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By TBH Asia Director, Colin Bullock
This article was first published in The Business Times on 23 January 2025.
Traditional risk assessments often fall short of their intended purpose, adopting a narrow perspective by focusing on specific risk factors while failing to consider the broader context.
Instead of highlighting the elements that truly impact a project’s outcome, these assessments frequently become bogged down in excessive technical terminology and intricate specifications. This approach, while comprehensive, and technically correct, can obscure the most vital information.
What lenders need is clarity – an understanding of the genuine risks and factors that can make or break a project’s success.
The Illusion of Accuracy vs the Importance of Understanding Risk
Traditional due diligence reports often assume that exhaustive technical information about specific materials, technologies, construction methods, and compliance protocols are necessary for a comprehensive assessment.
While it is true that the advisor must carry out this technical review, it does not necessarily make sense to have this information included in the main body of the reports themselves. In fact, the inclusion of excessive technical details can obscure the most important factors that truly impact a project’s success.
The outcome of the review should always be tailored. Conclusions should be communicated to the borrower, while any identified risks should be reported to the lender – focusing only on the most relevant information for each party.
Focusing heavily on technical details may seem impressive, but it can distract from the primary goal of any project: being able to deliver it on time and within budget. If the project takes longer to deliver, exceeds the budget threefold, and compromises revenue streams from the asset being built, technical excellence becomes insignificant.
Delays in projects can lead to significant financial losses, diminish stakeholder confidence, and cause a domino effect of issues across the supply chain. These unforeseen hindrances can escalate into financial and or customer crises, ultimately leaving investors with substantial risk and potential losses. Lenders require clear, concise information regarding the project’s economic feasibility and associated risks, not an extensive technical compendium.
A Lens for Time and Cost Risk Assessment
A more effective framework involves prioritising the comprehensive evaluation and management of time and cost-related risks. Reports should solely focus on 3 areas: quantifying risks, identifying root causes, and presenting mitigation strategies.
First, it is essential to quantify time and cost risks. Rather than relying on superficial qualitative assessments, advanced probabilistic modelling techniques should be integrated to assess both the likelihood and potential impact of delays and cost fluctuations. This sophisticated analysis must be presented clearly and concisely to enable well-informed decision-making.
Second, identifying the root causes of potential delays and cost overruns is crucial. It is not enough to merely highlight these issues; there must be a deeper exploration of the underlying factors. Complex influences such as permitting hurdles, labour market fluctuations, and material availability need to be understood. This insight allows for the development of more precise and effective mitigation strategies.
Third, the presentation of mitigation strategies is essential to help stakeholders navigate potential risks. Practical guidance, including specific steps to mitigate the likelihood and impact of delays and cost overruns, should be provided. This might involve contingency planning for permits, identifying alternative labour sources, and diversifying material suppliers and logistics to enhance overall resilience.
Although the advisor has a duty to the lender, they also have a professional responsibility to discuss potential risks and their appropriate mitigation with both the lender and developer to ensure the project is feasible and bankable. Thus, high-level checks on the programme and cost benchmarking are just as important as a deep dive into the programme’s critical path, cost breakdown, and technical aspects to assist the developer.
TBH is currently acting as the due diligence advisor for multiple projects throughout the Asia Pacific region, from Tokyo to Melbourne. We have standardised reports, from the initial investment studies to reports used for drawdowns from loan facilities.
Benefits of this Approach
The prioritisation of time and cost risks in due diligence reports presents a range of compelling advantages.
One key benefit is its ability to support informed decision-making. Providing clear, concise information about a project’s financial feasibility enables lenders to make well-considered decisions with greater confidence. This includes assessing potential return on investment, identifying warning signals, and negotiating loan terms that accurately reflect the actual risks involved.
Additionally, it facilitates more effective project management. By concentrating on time and cost risks, project teams can proactively address potential issues. Early identification of bottlenecks, the development of contingency plans, and the implementation of risk mitigation strategies all contribute to greater certainty in project delivery.
Another advantage is enhanced stakeholder communication. Clear and concise reports improve communication and collaboration among all stakeholders. While technical details remain important, they are presented in a manner relevant to lenders, fostering a shared understanding of project risks and opportunities. This leads to better cooperation and alignment among all involved parties.
The Bottom Line
It’s time to clear the path of the technical overload. The focus should shift to what truly matters: delivering projects on time and budget. By streamlining due diligence and prioritising insights on time and cost risks, we can transform these reports into powerful tools for ensuring project success. This redefined approach will lead to better project outcomes, a more efficient and predictable financing landscape, and ultimately ensure smoother sailing for all stakeholders involved.
About Colin Bullock
Colin is an experienced engineer who has spent over 30 years in the design and construction supervision of large infrastructure projects, mainly transportation, including the provision of technical inputs to advisory services. His move from a more traditional engineering consultant to TBH has been an eye-opener to understanding the importance of the often-under-appreciated role that those overviewing project time and cost risk have. Whilst technical compliance is essential to any project, project financiers are more concerned about whether their investment is at risk from programme issues that might delay revenue and cost issues, which might tip the balance on the ROI.