Simon Betty, head of credit at Wellesley Finance, explains the importance of appointing the right contractor…
CHOOSING THE RIGHT contractor is vital to the success of a property development project. The last thing any property lender wants to hear is that a project is taking much longer than expected, or that work on site has ceased because the contractor has financial issues or even worse, has gone into administration. This is why Wellesley has made it a priority in their assessment of potential development loans, that an appropriate contractor will always be appointed.
Wellesley’s head of credit Simon Betty ensures a comprehensive approach is taken to the assessment of contractors. Importantly, he is adamant that contractor selection should never be driven purely by cost, adding that “the cheapest is frequently not the best.” In Betty’s experience, at the point a proposal is put to Wellesley, developers will usually have a shortlist of potential contractors, if they have not appointed one already.
These may be contractors that they have worked with in the past, or recommendations from a third party. “The first thing that we look for is whether or not the contractor has appropriate experience of the size and nature of a particular project,” says Betty.
“For example, if it is a high-rise development in Manchester providing 100+ apartments – has the contractor satisfactorily completed a scheme of this nature before? If they haven’t, that is a warning sign.” It’s also important to look at the type of construction, Betty adds. For instance, if it is modular, does the contractor have experience of this type of construction?
Then Betty goes even further, looking into the contractor’s past performance and set-up, including the reliability of their supply chain, the procurement method, and their health and safety record. “I was recently looking at an application that was submitted by a lender – I Googled the contractor and found that they had a recent conviction for a significant health and safety oversight,” he explains. “That’s the sort of thing that should cause some concern and should be investigated further.” Concentration risk is also a big issue for the lender.
“If a contractor has a number of projects on the go at one time, we have to determine if they can actually cope with the new contract, both in terms of manpower and in terms of cashflow,” Betty says. “I had one situation recently where the contractor had taken on too many contracts and was not able to cope with them all.
And then you find that you can potentially be releasing money to the contractor but it’s not all perhaps going where it should go, and people on site are not being paid.” Next, Betty does some due diligence into the contractor themselves – what their balance sheet looks like, and whether they have sufficient cash reserves.
Undertaking such due diligence can be time consuming but the results speak for themselves. Over the past four years, Wellesley has reported zero losses and zero non-performing loans – a testament to the value of taking the time to conduct thorough due diligence before any investor money changes hands.