Project Finance

06/05/2011

By Chris Whittington, Consultant and Head of Construction & Engineering. First published in Construction News Magazine in May.

Given the current economic crisis, coupled with high profile casualties such as Rok and Connaught, whether companies have sufficient assets to take on large projects is a valid concern.  This applies to employers/developers as well as contractors - employers need their chosen contractor to be able to complete their works; contractors (and sub-contractors) want assurance they will be paid.

Clearly funding is available in the private sector - British Land recently announced £3bn of available funds on top of £1.5bn already committed.  It's £290m 'Cheesegrater' tower in the City is moving forward.  Land Securities announced a joint venture with Canary Wharf last October for the 37 storey 'Walkie Talkie' building at 20 Fenchurch Street.  The Shard, unfinished but already Britain's tallest building, continues apace.

The major contractors appear to have the necessary financial strength to take on major projects, whether alone or in joint venture (e.g. Morgan/Vinci/Bachy on the Lee Tunnel for Thames Water).  Availability of sufficient assets can be more problematic for smaller developers and contractors - despite being "open for business" (as they are constantly telling us) in many cases banks are proving reluctant to lend.

Where the financial position is less certain, what security is available?  For employers, the 'usual suspects':

  • performance bonds, typically for 10% of the contract;
  • parent company guarantees;
  • collateral warranties or third party rights.

For contractors (of any tier) security of payment is the biggest concern.  Contractors  could consider protecting against employer insolvency or default by requesting:

  • an escrow account - the employer pays into a joint account (in the names of the employer and the contractor/the contractor's lawyers) either regular payments, or a lump sum to be paid out if the employer defaults;
  • alternatively a project bank account ('PBA') which then allows direct payments to be made by a bank to the contractor, sub-contractors and suppliers;
  • advance payments if plant or materials need to be paid for up front (for which an on demand advance payment guarantee will likely be required by the employer in return);
  • payment without deduction of retention (an on demand retention bond will be required in exchange);
  • a parent company guarantee from the employer;
  • front loaded stage payments.

In the current 'buyer's market' the extent to which an employer may agree to provide these is debatable, but as the saying goes "If you don't ask, you don't get".