Financial health of builders

[Topline 1]

Hi, just want to check how you guys check that the builders you appoint are financially sound? Even if you get their financial statements, you cannot tell how many jobs they currently are doing. Especially during these C-19 times, there could be delays in the construction eg due to manpower and hence the risk to your project stretches longer. Is there insurance for protection against the builders going bankrupt?

[snoozee 97]

under BCA e-services, you can go to permit to start work option. slowly go through the months and years and look for your builder. from there you will be able to see how many big projects (which require BCA approval) they are handling at this moment

[IceEyez 4]

On 7/1/2021 at 1:23 PM, Topline said:

Hi, just want to check how you guys check that the builders you appoint are financially sound? Even if you get their financial statements, you cannot tell how many jobs they currently are doing. Especially during these C-19 times, there could be delays in the construction eg due to manpower and hence the risk to your project stretches longer. Is there insurance for protection against the builders going bankrupt?

When calling for tender we typically advise to do the following:

1) Request for the audited financial records to see their financial health.
2) Ask them to submit their company portfolio/resume showing how many jobs they are working on and their list of completed projects. 
3) Arrange for viewing of their completed projects - best is if the house owner is around. You can then speak with them to get a sense of how the contractor is like.
4) If you know what other projects they are working on - you can try calling the Architect-in-charge to get a sense of how they are. Are they endlessly delaying the project? Are they responsive? 


As for what kind of protection there is. Assuming there is a standard form of building contractor (E.g SIA building contract), there should be a few things that can protect you:

1) Rentention sum. This means a certain percentage of the monthly progress claim is withheld (e.g 10%) and not paid out. Half of this retention sum is only paid out when construction is certified to be complete. The other half is released upon end of the 12 months maintenance period (a period where contractor is liable to make good any defects that surface).

2) Performance bond - this is like a insurance purchased by the contractor from insurance companies or banks. Contractors charge a cost for this which pays for the premium chaged by the insurance company. Typically the performance bond claimable amount is based on 10% of the contract sum. If the contractor defaults (terminates contract, goes bankrupt etc.), you can call the bond. This is a on-demand bond meaning that the insurance company has to cough up the cash without any questions asked upon demand by the owner. How the insurance company settles/sues the contractor it is between themselves.


If it is a design and build project/contractor where you've already paid up front a large deposit amount, without any proper building contractor then your options are limited. Make sure you select VERRYYY carefully!

[3Cube 9]

On 7/2/2021 at 4:03 PM, IceEyez said:

When calling for tender we typically advise to do the following:

1) Request for the audited financial records to see their financial health.
2) Ask them to submit their company portfolio/resume showing how many jobs they are working on and their list of completed projects. 
3) Arrange for viewing of their completed projects - best is if the house owner is around. You can then speak with them to get a sense of how the contractor is like.
4) If you know what other projects they are working on - you can try calling the Architect-in-charge to get a sense of how they are. Are they endlessly delaying the project? Are they responsive? 


As for what kind of protection there is. Assuming there is a standard form of building contractor (E.g SIA building contract), there should be a few things that can protect you:

1) Rentention sum. This means a certain percentage of the monthly progress claim is withheld (e.g 10%) and not paid out. Half of this retention sum is only paid out when construction is certified to be complete. The other half is released upon end of the 12 months maintenance period (a period where contractor is liable to make good any defects that surface).

2) Performance bond - this is like a insurance purchased by the contractor from insurance companies or banks. Contractors charge a cost for this which pays for the premium chaged by the insurance company. Typically the performance bond claimable amount is based on 10% of the contract sum. If the contractor defaults (terminates contract, goes bankrupt etc.), you can call the bond. This is a on-demand bond meaning that the insurance company has to cough up the cash without any questions asked upon demand by the owner. How the insurance company settles/sues the contractor it is between themselves.


If it is a design and build project/contractor where you've already paid up front a large deposit amount, without any proper building contractor then your options are limited. Make sure you select VERRYYY carefully!

Clarification on Retention Sum"

There is a limit on this. The mechanism is as follows:

1) Every monthly payment, Ten percent is deducted from the accumilative total claim.

2) When the deducted amount reach the limits as spelled out in the SIA contract's appendix, no further deduction will be made.

Example"

Assume Contract Sum: $1 Million

Contract Period: 10 months

Retention: 10% (Limited to 5% of Contract)

 

1st Progress Payment:

Accumilative Claim: $100,000.00

Retention: $10,000.00

!st Claim Payment: $90,000.00

 

3rd Progressive Payment:

Accumilative Claim: $330,000.00

Retention: $33,000.00

Less: Claim Paid to date: $200,000.00

3rd Claim Payment: $97,000.00

 

 

5th Progressive Payment:

Accumilative Claim: $600,000.00

Retention: $50,000.00 (Limit of Retention)

Less: Claim Paid to date: $400,000.00

3rd Claim Payment: $150,000.00

 

In the example, The $50K will apply to all claim from 5th Claim onwards until the final account.

Half of this will be release upon TOP completion with final half upon DLP (Contractually known as Defects Liabilities Period as spelled out Appendix in SIA Conditions of Contract)

[snoozee 97]

just to add on for retention sum, if the owner is taking construction loan to finance the construction, the bank has a say on how much and when the retention sum can be released to the builder. so it does not mean that upon TOP, half of the retention sum will be automatically released to the builder. owners who are taking bank loans to finance the construction has to read all the terms and conditions from the bank carefully.

[3Cube 9]

On 7/2/2021 at 4:03 PM, IceEyez said:

When calling for tender we typically advise to do the following:

1) Request for the audited financial records to see their financial health.
2) Ask them to submit their company portfolio/resume showing how many jobs they are working on and their list of completed projects. 
3) Arrange for viewing of their completed projects - best is if the house owner is around. You can then speak with them to get a sense of how the contractor is like.
4) If you know what other projects they are working on - you can try calling the Architect-in-charge to get a sense of how they are. Are they endlessly delaying the project? Are they responsive? 


As for what kind of protection there is. Assuming there is a standard form of building contractor (E.g SIA building contract), there should be a few things that can protect you:

1) Rentention sum. This means a certain percentage of the monthly progress claim is withheld (e.g 10%) and not paid out. Half of this retention sum is only paid out when construction is certified to be complete. The other half is released upon end of the 12 months maintenance period (a period where contractor is liable to make good any defects that surface).

2) Performance bond - this is like a insurance purchased by the contractor from insurance companies or banks. Contractors charge a cost for this which pays for the premium chaged by the insurance company. Typically the performance bond claimable amount is based on 10% of the contract sum. If the contractor defaults (terminates contract, goes bankrupt etc.), you can call the bond. This is a on-demand bond meaning that the insurance company has to cough up the cash without any questions asked upon demand by the owner. How the insurance company settles/sues the contractor it is between themselves.


If it is a design and build project/contractor where you've already paid up front a large deposit amount, without any proper building contractor then your options are limited. Make sure you select VERRYYY carefully!

My opinion on Performance Bond:

This is the assurance given to the employer (ie: property owner). In my past experience, there are numerous cases where owner runs out of budget & fails to pay which in turn affects the project cashflow & the contractor becomes the financier instead. This almost always ends in messy court proceeding.

It's a double edge sword.

In most of my own company's turnkey job, the alternative way to assure the owner can be to propose a higher retention sum in lieu of the Performance Bond. This way, the builder do not need to set aside capital for collateral with the Insurer to secure the bond. The added retention on progressive completed works serve as assurance for the owner. This ensure all finance are fully focus on procuring the materials & labors to complete the works in timely manner.

[IceEyez 4]

37 minutes ago, snoozee said:

just to add on for retention sum, if the owner is taking construction loan to finance the construction, the bank has a say on how much and when the retention sum can be released to the builder. so it does not mean that upon TOP, half of the retention sum will be automatically released to the builder. owners who are taking bank loans to finance the construction has to read all the terms and conditions from the bank carefully.

Retention sum is not released upon TOP. Half is released upon issuance of Completion Certificate and the remaining half upon maintenance certificate. Just to clarify, TOP and completion certificate are completely different things. Issuance of TOP is determined by BCA while Completion is certified by the Architect. It is possible for the house is completed, but TOP not obtained and also the other way around (i.e TOP obtained but house not yet complete).

Upon issuance of completion certificate, half of retention sum has to be released to the builder. There is a stipulated time frame for owner to pay up according to the SOP (Security of Payment Act), once the Architect certifies the release of the money. It is a binding contract between owner and contractor. The bank cannot insist that contractor not be paid.

Where the money comes from, whether from your own pocket first or to be directly disbursed by the bank through the loan is a separate matter. 

[Topline 1]

Heard that sometimes, the contractors already mark up their pricing such that they dont need the remaining % (is it 5%?) retained to fix defects. So they dont care about fixing repairs? Is it possible to ask for more than 5% to be retained?

[IceEyez 4]

1 hour ago, Topline said:

Heard that sometimes, the contractors already mark up their pricing such that they dont need the remaining % (is it 5%?) retained to fix defects. So they dont care about fixing repairs? Is it possible to ask for more than 5% to be retained?

Typically, it is unlikely that the cost of rectifying the defect is same or more than then remaining retention sum.

For example 2.5% of a million dollar project is $25k. Unless the issue is something extremely major (e.g. entire ground slab water proofing failed resulting in ground water seeping in and say staining the entire living room/dining room marble which require them to hack away all the finishes and redo waterproofing/slab + finishes, it is unlikely a contractor will just give up on the 2.5%. After they have already spent so much time/money to construction the house, only to destroy their reputation (and thus future potential profits) to avoid doing some minor rectification work?

In the context of calling for a proper tender where there are 3-5 contractors bidding for a project, it doesn't work in their favor to "mark up their pricing so that they don't need the remaining 5%". Actually tender is a interesting game - contractors are all trying to guess the sweet spot of maintaining profit margins, while being cost competitive enough to get the job. If the tenderer enters the tender with that mindset, do you think they will be competitive?

Unless of course their intention is to just get the job first, cut as much corners as possible and build it at the extreme low price, leave the project full of problems and defects and abandon it after completion hahaha 🤣. These guys can expect to do just a single job and close down their company, destroy whatever reputation built up over the years, which doesn't make sense. 



Anyway, 10% monthly retention per progress claim (up to max of 5% limit) is the standard amount recommended in the industry. Yes it is possible to increase it, especially if in lieu of performance bond etc (example to 15% per month to max 10% cap). But by increasing the retention sum, you are limiting the contractor's cash flow, which in turn they balance out by quoting you an overall higher figure to maintain profit/risk ratios.