Due Diligence in Construction: Mitigating Risk Before Day One

In construction, surprises cost money — and the bigger a surprise is, the more it’s likely to cost. That’s why before starting the preconstruction phase of a project, stakeholders investigate physical, financial, environmental and other aspects of the project so that they know exactly what they are getting into. This investigation is known as the due diligence process. 

The due diligence process aims to give stakeholders a complete understanding of the potential risks and rewards associated with the project — allowing them to make informed decisions about whether to proceed with the project and to develop strategies for mitigating potential risks. This is an all-encompassing process that tests feasibility, constructability and the legality of a project site or construction plan. 

Every construction project is different, which means that a different combination of factors might need to be investigated during the due diligence process. This article outlines some essential types of due diligence to conduct — helping to mitigate risk on a project before preconstruction officially begins. 

Legal Due Diligence

Conducting thorough legal due diligence before starting a construction project is crucial for minimizing risks and avoiding costly delays. By addressing potential legal issues early on, project stakeholders can ensure that their projects proceed smoothly and comply with all applicable laws and regulations.

Title Search

A title search is performed to confirm that the current property owner has the legal right to sell or develop the land. This process involves examining public records to verify ownership history, identify any encumbrances (such as liens or easements) and make sure there are no title defects that could jeopardize the project.

Lien Search

A lien search is conducted to determine if there are any outstanding liens on the property. Construction liens (also known as mechanics liens) are legal claims against the property that can arise from unpaid debts, taxes or other obligations. If liens are discovered, they must be resolved before development can proceed, as they can cloud the title and potentially lead to foreclosure.

Zoning Review

Zoning regulations dictate how land can be used within a specific area. A zoning review is necessary to ensure that the intended use of the property complies with local zoning ordinances. If the property is not zoned correctly, it may be possible to apply for a rezoning or variance, but this can be a time-consuming and uncertain process.

Surveys and Right of Way Review

A land survey is often conducted to confirm the property boundaries and identify any easements or rights of way that may affect the project. An easement grants another party the right to use a portion of the property for a specific purpose (e.g., a utility easement). A right of way allows for passage across the property. Understanding these rights and restrictions is important for project planning and avoiding potential disputes.

Permit Review

Construction projects typically require various permits and approvals from local, state and federal agencies. A permit review involves identifying the necessary permits and understanding the requirements for obtaining them. This process can be complex and time-consuming, so it's important to start early and work closely with regulatory agencies.

Indigenous Review

If a project is located on or near land owned or traditionally occupied by indigenous people, additional legal considerations may apply. These considerations may include consulting with indigenous communities, obtaining their consent and complying with relevant laws and treaties that protect indigenous rights and interests. Failure to address these issues can lead to legal challenges and delays.

Additional Legal Considerations

• Environmental Review: Depending on the project location and scope, an environmental review may be required by law to assess potential environmental impacts and ensure compliance with environmental regulations.
• Contract Review: Construction contracts should be carefully reviewed by legal professionals to ensure they adequately protect the interests of all parties and clearly define roles, responsibilities and liabilities.
• Insurance: Adequate insurance coverage is essential to protect against financial losses due to unforeseen events, such as accidents, delays or natural disasters.

Physical and Structural Due Diligence

Once the legal due diligence is completed on a project, and there are no significant issues that might make the project too complicated or expensive, the physical and structural review of the proposed site can be assessed.  

Site Assessment

Assesses the suitability of the site itself for the intended project. Key considerations include zoning compliance, potential impacts from city, county, state or federal regulations, on-site geological hazards and proximity to potential issues like airports or brownfields. In essence, location feasibility determines whether the project can and should be built on the chosen site.

Soil Testing

Soil tests must be assessed to determine if the location soil can adequately support the structure. Even with a well-constructed foundation, factors such as wind load and earth movement can negatively impact the ground underneath a building. This risk is heightened if the soil has not been properly prepared beforehand.

Utility Mapping

Identifying and locating any water, power, or gas lines, sewer pipes, and telecommunication services on the property. Conduct a comprehensive utility location and identification process on the property. This process should include, but not be limited to, the following.

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  Water

  Locate and identify the main water line, as well as any service lines that branch off to supply structures on the property.

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  Power

  Locate and identify the main power line, the meter and any underground or overhead power lines that distribute electricity across the property.

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  Gas

  Like electrictity, locate and identify the main gas line, the meter and any underground or overhead gas lines that distribute gas on-property.

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  Sewer

  Pinpoint the main sewer line, as well as any service lines that connect structures on the property to the main sewer line.

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  Telecommunication

  Locate and identify any underground or overhead telecommunication lines, including telephone, cable, and fiber optic lines.

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  Additional Utilities

  Identify any other utility services present on the property, such as irrigation systems, fire hydrants, or private utility lines.

Environmental Review

Owners teams will need to inspect the property and any existing structures to identify potential environmental hazards, such as lead or asbestos, that may require remediation. This process encompasses an evaluation of both the property itself and any existing structures.

Structural Review

If the site has existing buildings, owners need to know the shape they're in, how solid they are, and if they'll work for the project. This means taking a close look at the foundation, walls, roof, wiring, pipes and everything else important. Note any issues, things not up to code or potential dangers that need fixing. Everything should be written up in a report to help plan the project, figure out the costs and set a schedule.

Financial Due Diligence

This financial analysis delves deep into the project's fiscal viability, encompassing a detailed examination of budgetary considerations, cost projections, revenue streams, and potential risks.

The financial assessment itself encompasses a wide array of factors, including an in-depth analysis of the project's budget, encompassing both initial capital expenditures and ongoing operational costs. Additionally, revenue projections are meticulously scrutinized, taking into account market conditions, demand forecasts and potential fluctuations. Furthermore, a thorough risk assessment is conducted to identify and evaluate potential financial pitfalls that could impact the project's profitability or overall success.

By conducting a rigorous financial due diligence process, stakeholders can gain valuable insights into the project's financial health and make informed decisions regarding its viability. This comprehensive evaluation helps mitigate financial risks, optimize resource allocation and boost the project's overall chances of success.

During the due diligence process, the following financial analyses are typically performed:

• Programming and sometimes schematic designs are often created to help determine budget pricing.
• The finance team might review similar projects to evaluate profitability and potential risks.
• Profitability, cash flow and debt projections may be carried out so the owners have access to the required funds and that the project can be completed profitably.
• Budget pricing for different elements of the work is usually sought from potentially qualified companies.

Preliminary Design and Due Diligence

In order to conduct proper due diligence, the project will have had to go through the programming design phase. In the programming phase, architects and design teams conduct exploratory work to determine project requirements, such as the number and types of rooms needed, overall space requirements, and the inclusion of any specialty spaces.

Having this early design allows the project due diligence team to assign costs, timelines and other assumptions to the project plan, and that, in turn, helps them to determine what needs to be investigated, and in how much detail. 

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Due Diligence: The Earliest Type of Risk Mitigation

The early stages of a construction project involve a key assessment to determine its feasibility. This process focuses on identifying potential challenges that could lead to project failure, budget overruns, or insurmountable obstacles when working with contractors during construction. 

By recognizing these risks early, project owners and their teams can avoid wasting valuable time and resources on endeavors that are unlikely to succeed.

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