Why Value Materials Off-Site?

On occasion, a large volume of construction related materials need to be stored off-site, and ‘called off’ for delivery to a construction project. The Principal Contractor is not always able to cashflow such a large order, and therefore, materials which are stored away from the site may need to be formally valued and vested. Quantity Surveying Partner, Adam Reeve, explores why materials are valued off-site, the benefits, the recommended protocols before valuation takes place, the potential risks, and provides final insights based on his experience.

Why Materials Are Valued Off-Site

It is important to understand why, in some instances, materials need to be valued off-site. It typically occurs on large projects, perhaps with a lack of on-site storage space due to the scale or location of the project. It can also occur on projects which use modular construction where components are put together off-site rather than in-situ, or where packages have long-lead times and they require manufacture to be started early, e.g. frame, cladding, etc.

The Benefits

One of the key benefits of valuing materials off-site is that it supports the Principal Contractor’s cashflow. It enables them to recover the cost of materials stored off-site that have already been paid for under their sub-contract arrangements. It means they are not left ‘carrying the can’ on significant advanced payments to their supply chain, typically due to reasons outside of their control. In the context of the current market, supporting the Principal Contractor’s cashflow, whilst protecting the client from risk, would be in the best interest of both parties – as it reduces their financial burden and would therefore reduce the likelihood of contractor default.

Furthermore, it should improve project programme certainty and efficiency, as it allows the Principal Contractor to ‘call off’ materials for delivery and installation. This means they can navigate programme risks by ensuring that materials are stored in advance of the programmed delivery date, eliminating the risk of late production of materials.  It should also provide more flexibility and reduces the downtime waiting on deliveries.

It also encourages early procurement as it allows for early manufacture of materials, providing protection against price inflation and supply chain delays.  This would reduce the Principal Contractor’s risk profile on a project, and should reflect in a lower construction cost, which improves viability, and value being achieved.

The Protocols Before Valuation

We always establish clear protocols which must be achieved before the cost for materials off-site can be recovered, which typically includes:

• Confirmation that the materials being valued are ‘Listed Items’ under the contract in the case of the JCT Suite.
• Agreeing the Schedule of Materials with costs for each component.
• Checking that the insurances required by the client are in place and maintained from each supplier and the Main Contractor.
• The valuer must visit the off-site storage facility and inspect the materials being included in the application, confirm that they are not damaged, are being stored safely, can be clearly identified, and are allocated to the specific client/project.
• Vesting Certificates, to properly transfer ownership of the title to the client. These should not include any Retention of Title clauses, or similar.
• Evidence of Receipt of Funds from Supplier to confirm that they have been paid by the Principal Contractor for the vested materials. The transfer of ownership is typically on payment, so this is vital.
• Delivery notes confirming what materials have been delivered to the site in the period, avoiding materials being double counted.
• Any other contractual requirements, as set out in the bespoke terms of the contract.

Are There Potential Risks?

The inherent risks with including off-site materials in payment applications can be mitigated through clear protocols and ensuring all the necessary paperwork is in place.  The potential risks, plus ways to overcome these, include:

• Materials not being formally vested to the client – ensure that protocols are followed and necessary paperwork is submitted promptly and signed.
• Valuing materials off-site not being permitted under contract – the best way is to agree pre-contract what “Listed Items” are needed to support the Principal Contractor’s cashflow. If a request is made post-contract, then check the terms.
• Overvaluation of materials off-site – ensure that the valuation criteria is clearly established, i.e. is payment due on the completion of components or a full system. And set up clear schedules which can be agreed whilst at the facility, and reflect progress.
• Damaged/stolen materials off-site or during transit – ensure that mitigation measures (i.e. safe storage, security etc.) are in place, and also that there are insurances in place for added protection.
• Inadequate insurance cover – client’s insurance expert to advise on insurance requirements, to protect them from financial risk.
• Materials are not allocated to your client/project – if ownership is unclear, then this causes challenges if the client has to step in and claim their materials. Therefore, the materials should be stored separately and clearly labelled with client/project address/vesting ownership.

Final Insights

From recent experience, our expert team of Quantity Surveyors recommends:

• Agree protocols early
• Establish clear timescales from inspection to payment
• Maintain a disciplined site visit calendar
• Agree a pricing document for valuation purposes
• Establish barriers to prevent double counting of materials
• Ensure the Vesting Certificates are signed promptly
• Regularly check contract conditions.