Welcome to Episode Eleven of The Constructive Finance Podcast.
Today, Dan spoke with Andrew Gray & Nev Cottrell of GRC about their market views, opportunities and challenges they have faced and some advice/lessons learned thus far in their careers.
The podcast will be released every fortnight on Tuesday and will feature an elite developer discussing these same topics.
The podcast will be available to stream from iTunes and via the HoldenCAPITAL website.
For more information about the podcast or getting involved please email paige@holdencapital.com.au
Read full transcript below:
Daniel Holden: Hello everyone, and welcome to the Constructive Finance Podcast. I'm your host Dan Holden. Very timely guest today on the podcast to talk about construction pricing and quantity surveying, we're joined by Andrew Grey and Nev Cottrell from GRC, which is Grey, Robinson and Cottrell. Thanks guys for joining us.
Andrew Gray: Thanks for having us.
Daniel Holden: Excellent, well let's jump into a bit of background I guess on GRC. So, by way of introduction, can you give us an overview to GRC as a business?
Andrew Gray: So GRC was established back in 1987, so that's 30 years this year, so we've been around for a while now. Originally, we're focused on obviously smaller projects and over the years we've built up our staff numbers and our diversity. Just to give you an idea of some of the jobs we're working on now, our resi sections obviously, what our company was based off and the boys have been working on projects like Queens Wharf or 300 George Street, where we assist contractors with their tender submissions, also working on 30 Albert Street directly with the client, so that's going to be Brisbane's tallest tower, or equal tallest tower, so that's in line with Sky tower, which Nev's actually working on as well.
We've also just started work on Orion Goldmark down the coast, which is going to be Australia's tallest tower, so there's a few towers we're pretty proud of and the boys have been doing a great job to build that brand. But since the GFC we've had to diversify a bit, just because the resi market wasn't always so strong, so we have had a big push into the resources and infrastructure space.
Daniel Holden: Okay.
Andrew Gray: We're currently working on some major projects, such as the Kingford Smith Upgrade and the Gateway North upgrade. I know those projects around Brisbane causing a bit of havoc with the commuters each day, but hopefully it's worth the pain.
Then we're also involved with some jobs overseas in New Zealand. In Wellington, we're working on a big highway called Transmission Gully, which we've been on for over a year and also just recently been appointed as the QS on Melbourne's Metro upgrade, which is the major rail project there, so we do try and diversify and work in a number of spaces and then myself and Nev, obviously work in the finance sector, so that's our bread and butter and then there's a couple of other minor areas that GRC do work in, but I guess they're the three major areas that we're involved with.
Daniel Holden: Okay, it's a good outline and I guess a good breadth of projects that you're working across, that's interesting. And so how many financiers are GRC working with currently? I'm guessing the main four major banks.
Andrew Gray: Yeah, so all the major banks, we've done work with for a long time. Obviously now, there's some new players in the market, mezzanine funders and the like, so generally if you're on the panel for the major four, you get a look in at all the other banks and financiers, so at the moment we haven't had any issues getting on any panels, so far we're just working with whoever needs the help. We're happy to jump in and do the job.
Daniel Holden: Yeah great, and so I understand your second generation at GRC, with your father being one of the founders of the business.
Andrew Gray: Yes.
Daniel Holden: How long have you been with the company and how did you gain experience to be now involved in the finance service team?
Andrew Gray: Yeah, my old man and Nev and along with one other partner founded GRC, so I started working there straight out of school. So that was in 2004, so I've been with company since then. Initially started in the cost-planning section for a couple of years and then just gradually went into the finance section, so I've been there since about 2006, doing the initial reports and claims for the banks, so I guess the stability I've been able to build up, relationships with a lot of bankers and developers, which is good.
Yeah, I enjoy it. It's not stuck in an office all day, so you get to get out and see different projects, which is an enjoyable process.
Daniel Holden: And so can you expand a bit more on what's involved for the QS and particularly the finance services role in helping developers achieve their goals?
Andrew Gray: So, obviously there's a few different steps and stages. When developers first approach us, they generally just want a high level estimate. They've got a side or a project or some concepts and they just want us to throw some rough rates to see if it works with their fees, so that's obviously the first step and if it all stacks up they buy the site, then they need to look for the finance, so that's when we get involved for generally acting as the financier's QS. And the general process is you have to undertake an initial report and that's effectively a review on the whole project. So you go through things like the contract, the builders' insurances, the programme, just a whole raft of things to make sure the project is looking okay and identify any areas of risk and then highlight them to the bank and then once the bank signs off on the initial report and the finance is in place, then we go out to site each month just to do the monthly progress claims.
We just have to assess how much work the builders done, making sure their claim is acceptable and if not, reducing it or highlighting areas that we need to discuss and then we give that report to the bank each month and they make payment based off that.
Daniel Holden: Yeah okay. So, in your role as QS, and this might be an interesting, do you work for the bank or for the developer?
Nev Cottrell: Generally, what we do is we'll work for both. On the larger projects, we'll get involved with the developer as early as possible and we'll work the project through from inception through to the design and development phase, through to the construction phase of the project. When we're working for financiers, generally we'll get involved from the construction phase of the project and we find that, as I've said before, that the financiers like to have an independent QS, because they believe that, for some reason, that if the QS is involved with the developer, they will take the side of the that developer. GRC, we're independent. We work for both developer and financier and we usually find that's probably more beneficial for the financiers on bigger projects to have us involved from day one, because we know how it's all gone together.
We've known what hurdles they had to jump, what shortcuts they had to take, if any. So, we've got a full understanding of the project and when we're working on a project like Skytower, that might be worth 400 million, it's very difficult to pick it up from not having worked on it previously, to be able to report in depth to the financier on all the shortcomings and to do the thorough checks, so we do work for both. As we say to financiers, we're independent. We'll work on your behalf and we act on your-
Daniel Holden: And so I would imagine though it's one or the other? Rarely both at the same time?
Andrew Gray: We're finding that a few of the overseas banks will accept the fact that we work for both and it's probably only a couple of banks that are reluctant to use us in both cases.
Daniel Holden: Okay.
Andrew Gray: And it's basically written into their agreement with their heads.
Daniel Holden: Yes.
Andrew Gray: That we're independent.
Daniel Holden: Makes sense and so property developers come in all shapes and sizes, what would typically represent most of your current client base?
Nev Cottrell: For payments, I think if we're doing say 200 payments a month in the office, 90% would be smaller developers, own builders, but 10% are major projects and generally they're with developers.
Daniel Holden: Yes.
Nev Cottrell: And major projects we'd say anywhere between 50 to 400 million.
Daniel Holden: Yes, okay. So to help listeners understand the process with completing a typical progress draw, maybe we can just walk through the steps of how the claim is completed and then maybe any gotchas for ... that developers might need to be aware of.
Nev Cottrell: Well, I think Andrew touched on it before, we'd received the contractors monthly progress claim. We'd meet with them, either meet with them or walk round the site, depending on the size of the project, some of our guys would go directly to site, walk around and make the assessment. Process it if we disagree or we've got any queries, we take that up with the builder and generally, then we'd be in a position to sign off on the claim to the financier and when you're talking about some of the problems that you come across with straight banking reporting, we're usually engaged after the contract has been signed, so sometimes you find that some of the conditions that the clients have agreed to, in payment conditions, aren't really what the bank accept, so one of the pitfalls you find is that clients may sign on a contract and be legally or contractually bound to make payments for things that the banks don't make payments for.
One of the examples is probably unfixed materials, on site, so banks don't like paying for stuff that can grow legs and walk away and there's probably in the majority of cases banks will pay for lift equipment off site, but they're reluctant to pay for pre-cast panels and steel and any items like that. However, if we're doing the initial report for the bank and we do have a ... And part as Andrew said, part of the process is reviewing contracts and reviewing all the conditions. We notify the bank that there is a condition in the contract that enables the borrower to pay the builder for offsite materials and things like that, so we'd notify them, they would then take that up with the borrower and say, "Look, yes we can, but we require insurances, bank guarantees, and things like that." And they can have a one-on-one discussion with the developer to actually alert them to the fact that, yes they will pay or they may not pay.
We also find that a lot of smaller projects, the administration of the project is either by ... It could be the architect, it could be the client himself, they might have a contract that is administered by a superintendent. We've been initial reports on projects at times and we find out that we're the superintendent where no ones told us that we're the superintendent.
Andrew Gray: We're not getting paid for it.
Nev Cottrell: We're not getting paid for it and the superintendent appears about 320 times in a contract and it's very onerous and the problem is that you end up on a project that if it goes bad, superintendent ends up being the project manager and we don't really take on that responsibility, unless we're asked. We do have a project management arm that get involved, but they've got to actually ask us first, but more often than not we find that the people who are administering the project, aren't administering it properly and if you do get in a situation where the job does go bad, they find it a very difficult task because they haven't kept the right book work and they haven't given the right notices and you can end up with some issues.
Daniel Holden: Okay, so this question I'm particularly interested in because it's something that when a developer brings a project to us and asks us to get involved in the financing particularly when it's an equity transaction, we ask them for copies of previous projects that they've run in terms of just conduct and how the things gone, because you've obviously got to plan at the start and then you got a reality at the finish, and it's interesting to see how those two might be the same, sometimes they're separate, but one thing that we ask for from developers who have got a good track record or wanting to prove to us and the financiers and investors we work with is to talk them through PCGs and how they've come over issues in the past and that's generally how they prove their worth, is that they've come up against issues and been able overcome them. So, I'd be very interested to get your insight into PCG meetings, project control group and maybe just run us through, obviously the purpose, who typically attends and most importantly, what should actually be focused on?
Nev Cottrell: Well, PCGs, depending on the size of the project and the time of the project, generally are on a monthly basis and the people who attend will be, the developer, the financier, the financier's QS and the contractor and they over view the project and discuss items like, programme, construction progress, delays, design, workplace health and safety, quality assurance, environmental issues, industrial relations, authorities, neighbours and any financial matters and trade lettings, how the builders letting trades and other general and appurtenant items that relate to the project and minutes are kept of that and you generally discuss or go through the minutes at the beginning of each meeting.
Daniel Holden: Yes.
Nev Cottrell: You find that this will occur on your major projects. I haven't seen a lot of it occurring on smaller projects.
Daniel Holden: Yes.
Nev Cottrell: You know, your little six packs and things like that. I also find that, PCGs sometimes when the financier turns up, I've said to clients that they're really a waste of time because you're only going to hear what they want you to hear. You're better off getting a better understanding and again this is why the QS acting for both the developer and the financier probably gets to hear a little bit of what goes on. I know when we did a project down at New Step, we'd go through a WC or works control group meeting, which goes into the nitty gritty and that's where the yelling happens and guys having a whinge about this, that and the other and that was probably a better meeting to attend, because you actually know what the issues are. Whereas sometimes your PCGs are very quarantined and they only tell you what you want to-
Andrew Gray: They're reluctant to say too much.
Nev Cottrell: In fact, I've heard developers, "Oh we don't want to tell the financier this." Which is probably not the thing that they want to do, but you don't want to alarmist and I tend to find that on some of the projects we work with the concerns, the programme is a big concern, "Why is their cashflow $50,000 less than it should be." And I'm going, "I think that's pretty good." But it enables ... We had one this morning where we had Singapore in, financier called in, dialled in and just got an understanding of the same when we have we probably have on the Skytower PCGs, we probably have 19 phone in's and they can all make contribution and they can all ask the parties around the table if there are any issues.
Daniel Holden: Yes.
Nev Cottrell: They're pretty upfront and they want everything addressed and it is a forum where it's not a design forum, we don't talk design, we just over view everything.
Daniel Holden: And hopefully solve issues before they become major issues?
Nev Cottrell: Well I think it's an addressing how, if there is an issue, how it's being addressed, you don't usually find that they're going to resolve any issues, but they're all addressed and how those issues being dealt with and just to give everybody a bit of comfort, I think.
Daniel Holden: Yes. So, I guess in the last 12 [to 18 months 00:18:36], since late 2015 we've seen the banks contracting their level of involvement in res-dev particularly and with growing numbers of none bank lenders appearing in the marketplace, can you identify any changes that has been driving the way you do reports or maybe expectations being placed on you between these new lenders and the way that they're conducting their business?
Andrew Gray: I think we find that the certain non-bank lenders, they have similar requirements as the major banks, a lot of the time that could be because staff members have got briefs or got the requirements from the major banks and they basically use those to formulate their own briefs, so, we're finding our reporting is pretty similar across the board but, obviously in the last 12 to 18 months, financiers across the board have been getting a little bit nervous with the market conditions, so from what developers are telling us obviously pre-sales are a big one. A lot of financiers are upping those, the LVRs as well also slowly changing, so the conditions at the moment are tougher to get the loan across the line, so it's a lot harder to work, like a couple of years ago anyone could walk in with a project and get the loan over the line and just move forward with it.
Now, there's a lot of hoops you've got to jump through, it's a lot of hard work at the front end just getting it all to stack, all to look right, even before you take it to a bank, so you want to get everything lined up perfectly before you make that approach, because if you get turned away by one bank, it's hard to come back with the same project to another bank and get any finance.
Nev Cottrell: They all talk to one another.
Daniel Holden: Definitely, so I guess most developers simplistically think of a QS as a lender-appointed consultant, but it appears from what you've been telling me today, you do a lot more than just assessing progress claims, so maybe a bit of an opportunity here for you guys to explain those other roles, so that developers can be talking to you guys earlier. How early is too early? And just those other services that are going to add value to the project for them.
Nev Cottrell: Well, as Andrew said, we've diversified across into civil works and other works and we do tax appreciation schedules and things like that, but basically, developers, if they get on a major project ... On smaller projects, most of the developers have done projects before, a lot of them have done projects before, they know how much a box they're building for.
Daniel Holden: Yes.
Nev Cottrell: And the building they're going to deal with. And really, they just churn out, I wouldn't say cookie cutter design, but we work developers that have two designs of a town house, a low level and high level and they used to knock 400 of those out a year. They knew it better than we did on the price.
Daniel Holden: Yes.
Nev Cottrell: But over the years GRC have developed a lot of estimating analysis that we've done on projects, and we can actually walk into a project with a client and look at a box and say, well, look, even on in-box planning, we're working on a project down at West End, where we got involved early by the client, we worked with the client when we were doing the green over at the R&A, and these guys moved on, got us involved in this project over at West End, and our guys walked in and working on the box plan, looked at it and said, well, these buildings aren't efficient enough. If you develop, if you go ahead and develop these designs, you'll end up with a building that's too expensive, or more expensive than it should be. So you can do all that work, produce all those drawings, get a number on it, and it might work, so you redraw everything.
So, basically, we started right from the get go, and came up with more rationalised overall plans. Sat down with the designers, with the client, and we ended up developing, or they ended up developing efficient buildings. And they're on budget, they're actually getting built now, and it would have saved thousands of dollars to actually achieve those results, and that money can be spent on putting nice stuff on the inside and outside of the building, and not just burning up time and fees.
So I think that's something smart our boys can add, because the amount of projects we see, we can look at it straightaway and know the efficiencies, and add value like the value managements to scale, we can work with the client if we get in earlier enough and save a lot of money. So that's what we like doing. And we've developed systems ... systems we've developed, we price everything, from vice principals. We price all the trades ourselves, we don't go to the market. We develop their estimates, and then at final check, we might go to the market and market-test it. But to the extend now, where contractors get us to actually measure stuff and price stuff and review their work because this is our specialty.
Daniel Holden: Interesting comment before, you were saying about getting the design right from the start, I think in the last two or three years, this little build-up in momentum we're seeing, particularly in the res-dev, you know, apartment, medium- and high-rise space, where a lot of landowners have patched together a bunch of consultants and lodged the [inaudible 00:25:00] just so they could show just what could be done on a site. And they just rush, rush, rush, hire the cheapest consultants, get the thing in within a couple of weeks, not months, and they don't do any upfront work, and you end up with just a design and a project that isn't actually that attractive, both from a buildability point of view, and definitely from a marketability point of view. And then they turn around and want top dollar per box, because it's just a box on a page, and then the incoming developer has then got to, not start from scratch, but pretty much.
Andrew Gray: Stuck with his-
Daniel Holden: Yes, he's either stuck or he's got to start again. And go "Right, this is what I want to do, and this is buildability factored in, and here's market smarts and [inaudible 00:25:46] built into it," and they come up with a different product.
[inaudible 00:25:50], which is good to see them re-jig it, rather than just build it because it's approved.
Nev Cottrell: We've found, too, in the past, that if you have a design, if it runs that route, example I gave before, where I did a review before of a project, a spice project on the river in South Brisbane, it turned out to be a nice project, but at the end of the day, speaking with the architects, there was a lot of detail and design that was pulled out at the last minute to actually get it back to [inaudible 00:26:28].
Daniel Holden: Yes.
Nev Cottrell: And you tend to find, if a builder gets involved in value-managing a project at the [inaudible 00:26:37], they just go for the low-hanging fruit. They take all the quality finishes out, all the stuff that sells apartments get removed. So it makes everybody's job a lot harder to actually have a market difference, or to actually provide something to the partners that they really want. So, if we are involved early and we can sort out the bones of a building, you've got all the more money to spend on getting, putting in the nice stuff.
Daniel Holden: Particularly as the market is transitioning more into that higher-occupier, higher end product, type of the market, it's becoming more and more important. There are more projects now that are going to sell their product on completion than ever before.
Nev Cottrell: That's exactly right.
Daniel Holden: Two years ago, you put somebody on site in a sales office, and the thing would sell out in a couple of weeks or months, and then now, it's becoming more about building it and the outcome. But the good thing is, they are selling. So that's a good sign.
So we've seen the rising construction prices from late 2014 through 2016, we saw, as you say, the per-box price increased. Sometimes was a monthly check to see the price because it really had some heat on it, there. Do you think that was more labor-cost driven, or materials, or was it just a market bulge that was a big push on contracts?
Andrew Gray: I think it was pretty obvious to everyone in the industry, how rapid the price increase was. And I think it was related to labour costs, as well as materials, but on those bigger jobs, I think the union effect definitely did hurt them. Pushing the labour costs up, which I guess we're still dealing with at the moment, just trying to get those tier one to stack with the labour costs, is a struggle. So, yes, we have seen in the last ... from the end of last year, a bit of a softening out of costs. I don't think they're still increasing as they were, from what we can see. But, obviously, they couldn't keep going that way, otherwise, no projects would out of stack, if they kept up that rate, so hopefully we're at the top now, and with a little bit of luck, they might drop off a little bit over the year.
Daniel Holden: That would be good, definitely, for the land price per boxes, started coming back pretty quickly, swiftly, which is good. If we can get the construction prices coming back a bit, some projects might stack up again. There's definitely quite a lot in 2016 that weren't stacking up, so it's good to see a little bit of movement there, in the [inaudible 00:29:20].
So in 2016, we saw at least half a dozen of mid-sized builders go broke in Brisbane. I guess that could be attributed to being caught out from cost increase, but also we saw a few that were probably attributed to rapid growth for that build up, jumping brackets of the type of projects that they do. What signs do you look out for with builders to try and help prevent that?
Andrew Gray: Well, the transition from being a big small builder, to a small big builder is always dangerous.
Nev Cottrell: Yes.
Andrew Gray: What we find is developers will work on smaller projects, and they've got their preferred builder that they use, and then they step into the bigger project market, and then they take the builder with them. A lot of builders go willingly, some builders go kicking and screaming, they don't really want to go into that market, but they do. Or you deal with developers that will go ... the classic will have a [tender 00:30:35] list, and will say, "What do you think of these five tenders?" And there'll be four reasonable-sized builders, and then a small guy. And the logic there, is we'll look at all the big guys, keep [inaudible 00:30:49] because we've got a small guy there. Taking a big, that step, to go from building something that's worth $5 million and building something that's worth $20 million. There's a couple of key factors that probably get ignored. If you get a builder that's doing quite a bit of work and he's got good relationships with one client or a couple of clients, and they're growing, they end up employing other staff, taking guys on from other building companies. If it's getting busy, too, you generally find if you're a good project manager, a good administrator, why are you looking for a job.
So some of the selection criteria of some of these smaller guys stepping out and taking on staff that really don't have the company at heart, it's just, "Okay, let's screw [inaudible 00:31:52], or do this, that, the other." So you tend to lose a bit of control, as well.
You end up with administrators getting bigger, you end up with administrators that are inexperienced.
Nev Cottrell: Contract administrators.
Andrew Gray: Yes, contract administrators. And they've been negotiating and things like that, so you just lose, instead of someone losing, having a tight grip on the reigns, that becomes a little bit loose. You also get the situation, where if you step up as well, you have, you're dealing with project-managers and superintendents that are, not unfair or unreasonable, because all superintendents are reasonable people, but they administer the project as it should be administered. And a lot of these smaller guys don't or are not used to that.
Also, the smaller guy's bookwork might not be as good as it should, giving notices, you know. You'll end up with contracts and if you're delayed, you should notify the superintendent, and then you have to re-notify them if the delay is still there, and we find that in this market, where things are tight and the subbies are a bit slow or you have issues in a smaller project, they say, okay, well, it's going to take us another 10 days or whatever, you start having ill dues apply, and they say, "Oh, no, we were delayed," But there's no paperwork there to support it. So you end up with a situation that they paint themselves into.
And sometimes, and we've had situations where they're programming their cash flows, all the good that have been accepted on a really tight programme, playing with the big boys who are also playing with the unions, and they can step in and we've seen the likes of [matrix 00:33:47] take on projects in turn with I guess, smashed by the unions. And it costs them dearly, with liquidated damages, it was just the straw that broke the camel's back. In their situation, where they were held at ransom by unions, in situations where, on other projects, they might have gotten away with, okay, we're a month late. But a month with $30,000 a day, [inaudible 00:34:19] days, [inaudible 00:34:21] is a hard pill to swallow.
This is where the smaller guys have got to be careful stepping out. And a lot of guys are reluctant, they won't do it.
Daniel Holden: And so, when you're working on a project and the builder goes broke halfway through, how does that impact your role? What do you guys then have to turn around and do?
Andrew Gray: I guess that's obviously not good for any party involved, when something like that does happen. But generally, it makes sense to move fast, get straight to sort out, assess works, where they are currently. So we get to select photos of every level, just to know what exactly has been done, what hasn't been done, and then generate a cost-to-complete report for the bank. So we can say, "Look at this point in time, at a specific date, this is exactly how much work was left to complete the project."
And then, obviously, the worst case scenario would be if we'd been doing the weekly progress claims and we'd actually over-certified and paid the builder more than what they had done. Then, that's not ideal. Then, we'd be ... there'd be instances where the customer complaint's not great enough to finish the job, so we never want to get in that situation so we generally take the more cautious route when we're assessing claims. But if, yes, the builder has gone under and this has happened, then we're also more than happy to work with the developer, or the client and assist, trying to engage a new builder. We generally know a lot of the builders in the market and deal with them. So we can gauge who would be interested, who would be a good fit and try to get them, or just assist to help the process as much as we can to try to get them a new builder for the most competitive price.
But generally, at the end of the day, you're never going to get a new builder to sign up for the same price. They're going to want to get paid a premium for taking on the original builder's works, which could be defective. So that's all in their calculations. So when that happens, yes, your project costs are always going to go up. There's no doubt about that. It's just about managing those costs and trying to get to the end of the project.
Nev Cottrell: It's very difficult to determine the consequential cost of a builder going broke.
Andrew Gray: Yes.
Nev Cottrell: And you can do a cost-to-complete on the construction value, but as Andrew said, if the developer hasn't been paid or the subbies haven't been paid, obviously a [inaudible 00:36:54] saying they haven't been paid, and they haven't been paid-
Andrew Gray: Yes. It gets pretty messy.
Nev Cottrell: Yes, it does.
Daniel Holden: Okay, so then, Nev, calling on your decades of experience here, what problems do you see developers getting themselves into, and maybe some ways they can avoid them?
Nev Cottrell: Well, obviously, they've got to employ GRC, and no issue at all.
Daniel Holden: It's all fine.
Nev Cottrell: That's right. Well, for your smaller projects, we don't get involved all that much, as I've said before, because they know the cost per box. But if you've got a decent project that you want a quality delivered on budget, the earlier we get involved, the better. And we can assist the project team in delivering an economical solution. And you can incorporate, as much as you can, hiring budget into the project without having a fat structure and all the finishes.
But one of the other problems that developers tend to have, if they are doing a standard contract, is if we get involved with the financier, it usually is up to them to sign the contract. And in some cases, we've had a situation where I've signed a contract with a set of trade budgets, front load, so to speak, and if they have someone on the dotted line, they're the trade budgets and you end up with a situation that Andrew was talking about. If you've got 20% too much in your structural trades, and if your structural trades are finished, and you've paid 20% too much for them, or there's 20% less in the budget to finish the work, and then if you get into trouble and you've got to finish the project, that's when unfortunately, the cost-to-complete is going over.
So if we have early involvement, if we can vet the, do an estimate, and vet the breakdown before it's signed off and we find now that on the bigger projects, the banks want signed off on their facility agreement until they get our report, our review of the cost, because if they say, "Look, this is front-loaded, our advice from our QS is that these have to be adjusted, and if you don't adjust them, we won't lend you the money."
So that's what we find on the bigger projects. Other issues is the same thing as the small builder with their administration. Not having a, if you have a poorly administered contract from the developer side as well, you can get yourself in trouble. Where builders are claiming things they shouldn't be claiming, but it's approved, or the superintendent's not getting back and saying, "No, we disagree," you have to [inaudible 00:40:08] this, and whatever. You really need a good administrator, an independent superintendent or someone who knows what they're doing.
Daniel Holden: On that point, particularly, we were saying, if your builders go under in the last 12 months, in Brisbane res-dev particularly, and like Andrew was saying before, you don't want them to have just claimed something they aren't actually due, and I think there are a few chatters, few guys claim lots of claims they could in the last month because they knew it was coming and there's just a bit of a cash grab for them to get what they can and get out so-
Nev Cottrell: Yes, we've had cases where the builders put in a ridiculous claim and we've heard stories of builders putting in a ridiculous claim and getting paid, and then they're gone. So that's the last thing you want to have done. I suppose that's why financiers get guys like us involved, to actually cover that risk. And the other thing that developers should be aware of is just understanding the lender's requirements, and what may be in their contract, that the lender might want to pay for, fixed materials and things like that. To be aware of what might put their hand in the pocket before [inaudible 00:41:35] equity.
Contingencies, having a ... The banks generally have a requirement of a 5% contingency. And the smaller projects, that covers variations and things, on bigger projects, it covers extra interest, if the project is delayed, and we generally find, or I find, that the bigger banks don't like us touching the contingency, and if the developers think that all the contingency, we'll spend that during the project, they might get a shock, that okay, this is $2 million worth of variations, you know, we'll pay $1 million out of contingency, but you've got to put your hand in your pocket for equity.
Andrew Gray: Yes.
Nev Cottrell: For equity. So it's understanding that as well.
Andrew Gray: Yes.
Nev Cottrell: But you usually find, if it's a bigger builder, and a bigger project, and a bigger developer, they usually know-
Andrew Gray: Have some smarts.
Nev Cottrell: -have some smarts.
Andrew Gray: I think a lot of developers look at QSs, and valuers as probably in the same boat. We're just a tick box that they have to go through to get their finance, but if we're involved more from the start, we can add value to protect them as well, to give them tips from design phase all the way through to try and help them protect. So we can add value as well, it's just sort of changing the thinking, sometimes.
Daniel Holden: Nev, on your point there about understanding the financier's requirement, one that we've seen, particularly in the past 15 months, since non-bankers become a very dominant source of funding is developers not realising that non-banks don't provide a GST overdraft. So when you have a finance approval for a bank, you got a $15 million project, you get an $11 million loan, they normally give you a $600 grand GST overdraft on the side of that $11 million loan, to cover the GST coming in and out, and they'll allow for two months, the biggest months to cover that. A lot of the non-bank lenders don't do that. They'll only pay the GST exclusive per claim. That means you've got to have your own slush fund to pay for that.
Andrew Gray: That, or you have to structure your contract directly to replace that. That, or well, look, these are our payment terms, our payment terms are 28 days, and you have to submit your claim before the end of the month so we can get our claim through, get the GST return, so we can actually pay the GST.
Daniel Holden: We've seen a few people get stuck with that. We did a piece on it a little while ago, but it's just worth taking that up, sharing in mind with people, that it doesn't automatically come with a GST.
So, next question, your role involves liaising between three parties, being the developer, the bank and the builder. There are often some pretty big dollars involved. There must be a bit of emotion at times, and definitely some ego. How do you manage that conflict and keep the peace?
Nev Cottrell: You don't really, there. You've got to understand each party's role, and their responsibilities, and remain independent, consistent, fair and reasonable. So if you can outline to everybody involved, what the bank's requirements will be, what the developer, generally the developer is hanging out there. The funders have their requirements. So they're the most important piece, because if you don't run by their rules, they just won't let you in the door. So it's the developer understanding what their limits are, and then it's having a contract that the builder knows what his responsibilities are, and what he can and can't claim for. And if everyone knows that and understands that, that's my clue from day one, usually you find it's pretty smooth sailing.
We've got a project at the moment with overseas lenders, and have got this thing about always paying the bill a week late. And when you've got a $7 million client sitting out there, a week is a long time. So we're, this current project, we've sort of got everybody lined up now, so we'll be sending our report to the bank probably a week earlier than normal, and saying, "Listen, these guys have to be paid by this time, and hopefully we don't have anymore hiccups," but sometimes, I've had situations where a bank won't pay a $7 million claim because it's a dollar out, rounding. So we've got to make sure that our guys have the 24 cents to make sure it rounds up or down. So everyone's happy.
Daniel Holden: So, what do you foresee as the next big game-changer or tech disrupter for your industry? And how do you think property developers and builders need to be preparing to deal with it?
Nev Cottrell: I think just sort of talking about the changing markets and what's coming up in the future already. We're starting to see a change obviously, the resi market is pretty saturated, so it's harder to get those smaller resi jobs off the ground with the bank finance. So we are seeing a bit of a push into a more boutique, high-end apartments, sort of one, two per level, higher price point, looking for occupiers, so a lot of developers are getting into that space and coming out with a really nice product that seems to be selling well.
Another area might be health, we're picking up a lot of health work at the moment. I guess with the population ageing, there's a lot of developers jumping on board that, and they have been for the past few years. And they're doing very well ahead of that, and that's just continuing to push further ahead.
Andrew Gray: Yes.
Nev Cottrell: And I guess another point to be aware of is the money coming in from Asia. There's a lot of projects we're dealing with, where we're acting as the client's QS and we'll ask them who's financing the project, where's the money coming from, and they'll just say it's all off-shore, it's straight from whether it's an individual or a syndicate, but that's sort of cutting out a section of the finance over here, so there's a lot of money coming in from Asia, and I think that's only going to increase. Australia is a very desirable spot for that, to leave their money.
Andrew Gray: It's very stable.
Nev Cottrell: Yes. So, they're looking at that as a good investment, so that's just another thing we have to be aware of, moving forward.
Andrew Gray: Hm. Yes, I'm off Sunday on a 10-day trip to Asia, and that's my fifth trip to Asia in 15 months. It's just now part of the regular routine, that we've got to be over there and looking for more pockets of money and investors.
Daniel Holden: [crosstalk 00:48:20] or investors?
Andrew Gray: Just investors, yes. Finding investors, talking to investors, telling them about Australia, a lot of them have invested in Australia already. And telling them about growth-start investment. Telling about the different positions in the capital stack, and how they can invest, and what the returns are. So we're being pretty active there in the last 18 months. And actually, to that end, we're announcing next month, probably by the time this podcast goes live, we're announcing that we're opening an office in Hong Kong.
So we've got a full-time presence there, just to meet with hedge funds, sovereign wealth funds, high-net wealth investors, and just help facilitate that investment into Australia.
Typically, as debt, were not there trying to find new developers to come here and develop high-rise buildings, we're over there trying to facilitate people or companies to invest into mortgages, traditionally into real estate development in Australia. So yes, I agree, Asia is going to be a big part in the debt space in Australia for the years to come. If you think about pre-GST, we had a very deep and healthy non-bank mortgage space, made up of the lenders that we know no longer deal with because they're gone. But a lot of that was because they borrowed short and lent long. So they borrowed short from an investor, [inaudible 00:49:42] investor, gave them their 8% [inaudible 00:49:44], and told them that if they wanted their money back, they could have it by the weekend.
And then they lent long, lending to a developer on a 12-month, 15-month long term, and they can't get that money back out of that project, because it's only half finished. So borrowing short, lending long as a means of funding construction projects, is proven that it didn't quite work, and can be well-managed, but it can easily go wrong. Values drop, investors want their money back, it very much falls apart. Finding that sticky investor, who is happy to stay in for 15 months, even if the market turns a little bit, is definitely the challenge for our mortgage market. I think Asia holds a lot of answers for that, quite frankly. Hopefully.
Daniel Holden: So as of March 2017, where do you see the current state of the market, you said before you've got a bit of a feeling that it might be at the top, in terms of pricing and that's a demand on jobs that are coming through the machine. So I guess, where is your gut feel that the market is heading now, in terms of pricing, and how that will affect building costs in the coming year?
Andrew Gray: I think it's pretty obvious, the way the media has made it up the last 12 months, that the resi boom is going to come to an end at some point. Despite what's going on down south, that seems to just be pushing ahead, but up here, we think the resi market is coming close to the end, obviously there's a lot of big projects in the park [inaudible 00:51:15] that are under construction, that won't be completed for the next 12 to 18 months, so I think once those settle and close out, I don't think there's going to be a big push for any more resi developments for a little while. There will obviously still be some, but not in the same capacity as we've seen in the last couple of years.
I think the developers are obviously going to start looking at other industries, different options, just to [inaudible 00:51:43] banking, or to wait two or three years, see what the market does, and then come back, place themselves in a good position, once the resi cycle comes back, to push forward, and make good profits there.
Daniel Holden: Where does that leave your view of the marketplace in, say, 12 months time, and are there any changes that might influence how our business is delivered, in say 12 or 24 months time?
Andrew Gray: I think that's sort of the same, if a lot of these developments don't go forward, that would obviously put quality surveyors in a space where there's less work to go around. The market between ourselves will be more competitive. We've always thought it's key to take care of your clients, develop those relationships, treat them more on a personal level, rather than just as a client. We spent the time to build those relationships, then hopefully, when times do get a bit tougher, they won't forget about us. And they will still have work to go on with. And also, as we spoke earlier, about the different areas we've diversified into, not just relying on resi, but government work, resources and infrastructure, all those different avenues, placing yourself well now, before resi comes off, and before they take off, I think that's key.
We spend a lot of time positioning ourselves to be in a great spot when market changes happen.
Nev Cottrell: Approvals, too, they drag on and on, so if you've got well-established clients, we've got good clients, they know the projects are actually, take two years to actually get from beginning to end, get started. So we're still working on projects like that. Even though they're not being built, you've still got to have the planning done. So when it does, when it is time to move again, you're not going, "Oh, we've better get back into development," and then you've got a two-year hiatus, where you're trying to get design.
Andrew Gray: Yes, yes.
Nev Cottrell: But yes, there's always this settlement risk that we're going to have in the next year, 18 months on all these clients sort of up in the air, and with off-shore purchases, are they going to settle, other people in the market, saying, "Oh, we just won't do anything, we'll see how they all, how everything settles," and the [inaudible 00:54:17] still there. You'll have projects that will need to get heated up and started, but they take longer to eventually get.
Daniel Holden: Okay. The crystal ball question, well, I guess the lookback question as far as what you've learned today, and this is one of my favourite questions, is what would you say to a younger you about navigating through the game of property development?
Nev Cottrell: Well, if it was Andrew, younger him is still walking around in the dark.
Andrew Gray: I'll let Nev take this one.
Nev Cottrell: But basically, I say to the guys, if we're going into a meeting, "Pay attention. Listen carefully. Don't speak unless you've got something relevant to contribute. If you ... you don't have to [inaudible 00:55:06] yourself by talking to me. It's better to listen. You've got two ears and one mouth."
Daniel Holden: Yes.
Nev Cottrell: Hasten slowly, establish to maintain a robust business model, I think that's what we've done in our organisation, when Stewart and I and Graham kicked off, we always knew that we liked to develop the boys within the organisation. It keeps, [inaudible 00:55:35] keep good people in the company. And I've worked in three [inaudible 00:55:41] bank firms, and you get a good team, and then someone wants to move on or develop themselves professionally, and they basically had to leave, whereas, we said no, we've got good people, we'll bring them into the company, bring them through the company, what they're doing, don't get greedy, don't try to make all your money in the first development, or ... all things take time. As a developer, surround yourself with skilled consultants, advisors, and in this day and age, contractors. Build relationships with contractors.
Daniel Holden: Yes.
Nev Cottrell: And gather the knowledge from your peers, through ... learn from your mistakes, learn from their mistakes. If you take that onboard, nice and slowly, I think you'll get on. I've always thought that, trying to have a mentor, and just learning from them, someone with more experience, like, the amount you can earn and apply in your own practises is perfect. Trying to soaking in as much as you can from more experienced people. And we do that, we're doing that at the moment with some of the CAs, and some of the guys, it's like a typewriter. I remember one of my clients, one of my project management clients, tell me he was thrilled because we were trying this guy out, and then moved him on because he was worth too much to be working on the smaller projects.
But we've got systems in place for estimating post-contract systems, as well, we're implementing on major projects, and the young CIs are sort of taking that on board. And they learn as they go through, because skilled administrators, I know when Lynn Lease were sort of champions of training and doing all that, a lot of these companies that have grown over the years, haven't spent the time teaching the younger guys, when we're doing our payments, we actually help them, as well.
Daniel Holden: All right. Some sage advice there, from an industry veteran. So get your notepads out, listeners, that's very good. The fun question, to finish off, what's the best bottle of wine recently?
Nev Cottrell: Oh, this is an easy one. I had my 60th last year, and we had some [inaudible 00:58:10] 128 that I was, that everyone was drinking, and then a mate of mine asked me to a barbecue, and so I grabbed a couple of bottles out of a box, and took them to the barbie, and I didn't have my glasses on, so I just grabbed these red-top bottles, and then we were having sausages and he brought out the decanter, and I said, "What's that for?" And he said, "Oh, your 2014 707 you brought, mate." So I had a $500 bottle of wine with sausages and a steak.
Daniel Holden: You're a generous man. That sounds like a very tasty drop. All right, guys, well, I've had a lot of fun today, and good to have an update from the front line on the construction side and the quality surveyor side, and I guess get a little bit more comfort that hopefully prices are curbing, and hopefully a few more projects stack up in the future. Thanks so much for your time, and talk to you soon.
Nev Cottrell: Always.
Andrew Gray: Thank you.