In a previous article, we explored the intricacies of due diligence and highlighted its importance. Today, we’re shifting our focus to the pitfalls of inadequate due diligence and the essential role of construction risk management. Want to follow along? Let’s get started!
Picture this: you’re going on a solo backpacking trip across another continent. Would you set off without a map, a plan, or knowledge of the local customs and languages? Or would you spend time preparing an itinerary, mapping out your route, and putting together a budget? Much like planning this grand adventure, commercial construction requires strategic thinking, foresight, and most importantly, thorough preparation. This is where due diligence comes in.
Think of due diligence as your travel guide—it helps you navigate the maze of critical information that separates success from failure. When executed properly, due diligence serves as your early warning system, steering clear of potential legal, financial, and operational setbacks to pave the way for project success. It examines every corner of the project, from legalities and finances to site surveys and zoning laws.
However, some developers might be tempted to skip a few sections or disregard this guidebook completely, hoping to save time or money. But just as in planning a trip, hasty decisions in construction can lead to missed flights, unexpected obstacles, or costly mistakes.
Due Diligence in Commercial Construction
Due diligence is a non-negotiable prerequisite in commercial construction. Its components are:
- Physical Surveying: This is like researching the terrain and climate of the countries you’ll be visiting on your trip. It involves checking the soil condition, evaluating the topography, and understanding the overall suitability of the land for construction. Just as your travel plans would consider the weather and geographical factors, this information is crucial to designing a structure that is stable, durable, and aligns with the surrounding environment.
- Building Inspection: This is similar to inspecting your backpacking gear before you embark on your journey. If you’re working with an existing building, it’s important to check its structural condition. This includes reviewing the building’s mechanical, electrical, and plumbing systems.
- Financial Assessment: Here, we evaluate the project’s budget, investigate the sources of funding, and evaluate the potential returns. Much like a savvy traveler would assess the feasibility of their travel plans, this process helps to decide if the project is economically viable and profitable in the long run.
- Zoning Compliance: Each region has specific zoning laws, and all projects must comply. This step is like checking visa requirements for each country you plan to visit. It ensures the proposed construction aligns with local regulations regarding the type of structures allowed, building heights, density, and so on.
Here, due diligence can be seen as your project’s ultimate travel guide, providing a clear roadmap to help you navigate through potential hurdles and guide you towards successful project completion. It assists in spotting potential challenges early on, equipping you with the knowledge to devise effective strategies to overcome them.
The Risks of Cutting Corners in Due Diligence
The phrase “cutting corners” usually means skipping essential steps or doing subpar work to save time or money. However, when applied to due diligence, this approach doesn’t just cut corners—it cuts into the foundation of the project’s success.
Consider the role of physical surveying. Inadequate physical surveying could result in unexpected site conditions, like unstable soil or hidden utilities, which could severely impact the project’s design, cost, and schedule. Imagine half-way through construction, you discover that the ground can’t bear the weight of your planned structure. The costs of remediation, not to mention a potential construction redesign, can be staggering, easily outweighing any initial savings from skipping out on the survey.
Moreover, a lack in due diligence can overlook important environmental and zoning compliance checks. A project’s environmental impact and adherence to local zoning laws are not just “nice-to-haves”; they’re requirements. Ignoring them could lead to expensive fines, project hold-ups, and severe reputational damage.
Omitting essential steps or rushing through due diligence doesn’t save time or money; it creates a ticking time bomb of potential problems waiting to explode. Upon completing due diligence, you may even discover that your business is not viable for the long term. Thus, investing in due diligence early on is not just best practice, but essential for your project.
The Role of Construction Risk Management in Mitigating Risks
Now, you might be wondering, what can I do to manage all these risks? Well, in addition to conducting comprehensive due diligence, practicing construction risk management can help you navigate potential hurdles.
When done correctly, this process can steer your project clear of obstacles that could hinder its success. It consists of four main parts:
- Risk Identification: This is where you keep an eye out for any challenges or risks you may encounter during the construction of your project. Whether it’s a supplier going out of business, regulatory changes, or unforeseen site conditions, this phase spots them all.
- Risk Assessment: This is the where you gauge the likelihood and potential impacts of these risks.
- Risk Response Planning: Now that you’ve identified the risks and their potential impact, it’s time to build your defenses. This is where you develop strategies to dodge, counter, or even eliminate potential risks.
- Risk Monitoring and Control: Finally, it’s important to keep track of these risks throughout the project lifecycle and adjust your strategies as necessary.
To give you an idea, let’s consider some common examples.
Financial risks can include cost overruns or unexpected funding disruptions. To prevent these threats, you can implement regular financial health checks, stringent budget controls, and set aside a contingency fund. For example, an unexpected rise in the cost of materials can be addressed by having pre-negotiated contracts with suppliers that lock in prices for a certain period.
Environmental risks could include unforeseen soil contamination. To mitigate these issues, rigorous environmental assessments and surveys can be conducted before construction begins. Should contamination be discovered after the project has begun, having a qualified environmental remediation contractor on standby can expedite the cleanup and minimize delays.
How Construction Risk Management Complements Due Diligence
Coming back to the idea of planning a successful backpacking trip, diligence would be your compass and map, providing you with valuable information about the terrain, potential roadblocks, and the most efficient route to your destinations. On the other hand, construction risk management is like your survival kit, using the information gathered from your map to help you prepare and respond to any obstacles or changes you may encounter along your journey.
In commercial construction, due diligence and construction risk management are two sides of the same coin, each complementing and strengthening the other. Due diligence lays the groundwork, providing an in-depth understanding of the project. This information is then used for construction risk management, helping to identify potential risks, assess their impact, and formulate effective response strategies, contributing to a more resilient construction project. Overall, due diligence, when paired with a robust construction risk management strategy, forms a comprehensive safety net that ensures your project achieves the best possible outcomes.
Conclusion
Cutting corners during the due diligence process might seem like a shortcut to efficiency, but the reality is far from it. Skipping over key details and steps can eventually weigh down your budget, schedule, and peace of mind. In commercial construction, the thoroughness of your groundwork determines not only the project’s success, but its cost-effectiveness as well.
At SCGWest, we bring years of expertise and a commitment to detail in handling all aspects of due diligence. Keep in mind that the true cost of your project isn’t confined to your initial budget. It also encompasses potential pitfalls and delays, both avoidable through exhaustive due diligence and risk management. So, don’t let corner-cutting today lead to dollar-draining tomorrow. Contact us to pave your way to a successful, cost-effective project.
