We’ve all seen or at least heard of rapidly increasing building costs and interest rates over the past couple of years. This has had a huge impact on builders and property developers with their margins being eroded and losses being incurred from property development projects.
We know from experience that property development disputes between builders and developers are more likely to escalate when development projects become unprofitable, and losses start piling up. In the last year, we have seen increases in such disputes, particularly due to the rising interest rates.
Development projects incur significant cash outflows during the construction phase because property acquisition, project building costs, and funding costs are incurred before any sale proceeds are received. Further, pre-sales normally only secure bank funding for part of the overall development costs.
The flow-on effect
Disputes like these don’t just affect the two warring parties – they also impact financiers, tradespeople, buyers in pre-sales, suppliers and so on. This has a flow-on effect down the track and may exacerbate the whole issue, let alone when it becomes necessary to engage legal counsel and increase the costs sometimes disproportionately. Even just the appointment itself of legal advisors can drive a wedge between the parties.
Naturally, the builder will want to protect their profits through variations to the building contract, and likewise the developer will seek to protect their profits arising from the ultimate completion and sale of the entire project. Restrictions in cash inflows through limited funding or market caps on sale prices will then create inherent conflict between builders and developers. The potential for conflict is further complicated when the builder also has a financial stake in the development.
Causes of disputes
- Handshake, unwritten or incomplete agreements
- Subcontracting services to related parties
- Unclear terms for the provision of related party services such as:
- Project Management
- On-site Supervisor roles
- Other Administrative functions
- Funding arrangements, including where security is given over unrelated properties, or third-party lending via back-to-back agreements with related entities.
The role of forensic audit and reconciliation
Conventionally, the disputing parties would engage lawyers aided by forensic accountants, quantity surveyors and other experts to quantify loss claims and counterclaims. However, more recently the Courts and Mediators are seeking the expertise of accountants to assist in undertaking a forensic audit and reconciliation of the financial aspects of the development project. This may include consideration of various scenarios and assumptions to deal with disputed facts or inconsistencies between various documents and agreements (both written and unwritten).
Appointing independent forensic firms like dVT Group in the first instance can help alleviate some of the angst that has been created from the dispute, providing a pragmatic and commercial approach to help provide a framework for resolving the dispute.
This can help in coming to a “high level” review of the likely outcome should the dispute continue, and how that outcome might change under different scenarios. Parties are then better armed with a picture of whether certain actions and costs might be justified.
The reality is that “nobody wins if everybody goes broke fighting a dispute”.
If you need help to settle a property development dispute, dVT Group’s team of forensic accountants are experienced and well equipped to assist with undertaking audits and reconciliations of the financial aspects of the property development.
If you would like to discuss any of the above, please contact Suelen McCallum at dVT Group on (02) 9633 3333 or by email mail@dvtgroup.com.au.
dVT Group is a business advisory firm that specialises in business turnaround, insolvency (both corporate and personal), business valuations and business strategy support.
