For almost two years we dealt with the local authority in order to obtain the developer's building permit. The local authority had requirements that changed from time to time and it seemed as if they were trying to put obstacles in the way of the project, so when he received the permit with conditions the joy was so great that he came to the office with a bottle of fine whisky as a token of thanks.
We arranged to travel to the destination and convene the team in order to proceed to a contractor tender, and in parallel the architect began working on the local authority's requirements in order to obtain the final permit.
The preparations lasted two weeks until agreement was reached among the project manager, the architect, the engineering team and the developer on the bills of quantities and the tender booklet for receiving price quotes from contractors. He submitted the booklet to several contractors whose work he had examined in advance and marked as potential. The local legal team came into action when the quotes arrived, and after the developer negotiated with the bidders and agreed on the contractor who would carry out the works, we shifted into higher gear in the negotiation of the agreement, with the aim of reaching a situation where, even before the final permit was received, the contractor could begin preparatory works. A lump-sum price per sqm for carrying out the project, a division of the project into phases and timetables for execution were agreed.
...And then the war in Ukraine broke out. Raw material prices rose. Financing stopped. The works stopped. Sales stopped. Three months after the outbreak of the war the contractor announced that he could not continue to wait for the developer's decision on continuing construction, and certainly could not continue to build at the price set in the agreement given the rise in raw material prices and labor costs.
The developer sits in my office, frustrated. The agreement allowed him to announce a stoppage of works for 90 days, but the local team too cannot guarantee that the war in Ukraine would be regarded as “force majeure”, and does not see how the contractor can be obliged to continue building at the price set in the agreement, when there is no forecast at all as to when the developer will be able to resume the works in terms of cash flow (after all, sales stopped and the bank also stopped the financing until the situation clears up).
Real estate projects are exposed to a wide range of unforeseen events that can significantly affect the scope of work, the timetables, the costs and even the economic feasibility of the project.
A study conducted by Harvard University found that unforeseen events cause average delays of 20% in real estate projects and an average increase of 10% in costs. The study also found that these events may lead to the cancellation of up to 5% of projects.
We had, of course, alternative financing options (whose cost rose as a result of the war), and it was of course possible to negotiate with the contractor over new timetables and also over the price per sqm. The developer nevertheless decided to freeze the project. Before the holiday, together with his traditional phone call with holiday greetings, he told me that he intends to restart the project before the building permit expires.
To deal with unforeseen events, real estate developers are advised to take the following steps:
- Carry out an in-depth risk analysis: Before starting a real estate project, it is important to carry out an in-depth risk analysis in order to identify the unforeseen events that may affect it.
- Buy insurance: It is important to buy suitable insurance that will protect the project against unforeseen events, such as natural disasters or third-party damage.
- Raise flexible financing: It is important to raise flexible financing that will make it possible to cope with unforeseen changes in market conditions.
- Manage the project efficiently
Stories are based on real situations, with identifying details changed. Not legal advice.
Translated from the Hebrew original. עברית