January 2009 - Mark Flinn
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Managing Construction Risks
Mark Flinn, Principal, SER Construction Services
Managing construction risks is a major challenge for lenders, developers and contractors. All face substantial potential liabilities and both have different agendas in relation to project completion and risk burdens.
These risk are magnified when a project is based in different country where expectations and cultural differences can severely cripple a project. Innovative solutions are required in order to protect the lender, investor, developer and contractors. A well designed construction risk management program can reduce the risk of design defects, construction defects, delays in construction and financial risks.
Proactive steps such as implementation of a construction risk management program with an experienced & qualified service provider can secure potential gaps and individual interests.
Constructing in Mexico-The Funding Process
The following is an effort to provide some broad based insight into the challenges associated with funding construction projects in Mexico compared to the U.S. process.
The most demanding venue is to understand that Contractors in Mexico do not have access to credit as is customary in the U.S. In Mexico, contractors will require an advance payment ie.primary anticipo, at contract execution before any work is performed. (This is not a joke!) Generally, this is requested at a 25% to 30% amount of the hard cost of the contract. In the U.S. this would never be accepted or even entertained. There are several key actions to take place to minimize the risk associated with this.
• Negotiate the amount down.
• Document there is an executed contract
• Obtain a Bond for 100% of the value of the advance payment
** All of this should be performed under Mexico Legal review.
• Track the distribution of the funds by reviewing the facturas
• Track the amortization during the course of construction.
Anther key element that differs in Mexico is that there are no mechanics liens. So how do make sure that the money is actually being paid to the General Contractor, and more importantly the sub-contractors and suppliers? First, you must verify that the work requested for payment and the materials are on site and/or installed. Secondly, you must track the facturas (or receipt of payments) in arrears monthly and cross-reference the tax ID on the factura with the individual contract to ensure that the proper taxes (both IVA and IMSS) are paid to the Mexico Tax Authority or Hacienda.
The best protection is to have direct payment to the sub-contractors and suppliers on the General Contractors check stock. This is performed in the US however currently it is very rare in Mexico due to the tax implications, but it is available and secure.
In conclusion, the overall philosophy is to establish the procedure and protocols to ‘keep an honest man honest” by contractual accountability and constant monitoring and tracking of the construction and funding process.
Next Issue-Secondary Anticipos and their relationship to risk and the primary anticipo
Mark Flinn
(210) 831.7930
mark@serconstructionconsulting.com
www.serconstructionconsulting.com
