July 29, 2020
The world has been impacted by COVID-19 and the full consequences are not yet known. The fallout will impact the capital projects market. While the future is unpredictable, professionals involved in the real estate, infrastructure, and construction sectors can take positive actions now to best protect their investment and businesses for whatever may lie ahead.
This article sets out the key indicators and actions capital project stakeholders – whether owner, investor, designer, contractor, or subcontractor – should address to best protect their investments. This paper follows on from Ankura’s webinar ‘Dealing with Project Distress – A Toolkit for Success.’
Recognize the First Signs of Distress
It is not always possible for project stakeholders to anticipate distress or recognize its first signs. Invariably, projects continue apace with performance reporting lagging by at least a month. Even with regular reporting regimes, issues may not be identified in that reporting period and may slip into the next, giving an unclear view of reliable actual status. Across EMEA and APAC, performance reporting is usually done by third-party delivery partners, typically project managers, adding the risk of potential bias on the reliability of the data produced (under or over reporting). Accordingly, project owners and investors may not fully know the real-time status of their projects and therefore are denied the opportunity to identify signs of distress. To manage this risk, project owners and investors need to check, validate, and challenge reporting, especially in unpredictable or volatile markets where things can change very quickly.
The most important recommendation for project owners and investors is to fully understand the project data reported by delivery partners. Awareness of the quality and reliability of the data gives project owners the best chance of recognizing, anticipating, and ultimately addressing project distress in an informed, timely, and decisive manner. While this is good advice, many project owners and investors may not have the “right” resources to check and interrogate performance data. In these scenarios, it is important that project owners and investors reach out to independent specialist providers to support them in these essential reviews, so that any potential distress can be independently identified and then properly addressed.
While lawyers are often the first port of call by many project owners, the law alone is not the complete solution. Advice and validation of project performance, time, commercial, operational issues, liabilities, impacts, and potential workout outcomes are vital from experienced industry specialists. This approach will ensure project owners have the most complete picture, can assess options and implement corrective action. The more detailed legal, technical, commercial, and operational advice project owners have, the greater the likelihood of a swift and successful recovery.
Understand the Depth of the Issues and the True Position
After recognizing that project performance may be faltering, project owners and investors need to test these risks through expeditious and robust evaluation of the project data available – and consider it in context with the wider project and stakeholder environment. This will enable project owners to understand how key issues could negatively impact on their project or investment. Project owners need to methodically evaluate the best, worst, and most likely impacts of each identified distress symptom to understand its potential severity. Key to the process is using a review team consisting of the right unbiased subject matter expertise and industry experience.
At a minimum, we recommend the review team should be fully independent from the delivery teams to undertake unbiased reviews to evaluate actual performance against planned performance. These analyses address core factors of time, commercial performance, procurement/award progress, cost forecasting, cashflow expenditure, claims, and contractual notices – together with sampling of key project correspondence to gain valuable insight into the parties’ emerging positions.
By being proactive, project owners will be better informed about the issues and options and can develop their own preferences and tactics of engagement for the resolution of emerging issues. This outcome is achieved through objective analysis and review — often only possible by third-party advisors – setting out the potential issues, symptoms, culpabilities, and recovery options available. Project owners can use this information to highlight, challenge, or request specific real performance data or proposals to ensure all stakeholders are aligned in the need for, and the plan to, mitigate specific risks and impacts.
A fundamental aspect of effective distress management is that the earlier the challenge is identified the more recovery options are available to the entire project team. When risks are not identified in a timely manner, recovery options decline for all parties and often result in more severe impacts and disputes.
Our 5- step toolkit to understand the status of the project is:
- Independently review and validate reported actual performance versus planned performance data;
- Test and challenge data by requesting unbiased additional verification and substantiation from the stakeholders to build a more reliable and robust picture of performance;
- Develop and model structured recovery option scenarios to test suitability and plausibility;
- Draw up a prioritized action road map, including how to engage the stakeholders; and,
- Be decisive – timely identification and resolution is key to success.
Following these steps will allow project owners to have an accurate assessment of key technical, commercial, legal, and operational project matters, allowing them to make better-informed decisions based on independent, quality, and reliable data insight.
Securing the Best Resolution and Outcome
It is imperative for project owners and investors to properly evaluate multiple scenarios when modelling the potential pros, cons, impacts, and implications of any desired solutions. By undertaking these exercises, supported by experienced and engaged advisors, project owners and investors can stress test outcomes before they are proposed to the other stakeholders. This process allows unforeseen challenges or situations to be tested in a ‘safe’ and non-live environment, to ensure only real, implementable recovery measures are advanced and pursued.
While this practice of scenario planning is not standard across the global property, construction, and real estate sectors, it is embedded and used by the major infrastructure projects and utility sectors to optimize project outcomes.
Having established these desired outcomes, project owners, supported or represented by their independent advisors, have the platform on which to engage from a position of much greater knowledge to negotiate with the delivery team to secure the best possible distress recovery outcome.
To effectively negotiate a solution, it is important that all parties understand actual performance against planned performance, the performance obligations of each stakeholder, and the causes for any variances.
Risk and distress are common features across all projects, and project owners must always remain vigilant. When project owners and investors have reason to believe there are potential execution issues, they need to quickly and objectively evaluate and understand the magnitude, causes, and likely culpability of the impacts, then develop data-based solutions to address and recover.
Pre-emptively and expeditiously recognizing distress, robustly evaluating the causes and impacts, and understanding the best resolution options with independent advice offers project owners and investors the right path to better protect their projects and businesses.
Acting now, by engaging the right expertise to fully understand the true performance position of each project, will help ensure that in the uncertain times ahead, all impactful risks are actively identified and optimized.
As cashflows increasingly come under pressure, being forewarned, prepared, and swift to act can turn a risk into an opportunity, resulting in a competitive advantage as markets recover.
 A recording of Ankura’s webinar ‘Dealing with Project Distress – A Toolkit for Success’ can be found at www.ankura.com/construction-forum