United States

Uncovering cost overruns at a hotel casino

CASE STUDY

The Client
Lender of a $700 million construction loan for a $3 billion hotel-casino development.

The Challenge
The developer defaulted on the loan and the lender’s attorneys requested a project review to identify soft costs to date, forecast the cost to complete, develop cash flow projections and evaluate their options.

Our Solution
RSM’s Construction Advisory Services group assembled a cross-functional team that included CPAs with extensive contractor audit experience and engineers with extensive hands-on construction management experience. A comprehensive review of the current project budget, cash flow reports, bank loan draw requests, vendor and supplier contracts and construction budget reports revealed numerous cost overruns. Our findings included:

  • Many hidden cost overruns not previously identified
  • Overly optimistic budget assumptions misrepresented the truth
  • Non-project costs included in the developer’s overhead
  • Hard cost overruns not accounted for under the guaranteed maximum price (GMP) contract
  • Unacknowledged schedule delays resulted in significant time-related cost overruns

Client Benefits
Our detailed cost analysis provided the client with an accurate project forecast. And, our findings regarding mismanagement helped the lender negotiate a quick and favorable turnover of the project to a new developer.

Lessons Learned

  • Manage the soft costs as closely as the hard costs
  • Don’t take a GMP contract price at face value
  • Watch out for additional costs resulting from schedule delays

To learn more about our Construction Advisory Services, contact Director John Lincoln at 312.634.3199 or john.lincoln@rsmus.com.

AUTHORS


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