheearliestopportunitycanbeperiodicallyassessed,andwiththe retentionofaccurateasbuiltinformation,theprojectcanberevivedeasilyandeffectively whenconditionsareright. Duringhibernation,allthechecksandbalancesofatypicalmaintenancecontractwillapply, withadefinedscopeofworks,assignmentofequipmentandresources,benchmarksfor qualityandsafety,ordering,spares,security,cleaning,environmentalcontrol,utilitiesand consumables.ThehibernationperiodwouldformallyendwithProjectRevival,a milestonewherethehibernationcontractorwouldhandovertothemaincontractor followingrenogotiationoraretenderoftheconstructioncontracttocompletetheproject.

RHR

RATIONALISATION
Project details Information status and ownership Contract status Information capture and compilation Building survey Estimate of time to restart of construction Size and number of assets and value Agreed Deliverables Assess Implement Protect Maintain

HIBERNATION

RECOVERY
Re-Assess Reboot Complete Handover

Copyright Langmead

Associates 2009/2010 2009

TheHybern8corporategovernancesystemcapturesAsBuiltinformationandallowsweb basedoperationandmaintenancemanualstobecreatedonlineusingOMTrak,whilstthe enterprisemanagementofastalledprojectcanbemanagedusingMainpac,both representedbyLangmeadAssociatesthroughouttheregion. ThebenefitsoftheRHRapproachtostalledprojectsareriskmitigationforowners,and effectivemanagementofstalledprojects,givingcredibilitytodevelopersandaclearly definedandproperlymanagedroleforcontractors.

AbouttheAuthor.

DouglasLangmeadisManagingDirectorofLangmeadAssociates,BusinessConsultants,withmorethan32 yearsofexperienceintheMiddleEastconstructionandpropertysector.