Mitchell Brandtman’s 2017 Education Program is for Financiers who would like to gain a more thorough understanding of what a Quantity Surveyor does and how we assist Financiers’ and their clients on a project.

After successfully launching our Financiers’ Education Program in QLD in 2013 and NSW in 2016, we are excited to now be offering this program to our Victorian clients in 2017. This year, we are running six sessions in Melbourne and you can expect to cover all of the topics listed below.

• Estimating
  • Check estimates
  • Elemental estimating
  • Bills of Quantities
  • $/m²

• 3 Types of Building Contracts
  • GMP (Guaranteed Maximum Price)
  • Cost Plus or Owner – Builder
  • D&C (Design and Construct)
    
• Understanding our reports
  • Initial Reports
  • Progress Assessments
    
• Different types of variations
  • Base Building variations
  • Client initiated changes
  • Purchaser variations
    
• Distressed Projects – early warning signs

• Assessments vs Certificate

• Insurances

• Bank Guarantees

• Dealing with unfixed material

• Civil Projects

• When is a project complete?
  • Certificate of Practical Completion
  • Certificate of Classification

Each session will also include a site visit. We will walk you through what we look for when assessing the site on behalf of the Financier.

To register your interest, please click on your preferred date below:

15 March 2017

5 April 2017

10 May 2017

14 June 2017

12 July 2017

16 August 2017

If you have any questions in regards to the Financiers’ Education Program please email Lisa Hemming at lhemming@mitbrand.com or call our Melbourne Office at 03 9944 3030.

We look forward to sharing  our knowledge with you and your team.

The Mitchell Brandtman Melbourne Team

Mitchell Brandtman compared a basket of their South East QLD projects which had successfully obtained construction funding over two periods – the first four months of last financial year (Jul-Oct 2015), and the same period in the current Financial year (Jul-Oct 2016). The goal was to see what has changed and what projects are currently getting funded.

There are a number of mixed messages out in the market place at the moment, and depending on where you sit you could be the busiest you have ever been, or staring at the edge of a rapidly approaching cliff.

The reality is that professional developers make up the core of most construction lending and they are a resilient lot.

They develop for a living and are adept at picking the cycles and moving from one sector to another depending on where they are in the property cycle.

On the other side of the fence, financial institutions don’t make money from leaving their funds in cash – they need to lend. APRA provides a helping hand with guidelines, but if you have the right product at the right time, and with the right team, then there will be funds available.

So What Has Changed In The Last 12 Months?

Based on the press, you would expect to find that number of construction loans for ‘residential’ purposes had slumped compared to the same period last year, however the opposite is true. The quantity of projects funded for ‘residential’ purposes are up over 15%. However, ‘residential’ picks up a wide variety of project types, the real story is in the detail.

Above: The figures in these graphs are based on a sample selection of projects Mitchell Brandtman worked on that obtained construction finance during the periods specified. The classification system is internal.

There is a rapid shift away from larger multi-residential projects, towards smaller boutique projects in the 5-10 kilometre ring.

In this sample of projects from South East QLD, the larger projects ‘8 levels and above’ and ‘4-8 levels’ receiving funding have halved, and the number of ‘townhouse’ and projects ‘up to 3 levels’ have increased nearly 60%.

Above: The figures in these graphs are based on a sample selection of projects Mitchell Brandtman worked on that obtained construction finance during the periods specified. The classification system is internal.

Developers are also casting their nets outside of the Big-4 for construction funding with a steady growth in projects funded by the smaller banks and alternative funders. They are also becoming more aware of the risk appetite of particular institutions for different types of developments and are targeting their finance applications.

Funders who last year were leading the pack in the multi-unit sphere are now more interested in funding sub-divisions.

When we look at what is actually under construction at the moment, we can see that the change in residential type has already started to bite. The data below is based on a 5 km petri dish of projects in Brisbane and on the Gold Coast ‘strip’.

It is based on all projects currently under construction with greater than 40 units.

The black line represents Nov16 and shows us that even if we add all of projects that are currently being marketed (green) to the projects that are currently under construction (red), then we are looking at having less work tomorrow than we do today in the 40 unit and above space.

There are a number of trends to watch out for in coming months:

• Financiers becoming increasingly wary of funding projects with ‘unknown’ contractors, or those who are not performing well on current projects. There are an increasing number of contractors who are struggling and the banks are following them extremely closely. The right contractor may win or lose your preferred a funding deal
• As preferred contractors in good standing with the banks become harder to find, Developers are resorting to locking them in earlier by using Design and Construction Contracts
• Experienced Owner Builders are revelling in the current market. They are agile enough to move quickly, and with one less layer of margin are able to make projects stack up
• A greater focus on lending for ‘non-residential’ purposes – in particular for aged care, pubs and clubs, and subdivisions
• A larger number of smaller projects with a shorter average loan life cycle – changing the dynamics of how financiers maintain their loan portfolios

In this current economic climate, the identification and management of risk is of prime importance.

Competition is healthy in any market but fierce competition the likes of which has been present in the SEQ market  from contractors “buying work” is a leading indicator of risk that we need to be aware of in the market today.  Competitive tender prices were gratefully accepted but they came with a heightened level of risk for all parties, and that risk not become evident until the project was well underway.

Contractors that tendered in the past, and are now having to let trade packages, may be finding that they have to pay more than they have allowed.

This leads to cash flow strain and can greatly limit their ability to deal with problems that arise on their projects. As a result the likelihood of projects in this situation becoming distressed is real, and we are already seeing a number of contractors and subcontractors going under.

While it is difficult to identify in advance every risk that may affect a project, staying transparent and exposing, and addressing, uncertainties early could make the difference between a project running smoothly and project becoming distressed.

Darryl Bird, a partner of Mitchell Brandtman 5D Quantity Surveyors, discusses the warning signs for distressed projects:

The Signs

• Low activity on site when it should be high – All projects have a rhythm, with different levels of activity during the different stages of construction. Uncharacteristic or unscheduled activity can be an indication of trouble ahead.
• Subcontractors and suppliers not being paid. This can be representative of a cash flow problem which can quickly escalated into liquidity issues and financial distress.
• Contractors over-claiming – This scenario may be evident through the progress claim process or in the number and value of variation claims submitted. Whilst this can often be seen as par for the course with certain builders, the reasons behind it need to be considered and changes in claiming behaviour interrogated.
• High turnover of Site Managers and Staff – Like with any company, any abnormal or noticeable turnover of staff can be an indication of the company having difficulties meeting the demands of it’s projects.
• Changes in the Developer and Builder’s relationship. Effective collaboration is the key to a successful project in a low margin environment. While these relationships can often be strained through a project, sudden unexplained changes can be a sign of stress.
• Another less obvious issue is where the parties to the contract do not disclose all relevant information and withhold the fact that there may be materially different Side Agreements in place. Often this does not become apparent until the project is underway, and the parties attempt to compensate for the side deal through over-claiming.

Communication is the key. There can be valid reasons for what appear to be troubling signs, like those described above, and it is important for all parties involved to communicate clearly and regularly. If, however, a project suffers a situation where the contractor enters Liquidation there are some immediate steps to take to limit further risks:

• Secure the site and ensure any further access to the site is monitored to ensure no further damage or loss is suffered.
• Insure the works.
• Review the existing contract and seek legal advice in order to terminate the contract, and in preparation for any further implications (ie. termination payments if applicable).
• Undertake a dilapidation style report including photographic records of the status of works on site, unfixed plant and materials, etc.

A detailed project or situation specific plan will then need to be established by appropriate experts to identify how best to proceed with the development.

How Can A Quantity Surveyor Help With Distressed Projects?

A QS can provide an independent review of a difficult project or situation, through to a full development audit and a detailed plan for the management and completion of a distressed project.

In some cases all that is required is a reality check and an experienced hand to get through a difficult period in the build.

Other projects may require a dedicated team of construction experts who can provide proactive, comprehensive analysis, advice, and innovative solutions for distressed project situations:

• Being a fresh set of eyes on a troubled project.
• By organising and recommending completion strategies and recovery plans including appropriate contract advice.
• Identifying current deliverables and completion status against the original plan.
• Validating recovery estimates, resource loading, budget and schedule.
• Establishing monitoring strategies and thresholds for budget and schedule issues.
• Identifying any avenues to reduce costs and eliminate scope creep.

There are a lot of misunderstandings around depreciation – what can and can’t be claimed, when claims can be made, who can claim them, and so on.

Here is a look at some “depreciation myths” with comments by Zac Gleeson, asset services manager at Mitchell Brandtman, that will hopefully demystify and simplify the matter.

Myth: Tax depreciation isn’t worth it due to Capital Gains Tax

The first myth which we would like to squash regarding tax depreciation is the notion that capital gains tax (CGT), which occurs at the disposal of your investment property, negates the savings made through claiming depreciation. The only instance where there is any truth to this statement is if you hold your investment property for less than one year, as you are unable to claim the CGT 50 per cent discount.

“People get scared off by the fact that claiming tax depreciation does in fact decrease your cost base. Let’s just look at this on face value for a second, claiming tax depreciation increases your capital gain and enables a larger after-tax profit,” says Gleeson.

If that is not enough, the increase in tax you pay at the capital gains event is less than half of the savings you have made through claiming tax depreciation over the life of your investment. Another win is the fact that plant and equipment, which equates on average to approximately $20,000 worth of tax deductions, is not taken into account within the capital gains calculations.

If we could ask you to take away three key points regarding this myth, they would be:

• the savings you have made through claiming tax depreciation is more than double the increase in tax you pay at the capital gains event
• it is important to hold your investment property for longer than one year so that you are eligible for the CGT 50 per cent% discount
• claiming tax depreciation increases your capital gain and increases your after tax profit

Myth: My property is too old to depreciate

The second myth we would like to squash is the far too common question that we get asked: “But isn’t my property too old to claim depreciation?”

Going back to basics there are two types of allowances available to property investors, Division 43 Capital Allowances (e.g. the building structure), and Division 40 Plant & Equipment (e.g. carpets, blinds, appliances and so on.)

Division 43 allowances are available to property investors whose investment property was built and/or renovated after September 15, 1987. Depreciation on plant and equipment is available to all property investors – there is no time limit for these assets.

No matter the age of a property, all investment properties qualify for depreciation. If your property was built prior to September 15, 1987, it will be inspected and your depreciation entitlements will be estimated based on the renovations, extensions and improvements undertaken to the property. No matter whether the works were completed by yourself or by previous owners, you are entitled to the depreciation of these works.

Plant and equipment is commonly worth up to $20,000 in total deductions over the full life of the assets.

If you are concerned about whether it is worth getting a depreciation schedule completed due to the age of the building, it’s worth speaking to a quantity surveyor (QS). From asking a few basic questions, these experts will be able to determine whether getting a depreciation schedule done is worthwhile and will outweigh their fee.

Myth: Renovations were completed by a previous owner, so I can’t claim them

I love this one as this is where a QS can really add value and increase your cash flow.

We believe there is no truth to this statement.

“This is where we as quantity surveyors come in to our own,” Gleeson says. “It does not matter if the works were undertaken by a previous owner; when you purchased the investment property you have also purchased the entitlement to claim depreciation on all of the property’s improvements.”

Quantity surveyors are the most suitably qualified and recognised profession by the Australian Tax Office to estimate the value of renovation works undertaken to the property and also estimate when the works were undertaken. They use a trained eye when inspecting the property, draw upon extensive construction knowledge, utilise historic council records and building searches, and use historical photos of the property as the basis for calculations. The experience a QS brings could save you thousands of dollars.

Most houses 10 or more years old will have had works done, the most typical being painting (commonly worth between $5,000 and $10,000,) bathroom (commonly worth up to $15,000,) kitchen (commonly worth up to $20,000,) and floor and wall tiles (commonly worth up to $5,000.)

On a 10-to-30-year-old property, there is $50,000 right there which you could be missing out on if you didn’t get a QS to do a depreciation schedule for your investment property.

If you are about to renovate your investment property, it may be worth getting a QS to undertake a pre-renovation inspection. This inspection allows a QS to identify what assets or capital works you are going to demolish or throw out. Did you know that you are entitled to assign a value to these assets and write them off as an immediate tax deduction? It is easy to get narrow minded when renovating as you want to complete the renovation as quickly as you can so that you can get a tenant back in paying rent, but a pre-renovation inspection and ‘scrapping report’ can save you thousands, which can offset your loss made through the renovation period.

Renovations to an investment property, whether undertaken prior to your purchase or if you are undertaking them yourself, are a gold mine if you utilise your depreciation entitlements correctly.

Myth: My accountant will look after my tax depreciation

Quantity surveyors often get asked, “Why can’t my accountant do the depreciation schedule for me?”

“I work alongside accountants every day and what we do as quantity surveyors enhances and positively accompanies what your accountant will produce,” Gleeson says. “There are a few key differences between what your Accountant and what we as QS’ can do for you and your investment property.”

Quantity surveyors are experts in construction costs and are recognised by the Australian Taxation Office (ATO) as the most suitably qualified profession to estimate the depreciable expenditure spent on the property prior to your purchase as well as the value of the fittings and equipment within the property. Even if it was constructed 25 years ago, a QS can estimate the construction cost using historical data, thereby increasing your depreciation entitlements. In accordance with ATO Tax Ruling 97/25, if your investment property was constructed after September 1987 and/or construction costs are unknown, you must engage a registered and qualified QS to produce a depreciation schedule. Your accountant can’t do this for you, if you haven’t paid for it or if you weren’t the original owner, you will need a QS involved to be able to maximise your depreciation.

Another scenario in which a QS can maximise your depreciation compared to an accountant is when you have built the building and you know how much it cost but you don’t have a sufficient break-up of items to be able to accelerate the depreciation. Can you show your accountant how much was spent on air-conditioning, light fittings, appliances, carpet, blinds and the like? In 99 per cent of cases, the builder will not break up this expenditure up for you. Quantity surveyors can again estimate the cost of each asset and accelerate your depreciation. It is very typical for a QS to be able to double your depreciation in the first full financial year by undertaking this exercise. This results in a saving of thousands of dollars which would have otherwise been paid in tax.

Myth: I have held my property for years, so there’s no point claiming depreciation now

We want to start this conversation off very simply with the fact that the structure of your investment property (IP) has an effective life of 40 years. If you have owned your investment property which was built post September 1987, then it is very likely you are missing out on thousands of dollars worth of possible tax deductions.

Even if your IP was built prior to September 1987, your property must have had renovations undertaken. Even if it was 10 years ago, there will still be significant value left to depreciate.

“Another tip which could save you thousands is that your accountant can help you claim tax depreciation retrospectively, amending up to the past two financial year tax returns making the most of your depreciation deductions which you may have lost through not claiming,” Gleeson says. “This is completely legitimate and the Australian Taxation Office actually encourages you, even if you haven’t in the past, claim depreciation deductions by amending your past tax returns (TD 2005/47).”

Now that Level 2 BIM is mandatory for all UK public sector projects from April 2016, the UK is looking to press on with Level 3 BIM to support a fully integrated and collaborative process that plans to save building owners billions of pounds each year. Previously the responsibility of the Department for Business Innovation and Skills, the BIM Strategic Plan will now be led by Treasury – the clearest sign that the UK is planning to own digital construction globally.  In contrast, the Australian Federal Budget released in early May, provides for strong financial investment of $50 billion for infrastructure projects through to 2019-20. However, it lacks any allocation for new projects or innovative smart city infrastructure planning on the horizon.

UK Continues to Fund Innovative Construction:

A week after announcing funding for Level 3 BIM in the budget policy papers, the UK Government also published its Government Construction Strategy GCS16-20 to deliver £1.7 billion in efficiency savings over the current parliamentary term. Increasing the use of digital technology including embedding Level 2 BIM is a key objective to drive innovation and reduce waste for the UK Government – the single largest construction client in the UK. The strategy is supported by the establishment of 20,000 apprenticeships across Government procurement. This policy is in recognition of a skills gap in the UK construction industry which if not addressed, is said to contribute to inflation and reduce productivity in the future. The Public Procurement Policy Note specifically requires the support of skills development and commitment to apprenticeships for any contracts of more than 12 months duration and worth more than £10million.

Running alongside the UK Government announcements supporting Digital Built Britain, is a recent call from the BIM Task Group for industry support to develop a standardised product sharing process and dictionary to support the industry wholesale.

Working in conjunction with CPA, BIM4M2, CIBSE and NBS, the focus for product data sharing is initially UK based but the BIM Task Group acknowledges the opportunities it will present internationally and the intention is that it will be mapped to Industry Foundation Classes and internationally agreed terms. The proposed process and dictionary were scheduled to be available from 30###sup/sup### April via the Construction Products Association (CPA) website.

So How Does Australia Really Compare?

Setting the missed budget opportunities aside, the Australian Government has at least signalled its interest in digital construction releasing the Smart ICT report in March. The 176 page document is an “inquiry” into the role of information and communication technologies (ICT) on design and planning of infrastructure in Australia. It demonstrates at the very least that Australia needs to establish a collaborative approach to ICT across federal and state Governments and industry organisations to deal with digital data and its opportunities for lean construction. The report has been prepared in consultation with a large number of local, state and federal Government stakeholders alongside industry associations and private sector interests in construction, engineering and technology.

Coming to the conversation a little late and lacking any teeth in relation to any mandatory recommendations, the Smart ICT report does focus keenly on…

[CLICK HERE TO READ FULL ARTICLE ON SOURCEABLE.NET]

For more information please email me direct at dmitchell@mitbrand.com

Headlines demand that we are facing over-supply, and that developers are pulling back on apartments, yet vacancy rates remain manageable and rents are holding up in most markets. What is happening is an increase in cost per apartment at the same time as demand, and sales prices reducing.

This is leading to some projects not stacking up and a tapering of growth and reduction in the number of projects forecast to come on the market. Many blame this on increases in construction cost and point towards EBA rates or specific examples of rises in core materials such as concrete. The reality is that material and labour prices have had marginal impact on the overall increases in cost per apartment.

Three impacts on construction costs relevant in the current market are: changes in product mix, changes in quality, and lastly labour and materials. The table below shows changes in costs per apartment over a number of periods.

The biggest impact on costs has been the shift from one bed/one bath/no car park stock, to two bed/two bath/one car park. Also significant in the cost mix has been the change in quality and increase in amenity provided by Developers as the race to differentiate their product and cater to a more discerning market heats up.

If your apartment doesn’t have high quality appliances, an elegant facade, and a ‘block’ style roof-top common area, then it isn’t going to sell.

Labour accounts for 35% of overall construction costs on a large project. A 5% increase across all trades on an EBA site would account for an approximate 1.75% increase in the overall construction cost. In many cases material costs are flat, if not negative. Increases in quality have been offset by lower product prices or offshoring.

The scenario in many markets is that mid-large size projects, of the style and quality demanded, cannot be delivered at a price point sufficient for the projects to go ahead. This is causing some projects to be shelved or re-worked, or on sold.

For the first time in a long while, Contractors and Sub-contractors in this space are starting to feel that they have more work currently on their books than they do in the pipeline and are more keenly competing for new work. This has downward pressure on profit margins and ensures tenders are competitive.

It is important to understand that while the apartment market gets a lot of attention, it is only a sub section of the whole. The overall residential market – picking up low rise and sub-divisions – is buoyant. A number of Developers are shifting their focus to these markets and land banking apartment projects for the next cycle.

One of the most active sectors across Brisbane, Sydney, and Melbourne, are low-rise and townhouse projects outside of the CBD. Owner Builders in particular are revelling in this space and are capitalising on the reduced layer of margin.

Forecast Escalation for the 6 month period 1 July 2016-31st December 2016 is as follows:

The construction industry continues to wait for the release of AS 11000 General Conditions of Contract which will replace the two current suites of Contracts AS 2124:1992 and AS 4000:1997. Public comment on the draft AS 11000 released in 2015 was overwhelming and as a result a new draft is expected to be open to public comment in the coming months in order to reconcile and account for the many proposed changes and comment received during the first round.

The current draft AS 11000 has been designed to improve contract administration and allow for an early warning procedure to better identify and balance the risk allocation. The intention is also to reduce the cost of management and administration of contracts.

The general premise of the changes also focuses on clarifying and simplifying the language and requirements i.e. business days calculations in relation to security of payment claims, and some general administrative changes allowing for changes in technology to benefit the process, i.e. service of notice by email.

As a result of the desire to simplify requirements and shift risk between the parties, the new Standard may however have inadvertently created another layer of uncertainty and tension within contract negotiations. The proposed Standards are adopting the Abrahamson Principles of risk allocation, which is effectively, ôA Principal should not ask a Contractor to price an unquantifiable risk which is within the control of the Principalö. It appears however that unquantifiable risks not within either the Principal or Contractors control can be forced on to the Contractor.

Express Obligation to Act in Good Faith:

The new good faith clause is an ôexpress obligationö and also an overriding obligation that has caused some concern in the industry in relation to its impact on the entire contract. This ôexpress obligationö, the lawyers say, is concerning because it hasn’t been clearly defined and to ôact in good faithö in the law of contract is still not yet conclusively defined by the courts. It is open to much broader interpretation. The concerns from the lawyers is that because to ôact in good faithö is not defined by the new Standard it could impact on the way commercial contracts are negotiated as the clause will shift the focus from commercial self-interest to imposing a standard of duty to consider the business interests of all parties to the contract.

Early Warning Provisions and Dispute Resolution:

In addition to the requirement to act in good faith, the new Standards make provisions for an early warning procedure, whereby parties or the Superintendent are obliged to advise of any change of circumstances that may impact on the Contract. This is designed to prompt early resolution of any issues and mitigate the risk of disputes under the Contract. In addition the new Standards make provision for greater flexibility in relation to dispute resolution options available and a proposed accompanying Standard, AS 11001, will deal with these alternative forms depending on the nature of the project or the more ôformalised forms of contract management proceduresö.

Security of Payments Compliance:

The new Standards will also seek to meet the compliance needs of the various state and territory Security of Payments legislation and more specifically in relation to a consistent application of business days as calculated in the various SOP legislations.

The current draft AS 11000 amends the payment clause in order to facilitate better administration of the contract and allows for the Superintendent to receive and issue documents on behalf of the Principal to comply with the relevant Security of Payments Act.

Where relevant under any SOP Act, the Superintendent can receive payment claims and issue payment schedules on behalf of the Principal, acting as their agent. AS4000’s dual certificate has been abandoned in the new Standard which means that the Superintendent only issues one certificate for the amount payable which complies as a payment schedule under the SOP Act.

Other Contractor Conditions:

The new Standards propose that all Bills of Quantities submitted will be required to be priced, whether or not they are to form part of the contract. This will be a benefit to the Superintendent when the contract requires that a valuation is to be made particularly where the BOQ is not a contract document.

Major changes to pre-payment of unfixed items offers two alternatives for Contractors, the first not allowing for Contractors to be pre-paid and the second allowing pre-payment subject to the Contractor satisfying conditions set out in the new Standards. Financiers and Developers need to be aware that this change is likely to be in conflict with the finance conditions of offer and that the Developer may have to fund these early payments until the work is fixed in position.

There is a requirement on the Main Contractor to apply the AS 11002 subcontract conditions without amendments except where necessary and any non-compliance is expected to be a substantial breach by the Contractor.

We see that many Contractors will struggle with this requirement as it takes control away from them as to their conditions and relationships with their subcontractors. The majority of Contractors have in house subcontracts and/or major amendments and special conditions that they have developed over time and that they include in all their Subcontracts.

Superintendent’s Role:

The new Standards are said to revert back to the AS 2124 requirements in relation to the Principal’s obligations to the role of the Superintendent and this specifically clarifies the Superintendent’s need to act impartially where they are required to certify, assess, price, measure or value works under the Contract.

The contractor will also be under a specific obligation to rectify work when it becomes aware that the standard of work does not meet the requirements of the contract and without the need for the Superintendent to advise them to rectify the works. Not only does this require the Contractor to identify the defect but also effects the time to rectify the defect, it may be the case that it is to be rectified as soon as it’s discovered which could be inefficient.

Extension of Time:

Extension of Time will be measured in working days which will be a defined term under the new Standards. ôGiving of noticesö will continue to be calculated in business days. This is of benefit in that it alleviates previous ambiguities that arose in the calculation of days under the various contract conditions.

The new Standards propose substantial changes to the programming provisions and the Superintendent will have the power to accelerate the works. It will include a specific obligation to notify any delay of works promptly and at the very least within 5 business days. It is unknown at this stage if the five (5) days is from when the delay commences, or when the delay becomes apparent, or within five (5) days of the end of the delay. The Contractor will be required to include in its written notification whether an extension of time claim is likely as a consequence of the delay. This infers that the Contractor must advise of Contractor caused delays and may have some interesting consequences, especially with the right of the Superintendent to direct acceleration due to a Contractor caused delay. The new Standards are expected to clarify causes of delay and the grounds for which a Contractor can claim an extension of time as a result of the delay.

There are substantial changes proposed for the assessment of extension of time claims and the Superintendent has the option to assess and agree the extension of time within 20 business days or request further information from the Contractor within that time. Upon receipt of the further information the Superintendent has a further 20 business days available to assess the extension of time. Failure to do so will result in the Contractor being granted the extension of time. The Superintendent will now have to ensure they complete such tasks within set time frames.

The changes also include that where there are concurrent delays, and where one delay the Contractor is entitled to a delay (including Principal caused delays) and another where they aren’t entitled to an extension of time, then the Contractor will be entitled to an extension of time but not for delay damages.

Variations:

A new regime is proposed in relation to a direction being considered a variation. The Contractor has 5 business days upon receiving the direction to submit a notice that the direction is in fact a variation. The Superintendent then has 5 business days to respond and can invoke the early warning procedure if it does not accept that the direction is a variation under the Contract.

Interestingly there are no changes proposed to the Variation Valuation clause other than to say that profit and overheads are generally included within rates and prices unless otherwise advised and the new Standard proposes including a specific right to cover delay costs caused by a variation if not already included in the price. This doesn’t deal with the issue of what the percentage is for items where profit and overhead are not included other than to rely upon the percentage for provisional sums where the work is subcontracted.

The new Standards also provide for a differentiation between ôdelay damagesö and ôdelay costsö.

Recognition of Digital Data and Building Information Modeling (BIM) û A missed opportunity?

While the proposed AS 11000 makes a small step in the direction of technology by acknowledging email as a communication method it does not recognise any forms of digital data, online document management or web collaboration and communication methods.

Coincidently on Tuesday, 15 March 2016, the House of Representatives Standing Committee on Infrastructure, Transport and Cities tabled the Smart ICT Report on the inquiry into the role of smart ICT in the design and planning of infrastructure. The Standing Committee ôrecognised the possibilities inherent in new technologies and systems. These technologies, if used effectively, have the capacity to transform the design, construction and management of infrastructure assets; the management and use of existing assets; and the operation of transport, communications, energy and utility systems. These technologies are transformational, with the capacity to increase the productivity of the Australian economy. In order to achieve this, however, governments and industry must be aware of the potential of smart ICT, and must invest in the technologies, skills and systems to make the transformation a reality.ö

In an environment that does not acknowledge modern forms of information it is difficult for innovation to exist because one party can deny access to digital data on the basis that the General Conditions are silent about it and its use versus paper.

That recognition need only consider redrafting of Clause 8 Discrepancies or a simple change like the introduction of a definition for information to the effect of ôInformation: a reference to æinformation’ includes information, representations, statements, data, samples, calculations, assumptions, deductions, determinations, drawings, design, specifications, models, plans and other documents in all forms.ö

The incorporation of Building Information Modeling (BIM) is a more consuming task but nevertheless is needed because there is currently no statutory or common law framework around the use of BIM in Australia. If Australia is to follow the UK’s lead in accordance with Recommendation 7 of The Standing Committee, the simplest way to define and protect a party’s rights and obligations when participating in a BIM project is to develop a bespoke BIM protocol and annex it to an existing Australian Standard Contract.

If AS 11000 does not consider BIM there is a risk that the new standard will provide a platform for the development of a series of protocols by Principal’s and clients. This will exacerbate the onus on contractors and consultants in having to satisfy a range of different protocols when working on multiple projects at any one time.

You can view information on the current draft AS11000 here and we await the release of the final draft Standards anticipated mid-year.

For more information contact Gary Thompson (Partner at Mitchell Brandtman) on +61 407 964 435 or email gthompson@mitbrand.com.

The Opposition outlining its platform for changes to negative gearing, and the Government refusing to rule them out, does this signal an end to tax depreciation on investment properties?

With debate raging on the implications of proposed changes to negative gearing and Capital Gains exemptions, there is a further consideration for property investors and their ability to offset the ônon-cashö loss of income generating assets via depreciation.

Depreciation of capital and plant and equipment associated with an investment property is very much wedded to the benefits of negatively gearing a property, allowing an owner to offset ônon-cashö losses against other taxable income. Over the shorter term it reduces an individual’s personal tax liability, while over the longer term, reducing the cost base and allowing the Government to gain a greater take of tax on the sale of the asset. This delayed approach had the impact of encouraging investment in low yielding asset classes.

Why claim depreciation on an investment property if you cannot offset the loss?

Any proposed changed by either the Government or the opposition which impact negative gearing may have a flow on impact to the overall benefit of Depreciation.

Investors are asking, ôwhy would I want to claim depreciation on properties that are negatively geared in the current year when it won’t reduce my income but will have the impact of reducing my cost base when I sell?ö This view is that investors will only want to claim depreciation on properties that are cash flow positive – to a point where they are breaking even.

Sian Sinclair of Grant Thornton explains that claiming depreciation is an incentive that is available, but isn’t a choice û if you don’t claim it in full you may miss out. The adjustment to the cost base of an asset has to be made regardless of whether you have chosen to claim depreciation in the past or not, so why miss out on claiming the entire deductions that are, at least partially, going to reduce your cost base anyway.

The current government is remaining coy about negative gearing, however has ruled out changes to CGT exemptions (at least outside of superannuation). It appears that their preference is for a cap on deductions, perhaps up to a percentage of their income.

Taking the assumptions made as part of Labor’s proposed reforms currently under scrutiny, we can look at a worked example of a new negatively geared property purchased for the median BCC House Sale price (as at January 2016), of $610,000 to demonstrate the impact. Assuming the property was neutrally geared prior to depreciation being applied and remained so for the 5 year holding period.

If we assume a 5 year holding period on the investment the current capital allowance depreciation deductions under Div 43 is $27,500 over the 5 years. Under the new proposals there would be no direct benefit from claiming depreciation year on year as there is no direct effect on the property investor’s cash flow and no ability to offset any ôlossesö against personal income.

When the investment runs its course over the 5 years under the current rules, the net effect of the cumulative depreciation offset is likely to be as high as $15,939 based on a marginal tax rate of 37%.

The real loss directly impacts the net tax position of the property investment when the property Investor sells the asset as it results in a typical Investor paying approximately 84% more in tax on their investment property over a 5 year holding period.

When directly considering the effects of the proposed changes on depreciation relating to negatively geared existing properties purchased post 1 July 2017, the effect could be dramatic. Depending on how deducting the cumulative losses on the property is handled within the CGT calculation, depreciation will still need to be known at the CGT event to reduce the capital gain. However the difference depreciation makes on CGT is diminished by the decrease in the exemption. Also, the cumulative losses are deducted from the Capital Gain but the Investor has received no tax benefit from those losses throughout the holding period which also reduces the positive effect depreciation has on an Investor’s cash flow.

Who wins and who loses?

The incentive to produce income generating assets rather than focusing on the tax liability incentives is likely to change an investor’s portfolio mix which is also likely to have an impact on demand for certain types of property. This may also change the dynamics of financing these investments if the incentive to negatively gear a property is removed. Over time it may give rise to a greater need for depreciation as a result of cash flow positive properties needing to offset non-cash losses against the profits generated on a positively geared property.

So who wins under these proposals? Is it purely an opportunity to raise revenue for the government as an alternative to a change in the GST or a safer bet then taking on superannuation? Are there bigger winners and losers falling out of the longer term impacts to the property and finance sectors?

One thing is clear, Depreciation is here to stay. Investors need to talk to their Quantity Surveyor and their Accountant to make sure that they are keeping the correct records and making the most of the entitlements offered now and moving forward.

The Building and Construction industry globally continues to struggle to find clarity around the usefulness and correct application of Level of Development (LOD).

LOD is a measure of confidence and reliability of information at the various stages. When initially introduced, LOD filled a void and allowed project teams and particularly those downstream to understand the content and reliability of the model data they could expect to receive. Since its acceptance as a standard of reliability and integration within Building Information Modeling (BIM) and 3D models, it has been largely exposed to broader interpretation in relation to its application and what it is expected to deliver.

The LOD Specification document, published by the BIM Forum, http://bimforum.org/lod/ which is derived from the AIA G202-2013 Building Information Modeling Protocol Form document, helps to clarify the LOD concepts by objects and their attributes. It has now been adopted by many as a default industry standard and used as a basis for contracts. This may be pushing the LOD Specification too far. The LOD Specification is designed as a reference guide to assist the industry to specify the reliability of the information at each stage of projects.

Misinterpretation of the role and use of LOD, perhaps masks the bigger issue associated with building model data exchanges. For example, models are often now ill-defined as LOD 200 or LOD 300 rather than containing objects of a particular LOD level. Industry needs to agree on how to exchange data effectively and consistently throughout the project phases on a discipline to discipline basis – both geometric and non-geometric.

Information Delivery Manuals and Data Exchanges:

The building industry globally needs a robust and reliable means of exchanging digital information that is machine readable and easy to check and validate at each stage of development.

buildingSMART, formerly the International Alliance for Interoperability (IAI), has since 1994, aimed to improve engagement and knowledge sharing amongst members and to take the lead in defining user needs and determining open BIM solutions for all, through internationally recognised standards, tools and training.

buildingSMART developed Industry Foundation Classes (IFC) to enable project teams to share information across the variety of software applications used for design, construction, procurement and ongoing operation of a building. At present it is considered the standard in rich data exchange. buildingSMART certifies applications that comply with IFC which provides a platform of industry wide acceptance and use in relation to how data is entered, used and extracted within the model.

buildingSMART developed the ISO 29481-1:2010 ôBuilding information modelling – Information delivery manual – Part 1: Methodology and formatö standard to capture and specify processes and information flow during the lifecycle of a building. The standard provides a methodology for the accurate exchange of data between parties, known as the Information Delivery Manual (IDM). This process helps to create the technical specifications of the project known as the Model View Definition (MVD). The beauty of MVD is that it allows different consultants and contractors to easily access the information relevant to their part of the build.

The Future is Data Exchanges:

buildingSMART has a working group developing IDMs: http://iug.buildingsmart.org/idms/roadmap.

This roadmap covers the full range of project phases and seeks to identify discipline to discipline exchanges. These data exchanges are then more fully defined in MVDs that detail the objects and their properties (or attributes) that should be present. By defining these requirements, it is then possible to automate the exchange and checking of the embodied data. This helps to build confidence and reliability.

Examples are found on the buildingSMART IFC Solutions Factory site: http://www.blis-project.org/IA… . These exchanges are also put in the context of æProcess Maps’ that have æExchange Requirements’.

This is the level of detail in defining building data exchanges on a discipline to discipline basis at different project phases that I think we need in the industry.

Some examples:

The Concept Design BIM 2010 MVD, developed by GSA and CSI from USA, Statsbygg from Norway, and Senate from Finland, is a good place to look for further development of data exchanges. It covers Spatial Program Validation, Circulation/Security Analysis, Energy Performance Analysis and Quantity Takeoff, which enable four types of analyses early in the process to optimise the design and helps to see the application of MVDs.

A more focused IDM is the Information Delivery Manual for Structural Steel by AISC and Georgia Tech. It addresses the exchanges required by the structural steel industry with Exchange Models created by the architect, structural engineer or steel detailing engineer. Table 3 shows exchanges by project stages and the people who will create or receive them. The final table shows the attribute detail expected. https://www.aisc.org/WorkArea/…

Where to from here?:

The IDM Roadmap shows the work still yet to be done to define and refine the full range of exchanges for industry, and buildingSMART welcomes assistance to make this happen.

The need to better define, produce and deliver building and construction data is an urgent issue. LOD has helped to identify the issue but we need to structure data exchan bges more simply for people and more precisely for software.

Perhaps the IDM and MVD work can help here.

For more information contact Scott Beazley, Mitchell Brandtman, +61 2 9541 8000 or email sbeazley@mitbrand.com.

In Part 1Part 2 of our series on Return on Investment (ROI) and BIM, we reviewed the success of large scale institutional owners and stakeholders, contractors and sub-contractors and how BIM is creating metrics that demonstrate savings achieved on many projects. In our third and final instalment we look specifically at the Architects and Consultants and how immersed we need to be in BIM in the longer term to get a return on our investment.

We know that BIM and the technologies supporting it allow all of the supply chain to benefit from the information and provide known quantities and costs at all stages from developed design to tender.

More than ever, BIM’s collaborative nature provides the greatest opportunities for design and construction teams to innovate and instigate process improvements that can resonate quickly across project teams. Industry reports including SmartMarket demonstrate strong engagement in BIM from architectural and consultancy firms and suggests a stronger, faster take up in the short term including improving their team’s understanding of BIM to a high competency level.

Design and consultancy firms adopting BIM and its associated technologies wholesale are now creating the points of difference in the market and realising the savings internally through improved workflows and market reputation knowing that collaboration and data sharing directly result in reductions in revisions, clashes and RFIs.

The call from architects however is for there to be a greater focus on the quality rather than the quantity of reduction in errors. The reliability of the information built from a collaborative project team allows designers to robustly defend the scope. It adds integrity to the design process early on and allows their clients to make real savings decisions based on accurate information and not perceived ôexpensiveö design statements. The benefits of BIM are in the knowledge gained and how it’s applied to create intelligent design. It’s not enough just to implement the software and think it will resolve modelling issues.

Here is a collection of benefits seen by architects, engineers and project consultants, arising from their investment in BIM and the ROI it brings to their companies.

Designers and Consultants

Professional services company Worley Parsons whilst addressing the Mining Club in July 2014 suggested that the potential benefits in the digital assets concept on project delivery included a capital costs reduction of up to 5% through data integrity, increased speed to market through reduced project cycle time by up to 20% and a reduced design costs by up to 70% through reuse of data and design.

The purpose built Leeds Arena, designed by Populous Architects and completed in 2013 by principal contractors BAM Construction, is an excellent example of reduced design costs. The project team attributes BIM to streamlining early design stages which reduced wastage by an estimated 9,000 drawings. BIM’s collaborative process is also reported to have saved 15,000 collective man-hours throughout the design development stage of the project. Expected design clashes of 100 materialised to just 2, saving the project an estimated $350,000.

The award winning Collaborative Life Sciences Building (CLSB) a joint university project in Portland, Oregon opened in 2014 and is …

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For more information please email me direct at

dmitchell@mitbrand.com