Capital Projects COVID-19 response - Deloitte
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Capital Projects COVID-19 response
Capital Projects
Contents
Context 4
Considerations for capital project sponsors 10
Considerations for contractors 14
3
Context
Total coronavirus cases in the UK
-
Figure 1.
5,000
10,000
15,000
20,000
25,000
15th February
16th February
17th February
18th February
19th February
20th February
21st February
22nd February
23rd February
24th February
25th February
Source: Worldometers/Deloitte Real Estate
26th February
27th February
28th February
29th February
1st March
2nd March
3rd March
4th March
5th March
6th March
7th March
8th March
9th March
10th March
11th March
12th March
13th March
Total coronavirus cases in the UK
14th March
15th March
16th March
17th March
18th March
19th March
20th March
21st March
22nd March
23rd March
24th March
25th March
26th March
27th March
28th March
29th March
30th March
5
Capital Projects
Capital Projects Capital Projects
UK business resilience - output index by sector UK commercial property investment volumes
Figure 2. Figure 3.
12,000
65
10,000
60
8,000
55
£ million
6,000
50
4,000
45
2,000
40
-
2018 2019 2020
35
* as of 30th March 2020
Mar-20*
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
Dec-19
Sep-15
Sep-16
Sep-17
Sep-18
Sep-19
Nov-14
Mar-15
Nov-15
Mar-16
Nov-16
Mar-17
Nov-17
Mar-18
Nov-18
Mar-19
Nov-19
Feb-15
Oct-15
Feb-16
Oct-16
Oct-17
Feb-17
Feb-18
Oct-18
Feb-19
Oct-19
Feb-20
May-15
May-16
May-17
May-18
May-19
Aug-15
Aug-16
Aug-17
Aug-18
Aug-19
Apr-15
Apr-16
Apr-17
Apr-18
Apr-19
Jan-15
Jun-15
Jan-16
Jun-16
Jan-17
Jun-17
Jan-18
Jun-18
Jan-19
Jun-19
Jan-20
Jul-15
Jul-16
Jul-17
Jul-18
Jul-19 January February March* April May June July August September October November December
Services Manufacturing Construction No change
Source: IHS Markit / Deloitte Real Estate Source: Property Data/ Deloitte Real Estate
*UK contruction PMI for March 2020 not yet available
6 7
Capital Projects
UK all-property forecast
Figure 4.
2019 2020 2021
Rental value growth (%y/y) -0.6 -3.2 2.4
Equivalent yield (%) 5.6 5.9 5.8
Capital value (%y/y) -3.3 -9.4 4.9
Total returns (%y/y) 1.2 -4.6 9.8
Source: MSCI/Capital Economics
8 9
Capital Projects
Considerations for capital COVID-19 is generating a range of risks and challenges to planned and
in-flight projects
project sponsors In these rapidly changing and uncertain times every project sponsor should be considering the following matters as potential response
actions. Furthermore, some actions may lead to the ability to realise opportunities in the recovery phase.
Cash Flow and Liquidity Management Manage Non-Critical Expenditure
• Review and ensure that you fully evaluate and understand any • Reduce discretionary/expansionary capex in the short term;
cost risks;
• Implement stricter project change controls to ensure variations
• Review both long term and rolling 13 week cash flow forecasts and spend are managed robustly;
based on any identified risks and identify steps required to
• Ensure that the project team understands the revised project
maintain short term liquidity;
change controls and that they are liaising closely with the finance
• Identify what project critical expenditure is required and also function;
what can be deferred in the short term;
• Review delegated authority levels; and
• Negotiate revised payment terms where possible;
• Consider whether it is commercially viable and possible to
• Consider drawing down on liquidity facilities irrespective of suspend or terminate any non-critical contracts.
immediate cash need;
Third Party Supplier Risk
• Review and, if necessary, adjust any other finance drawdown
• Assess the financial strength of key third party suppliers;
arrangements that are in place; and
• Develop contingency plans where concerns exist about third
• If experiencing liquidity constraints or pressure on your banking
party suppliers;
covenants consider the following initiatives:
• Review any performance, retention or advance payment bonds
– keep creditors well appraised of your business performance;
and contact the surety as soon as there is a problem with the
– give ample warning of expected covenant breach and likelihood supplier;
of request for waivers;
• Determine which suppliers are mission critical for project success
– ensure any ask of creditors is well formulated and specific, such and if appropriate consider agreeing special terms to help
as: support them, such as:
– waiver combined with roll-up of interest expense; – advance payments;
– rescheduling of principal payments due; and
– forward ordering;
– access to incremental sources of liquidity.
10 11
Capital Projects Capital Projects
– payment on order; and – Loss and expense; including building and refreshing Base, Upside and Downside governance processes considering impacts from new ways of
scenarios with mitigating strategies; working, and to reflect level of effort on projects; and
– pre-payment. – Force majeure;
• Consider alternative project strategies, for example: • For projects at the stage of seeking town planning approval
• Have regard to government guidance if relevant; for example – Frustration; and
consider alternative approaches to maintain momentum, for
Procurement Policy Note 2/20 on “Supplier Relief due to – Suspension;
– Prevention. example appropriate use of technology to enable stakeholder
COVID-19”.
– Termination; consultations.
• Seek to negotiate new contract terms to improve positions and
Mitigation of Financial Losses
reduce business risk, such as for: – Scope change; Continuity of Construction Operations
• Continually monitor the ongoing validity of project-related
– Agreements for Lease, – Cost reduction; and • Maintain a regular dialogue with your third party supply chain;
insurances;
– Sales Agreements; and – Phasing of construction works. • Monitor evolving government guidance insofar as it impacts on
• Leverage government initiatives to the fullest extent e.g.
site operations;
deferment of tax payments; furloughing of staff; availability of – Construction and Supplier Contracts. • Regularly review and incorporate the impact of government
grants (see Deloitte’s website for regularly updated summaries of updates; and • Request suppliers to provide contingency plans for sourcing key
• Encourage collaboration and consider how best to incentivise all
the Government funding response to COVID-19); and materials and components;
parties to mitigate risks and costs. • Strategic business case assessment of alternative projects that
• Ensure all contractual notices are issued in accordance with the may need to be initiated to reflect changed demand for built • Be prepared for site shut-downs including ensuring appropriate
Capital Project Prioritisation
contract. facilities in the response or recovery phases. safety, security and maintenance arrangements are put in place;
• Undertake a risk and impact assessment to determine which and
Alignment of Contracts – Financial Risk Establish Effective New Ways of Working
projects in the portfolio fall into the “stop” or “continue”
• Check insurances and any bonds that might be in place.
• Assess the alignment of performance and damages clauses in categories by considering : • Where the project teams have been forced to split or work
related project contracts, for example: remotely you should attempt to create as close to a “normal” Communications
– Financial stress;
work environment as possible;
– Finance agreement; Develop and implement a detailed communications plan for all key
– Technological resilience;
• Ensure back-up team members are identified for business stakeholders.
– Construction contract(s); and
– Delivery risks; continuity in case of illness, need for time off to care for relatives
– Agreement for lease. etc;
– Contractual obligations;
• Understand how contracts’ provisions address exceptional • Establish effective remote working and collaboration practices
– Demand for the building(s) once construction is completed;
circumstances, for example: harnessing technology where appropriate;
– Investment to date; and
– Long stop dates that may come into play; • Consider ways to streamline information flows and decision
– Ongoing business need and investment justification. making;
– Extension of time;
• Real time scenario planning to support ongoing decision making • Review and implement changes to improve resilience of client
12 13
Capital Projects
Considerations for COVID-19 is generating a range of risks and challenges to in-flight projects
contractors Many of the matters identified for project sponsors will be relevant to contractors, suppliers and sub-contractors, who in addition should
be considering the following matters.
Cash Flow and Liquidity Management Alignment of Contracts – Financial Risk
• Review all short term cash receipts and identify contractual • Assess the alignment of performance and damages clauses in
timings and the risk of non-receipt of these monies; related project contracts, for example:
• Maintain a regular submission of future applications for ongoing – Sub-contracts and materials supply contracts;
projects and, where possible, consider if intervals can be reduced
– Plant hire agreements;
to assist with cash flow;
– Plant and equipment purchase; and
• Maintain regular preparation of accurate CVR’s; identify costs
that: – Warranties & guarantees for equipment and plant for
incorporation in the works (if delivered will be longer liability for
– may be incurred (such as variations, claims and disruption);
defects period due to EOT/Delays – can they be extended FOC).
– can be recovered (such as Loss & Expense under NEC); and
• Consider requirement for ongoing contract administration and
– must be subsumed (such as Loss & Expense under JCT). provision of notices/ communications (these must continue
to be applied but you might be hampered by having key staff
• Negotiate, where possible, shortened payments terms with
unavailable); and
employers and extended payment terms with third party
suppliers; and • Negotiate revisions to contract terms to provide relief with clients
and sub-contractors/ suppliers.
• Reduce the numbers of people with delegated authority
for expenditure and reduce limits on level of expenditure Continuity of Construction Operations
authorisation (use double signature approval as a key control).
Maintain a regular dialogue with clients as well as supply chain &
Third Party Supplier Risk sub-contractors;
• Consider financial/legal protections to assist supply chain (whilst • Develop strategies for dealing with materials due to be delivered
taking appropriate measures to limit risk); and to sites that are closed (considering risks and costs);
• Consider re-commencement lead times for specially • Record status on sites being closed accurately and document
manufactured/imported materials and what impact rescheduling extensively;
of deliveries could cause. • Once a shut-down is in place then re-focus to actively plan for
15
Capital Projects re-commencement of operations including logistical, schedule, commercial and cost impacts; and • Re-prioritise work that can continue remotely such as O&M documentation production, H&S files, and pre-ordering of materials. 16 17
Contacts Nigel Shilton Mike Cuthbert Chris Davies
Partner, Real Estate Partner, Real Estate Director, Real Estate
+44 (0) 20 7007 7934 +44 (0) 20 7303 3521 +44 (0) 20 7303 3525
nshilton@deloitte.co.uk mcuthbert@deloitte.co.uk chridavies@deloitte.co.uk
Peter Heslington Phil Adam Matthew Mawhinney
Director, Real Estate Partner, Advisory Director, Restructuring
+44 (0) 20 7007 4566 Corporate Finance Services
pheslington@deloitte.co.uk +44 (0) 20 7007 0308 +44 (0) 20 7007 1730
pdadam@deloitte.co.uk mmawhinney@deloitte.co.uk
John Cooper Nigel Durman
Partner, Real Estate Partner, Real Estate
+44 (0) 16 1455 6512 +44 (0) 20 7303 3573
johcooper@deloitte.co.uk ndurman@deloitte.co.ukImportant notice This publication has been written in general terms and we recommend that you obtain professional advice before acting or refraining from action on any of the contents of this publication. Deloitte LLP accepts no liability for any loss occasioned to any person acting or refraining from action as a result of any material in this publication. Deloitte LLP is a limited liability partnership registered in England and Wales with registered number OC303675 and its registered office at 1 New Street Square, London EC4A 3HQ, United Kingdom. Deloitte LLP is the United Kingdom affiliate of Deloitte NSE LLP, a member firm of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”). DTTL and each of its member firms are legally separate and independent entities. DTTL and Deloitte NSE LLP do not provide services to clients. Please see www.deloitte.com/about to learn more about our global network of member firms. © 2020 Deloitte LLP. All rights reserved.
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