 |
|
|
The Dreaded Workout
James B. Salter, November 2003
I am constantly asked "So Jim what do you think?" Are we facing 1990 all over again? And if so what can we expect?" My first reaction is "Why are you asking me? I'm just a design and construction management guy". But on more careful consideration, based on my having experienced and been the beneficiary of the early 1980's (Remember WIN buttons), RTC, and the 1990 real estate implosion, I guess I have learned a few things.
I call this time "Era of The Workout." A "Workout" is a project that has gone south for some reason and needs to be salvaged. In this decade, the cause of project failure is not high interest or restraints on capital. This time most of the project failures are based on poor pre-planning, bad design management, unrealistic budgeting and scheduling, poor construction execution, the absolute dissolution of markets such as the dot-com phenomenon, and unanticipated world events such as 9/11, the Iraqi war, and the arrival of SARS. As was true in the early 1980's and the early 1990's the key to project salvaging is to immediately assess project strategies and risk management policies for all development projects and be capable of making tough and sometimes unpopular decisions. When times are good, development project discipline naturally tends to be less stringent, but when projects start to go south, tough immediate enforcement of development project discipline must rule the day.
Look for the red flags of a project in trouble:
- Lack of Reporting and Communication
- Resistance to Review and Audit
- Lack of Staff Depth
- Unsophisticated Accounting (Job Cost Accounting-you've got to track committed costs as well as spent to date)
- Change Orders, Cost Overruns, and Schedule Extensions early in the Design and Construction Process
- Disputes of any kind
- Liens
A competent assessment team must be put in place as soon as signs of problems surface. The worst that can happen is you find out it is not serious and no action is necessary.
The "Workout" Process - Rules of the Road are:
Secure the facts
- Forget the blame and don't cast aspersions "Just the facts ma'am"
- Be open to the news - good and bad
- Calm, cool, and calculated heads must prevail
- Meet and interview the stakeholders
- Design team
- Lenders
- Municipality
- Contractors
- Sub-Consultants
- Accountants
- Attorneys
- Leasing and Sales team
- Outline results of assessment
Propose a recovery plan
- Assemble the right team of professionals to create the strategy options
- Create a well thought-out list of recovery strategy options
- Play your longest and strongest
- Establish the right team to execute the selected option
- Hire the best
- Be realistic and conservative
Execute
- Be decisive and fair
- Select a recovery strategy
- Focus on the solution that brings the project back on or as close to the original financial track as possible
- Obtain the support of Executive Management for the team's selected option
- Establish a clear outline of project objectives to the new and remaining project team
- Establish a clear outline for project protocol and discipline
- Establish a clear outline of communication and decision-making channels
- Leave emotion, ego and blame outside the meeting room
- Be willing to make tough and often painful decisions
- A philosophy of "win the war, not the battle" must persist
Execution of a Workout requires a leader with absolute dictatorial powers as it relates to the other team members - The Project Director. The other team members typically include:
- Marketing Manager - The Marketing Manager is responsible to assess present market conditions and determine what new direction, if any, is required to effectively achieve the selected development project option. In addition he is responsible for the leasing and/or sales effort required to achieve the desired exit strategy of the client.
- Legal Team - A legal team capable of supporting the Project Director in all facets of the real estate project workout process inclusive of litigation, transaction, title, and contract and construction expertise.
- Finance Manager - The Finance Manager is responsible for preparing the financial models of the various development project options under consideration. In addition he is generally responsible for negotiating with the in-place lenders and/or the solicitation of appropriate lending facilities to see that the selected development project option is fiscally capable of executing its plan.
- Project/Construction Manager-.The PM/CM is responsible for providing realistic budgets, cash flows and schedules for the various options. It is in charge of directing the design team to design in conformity to the selected option. It is responsible for all necessary entitlement and permit requirements of the selected option. It is responsible for the efficient execution of all construction activities relating to the selected project option.
- Project Controller/Accountant - The Project Controller/Accountant is the ultimate gatekeeper of budgets and financial records. He is tasked with tracking both the interim budget as well as the Ultimate Baseline Budget established for the selected development project option. He has the responsibility of mongering payments as well as job costing. Job cost accounting cannot be short-changed, because it is good job cost accounting that not only accounts for dollars spent but also total dollars committed to date on a project. How often have you heard "Where did all the liens come from? I thought all the bills were paid."
Once the team is formulated, a process of communication must be established where clear communication of project status and options can flow amongst the entire team. Generally this requires a weekly team meeting where information is openly shared, requested and reviewed amongst the whole team. Trust is the foundation of the team and there must be environment of openness where the messenger of all news (good and bad) can feel free to impart project data without fear of recrimination or political backlash. As a part of this meeting strategies are formulated, action plans are established which includes a listing of responsible parties and deadlines, and plans are put in place to deliver status reports and recommended action plans to the financial stakeholder of the Project. Project team members should always cross copy the leaders of each team component so that all team members are well informed at all times.
CM&D has established a PCG (Project Control Group) system for numerous capital market clients whereby the Project Team prepares a detailed outline agenda and presentation booklet that is collectively presented to the financial stakeholders for their consideration and recommendations of future action. This meeting is scheduled monthly. Instructions are issued from the stakeholders to the team as to how they are to proceed. Minutes are taken to ensure accurate documentation of these instructions and identify action items for members of the team. If the meeting is held in an orderly fashion and follows a managed agenda, the PCG should never last more than 3 to 5 hours. Presentations should be prepared in advance relating to all issues and decisions, as well as an outline of progress to date. The primary purpose of the meeting is for all the stakeholders to have a focused, thorough outline of the project status and issues so that they may make well-informed sound financial decisions.
Finally it needs to be understood by all the financial stakeholders that the Workout is a process whereby the team is trying to make the best financial outcome out of a bad situation. One thing that is always beneficial, if stakeholders are to avoid similar problems in the future, is to always prepare a "De-Brief Paper" which clearly defines what caused the project to reach Workout status, and outlines what risk management and project controls could have been in place to avoid the problem - if at all.
Hopefully the final outcome of any Workout program will ultimately result in:
- A salvaged project that mitigated as much financial pain as possible and hopefully retained some ROI.
- The implementation of learned risk management policies and project controls for ongoing and future projects.
< Previous Page | ^ Back to top
|
|
Home
