When it comes to development projects, all completion dates are important but some are more important than others.
There are obvious examples of projects where completion by a specified date is fundamental, such as Olympic Games venues or football world cup stadia. Development of student accommodation projects may not be quite so high profile, but there are still significant financial and reputational consequences for a developer who fails to complete on time.
The most obvious critical date for a developer constructing student accommodation is ensuring that the works are completed by the start of the academic year, allowing an appropriate period to deal with snagging and finishing so that the rooms are ready to be occupied before the start of term.
But the completion date is not the only critical date. To a developer, operator or investor the marketing timetable will also be fundamental to maximise lettings. A completed marketing suite must be ready at the appropriate time to ensure that the development can compete with other new or existing development schemes available in the relevant local student market. Building contracts and development agreements for student accommodation should therefore often contain specific provisions for early completion of a marketing suite to enable the development to be marketed. There will also be keen interest to ensure that the works can be seen to be progressing well so that students visiting the site prior to completion will not have concerns about the accommodation being ready in time for the start of term.
But what if the completion dates are missed? The costs to a developer of late completion can be extensive, and may include the costs, not to mention logistical challenges, of finding alternative accommodation for each student and the costs of moving the students once the works are complete. There is also the added risk that students may opt to move to alternative accommodation, leading to empty rooms for the whole or part of that academic year. The contractual arrangements between the developer and the investor may then oblige the developer to compensate the investor for the resulting loss of income, pursuant to damages provisions or an income guarantee. In a forward funding arrangement, the contractual terms may also provide for the developer’s profit payment to be linked to lettings achieved and therefore diminished as a consequence of the delay.
If there is delay due to a cause which is the contractor’s risk under the building contract, then most building contracts will provide for the developer to levy liquidated damages against the contractor. However it is unlikely to be commercially viable in most cases for a developer to seek to pass the full cost of delay to a contractor, as most contractors would not be able to accept such high losses. Alternatively, the developer and contractor could seek to agree general damages for delay. This would require the developer to prove their losses after the event and seek to recover these costs through the courts; again, taking the full risk of the economic losses is unlikely to be acceptable to a contractor. The developer is likely to need to accept any losses which cannot be passed down to a contractor through liquidated damages.
In addition, not all delays under a building contract will be the contractor’s responsibility, for example, where delays are caused by force majeure events which are outside the remit of anyone’s control. It may be possible to take out insurance which would cover delay related losses arising from insured events, albeit that such insurance is likely to be expensive, but what can a developer otherwise do to mitigate such risks?
A developer should always monitor progress of the development against the agreed programme so that any potential delay issues are addressed at the earliest possible stage. Some standard form construction contracts such as the NEC3 suite require the contractor to give early warning notices if an event occurs which may lead to delay, but similar mechanisms can be built into other forms of contract if appropriate.
A building contract might also allow for acceleration of the works, so that the developer has the ability to instruct the contractor to speed up the works to meet an agreed date, although this of course will come at a cost to the developer. In conjunction with, or in addition to acceleration, a bonus for completion of the works by a target date, subject to adjustment, could also be agreed to incentivise the contractor to complete the works earlier than would otherwise be the case.
Alternatively, or in addition to the above, a developer could instruct the re-sequencing of works so that elements which are not critical to occupation are deferred; this is likely to have time and cost consequences.
It would be prudent to allow for an appropriate amount of ‘float’ in a construction programme, ensuring that there is sufficient time to deal with unforeseen delays and snagging. This could either be by way of an extended construction period, perhaps with a liquidated damages ‘holiday’ built into the building contract such that the building contractor is not immediately liable to pay damages in the event of delay.
Of course, any extension to the project needs to be balanced against the costs to the developer that would arise from the works completing too early, such as having to provide security for an unoccupied building for an extended period of time.
Ultimately, while the developer may be able to recover some financial losses for late completion, the key to ensuring success lies in sound forward planning and strong project management.