Best Practice Guideline: MAJOR CAPITAL WORKS 1. PURPOSE This Guideline aims to assist ClubsNSW Members dealing with major capital works projects by: setting out the main steps that should be followed in evaluating, planning and managing capital works projects; considering the key questions that need to be made at various stages; and describing the main criteria for selecting outside experts to assist with the project. Given the wide variety of types and sizes of Clubs, the term major is a relative one. By the same token, projects vary in complexity, size and importance. The resources spent on appraisal of projects should be in proportion with the cost of the project, its degree of complexity, risk and the size of the Club. In general, more detailed appraisal criteria should be applied to projects which: are estimated to have a capital cost in excess of $500,000 or 2.5% of last audited total revenue; involve complex or specialised issues or untried technology; or are unique and unprecedented in the Club industry. 2. DEFINITIONS Disposal of core property is defined as per the Registered Clubs Act 1976. EBITDA means earnings before interest, taxes, depreciation and amortisation. Fixed assets are tangible Club assets such as land, Club buildings and facilities, accommodation and sporting facilities. Major capital works are improvements, replacement or additions to Clubs fixed assets. 3. BACKGROUND Among the most important decisions Clubs make are those relating to refurbishments, extensions or other major capital works. Clubs rely on improvements to fixed assets such as buildings, plant and equipment, parking, etc to provide services to members and attract new patronage. Major capital works involve a combination of materials, plant, equipment and labour and can include, for example: New equipment (e.g. air conditioning); Refurbishments (e.g. carpeting, kitchen fit-out); Extensions; and Redevelopment of Club land (e.g. residential development). 4. GUIDING PRINCIPLES Major capital works should be commissioned and implemented in the best interests of Club members in line with these principles: Projects should be properly researched and analysed in respect to market feasibility and the long term strategic position of the Club;
BEST PRACTICE GUIDELINES Projects should be properly defined, documented, cost planned and approved; Projects should be subject to appropriate contracts with the chosen supplier; Clubs should seek legal advice on contracts associated with major capital works; Club members should be provided information and given opportunities to comment at regular intervals during the planning and execution of major capital works projects; The Board of Directors should act diligently and in the best interests of Club members in approving and overseeing major capital works projects; Directors should avoid any conflicts of interest in relation to a capital works project of the Club; Proper processes should be used to appoint third parties. Where non-price criteria are used to select these third parties, these criteria should be documented; and Legal requirements should be adhered to. 5. DISPOSAL OF CORE PROPERTY There are controls on the disposal of core property of a Club 1. If the project involves the disposal of core property, it should be conducted in accordance with Sections 41J of the Registered Clubs Act 1976. Since 2004, section 41J of the Registered Clubs Act has imposed very strict controls on the disposal of Club land. Section 41J 1 Note: the Registered Clubs Act 1976 defines core property as a Club s defined premises (the Club house), any facilities provided for members and guests (car parks, bowling greens, golf courses etc), but allows Members to declare property as non-core. includes the concepts of core property and non-core property. All land owned or occupied by a Club is classified as either core property or non-core property for the purposes of section 41J. Core property is: the defined premises/licensed premises of the Club, that is the Clubhouse; any facility provided by the Club for the use of members of the Club and their guests. This is intended to catch facilities such as car parks, bowling greens, golf courses and tennis courts. However, it has potentially wider implications and may include other land; and any other property which the members at a general meeting, by a resolution passed by a simple majority, declare to be core property. In other words, any land owned by the Club can be designated as core property by the members. Non-core property is all land of the Club which is not core property. While these definitions of core and noncore property are contained in section 41J, the section also provides that the ordinary members of a Club can pass a resolution at a general meeting to have core property declared to be non-core property and vice versa. Accordingly, a block of land which is used for the Clubhouse or facilities such as a golf course or bowling green or Club car park is core property. However, the ordinary members could pass an ordinary resolution to have the land declared to be non-core property. The relevance of the distinction between core and non-core property relates to how land can be disposed of. A Club can only dispose of core property in accordance with section 41J(3) which requires:
MAJOR CAPITAL WORKS the disposal to be approved by a resolution passed by a majority of the ordinary members of the Club; the disposal must be by way of public auction or open tender conducted by an independent real estate agent or auctioneer; and the property must be valued by a registered valuer within the meaning of the Valuers Act 2003. Dispose of property in section 41J means to sell, lease or licence the property or to otherwise deal with the property in such manner as may be prescribed by the Regulation. This provides for a broad definition of disposal. Clubs need to be aware whenever they are dealing with any of their core property that a transaction may be a disposal for the purposes of section 41J, even if the Club does not believe it is disposing of any of its land. Exceptions to section 41J Clause 19 of the Registered Clubs Regulation sets out exceptions to section 41J of the Act. If an exception listed in the Regulation applies to a particular transaction, section 41J will not apply to the disposal of that core property. Of course, if the Club is disposing of non-core property section 41J will not apply at all. The exceptions to section 41J in clause 19 are expressed as follows: Section 41J (3) of the Act does not apply in relation to the disposal of any core property of a registered Club in any of the following circumstances: i. the property is being leased or licensed for a period not exceeding 10 years on terms that have been the subject of a valuation by a registered valuer, ii. iii. iv. the property is being disposed of to a wholly owned subsidiary of the Club, the property is being leased or licensed to a telecommunications provider for the purposes of a telecommunication tower, the disposal of the property involves calling for expressions of interest and a subsequent selective tendering process, and the disposal and disposal process has been approved by a majority vote at a general meeting of the ordinary members of the Club, v. the property is being sold by private treaty, but only if it failed to sell at public auction or open tender following compliance with the requirements of section 41J (3) of the Act, vi. the terms and nature of the disposal (including details of the parties, property, price and valuation) are disclosed to the ordinary members of the Club, and the disposal is approved at a general meeting of the ordinary members of the Club, vii. the Director has, on application by the registered Club, approved of the property being disposed of otherwise than in accordance with section 41J (3) of the Act. Section 41J (3) of the Act does not apply in relation to the leasing or licensing of any core property of a registered Club if the lease or licence: i. is granted to a person for the purpose of enabling the person to provide goods or services exclusively to members of the Club and their guests and to other persons attending the Club in accordance with a functions authority held by the Club under section 23 of the Act, or ii. is granted to a person for the purpose of enabling the person to provide goods or services to members of the
BEST PRACTICE GUIDELINES Club and their guests and to other members of the public and the granting of the lease or licence for that purpose has been approved at a general meeting of the ordinary members of the Club. Section 41J (3) of the Act does not apply in relation to the disposal of any core property of a registered Club to a government department, statutory body representing the Crown, State owned corporation or local council. Reporting to members Section 41J(2) provides that the annual report of each Club must specify the land of the Club which is core property and the land which is non-core property as at the end of the financial year to which the annual report applies. Annual report is not defined in the Registered Clubs Act or the Corporations Act but it has traditionally been held to refer to the financial statements and accounts, directors report and auditor s report which are sent to members each year. The members do not approve or determine the classification between the Club s land as core property and non-core property. This is the task of the Board. Once allocated, the classification must be included in the annual report. A simple statement which sets out which land is core property and which land is non-core property is sufficient to meet the obligation under section 41J(2). However, this does not inform members of the effect of the allocation between core and noncore property. It is preferable that the consequences of the allocation be included in the annual report so that members are made aware. If a Club disposes of core property other than in accordance with the Registered Clubs Act, the OLGR can make application to the Supreme Court for an order: declaring a contract for the disposal of land void; that the land be transferred back to the Club; directing the payment of an amount or further amount in relation to the disposal of the land by the person to whom the Club has disposed of the land; and such other orders as may be necessary. The Director General could also take disciplinary action against the Club under the Registered Clubs Act which could lead to removal of office of directors and/or the secretary, substantial monetary penalties and possibly cancellation of the Club s licence. 6. PRELIMINARY APPRAISAL All major capital works projects should be properly defined. This is a step-by-step process commencing with an initial brief, conceptual options with approximate cost estimates and early feasibility analysis. The systematic appraisal of all major capital works projects helps ensure the best choices are made and the best value for money is obtained. Before embarking on major capital works projects, Club Directors and management need to carefully consider and document their justification for planned expenditure. However, it is not enough to be satisfied the investment is justified in terms of need; it is also necessary to ensure that it produces its planned benefits to Club members and the wider community.
MAJOR CAPITAL WORKS The preliminary appraisal should include a clear statement of the need which the project is designed to meet and how this will be achieved. It should identify all realistic options, including the option of doing nothing and, where possible, quantify the key elements of all options. It should assess the costs and benefits of all options, identify the preferred one, and recommend whether its benefits are sufficient to warrant incurring the costs. Costs include the initial capital cost and the ongoing costs generated by the use of the capital asset. Avoiding Premature Commitments All involved in the appraisal and management of projects should guard against the danger that when a project is mooted, it is given a degree of premature commitment. This should be avoided. A sequence of considered decisions generally will lead to progressively greater commitment of resources, but an irrevocable commitment to proceed should only be made after all appraisal stages have been satisfactorily completed and final approval obtained. These decision points should be clearly noted in the minutes of Board and/or relevant Committee meetings. Ability to Pay Before moving on to a detailed appraisal of the project, the Club needs to consider its capacity to pay for the project. It should be recognised at the outset that major capital works projects involve the Club investing in additional operating assets. If the Club intends to rely on a financial institution for funding, an initial approach should be made at this stage to assess likely repayment terms. planned major capital works project. This assessment should include: profit and loss projections showing the impact of the project on the main revenues and costs of the Club; balance sheet projections showing the impact of the project on the finances of the Club; and cash flow analysis - showing the impact of the project on cash flow. While the assessment does not have to be extremely detailed at this stage, it should be recognised a more accurate analysis will improve the confidence of members in the viability of the project and the Board s ability to deliver it. 7. DETAILED APPRAISAL If the preliminary appraisal is favourable, the proposal is further developed and defined, usually by a third party entity. Clubs should be aware of the different approaches for major capital works and carefully consider which is the most appropriate approach for their specific needs, remembering that the choice lays with the Club, not the third party entity. The way in which the Club allocates responsibilities to third parties throughout a project should be determined only once the Club has established its key needs and criteria for the project. Some common methods include: Design and Construction where the responsibility for the design, documentation and construction is contracted to a single entity; Design and Tender where the design is documented and then tenders At this stage, Clubs should conduct an assessment of the financial impact of the
BEST PRACTICE GUIDELINES sought from a single contractor for construction 2 ; and Construction Management where a professional agent undertakes the management of the individual trade tendering for a management fee. The Club enters contracts directly with each trade rather than a single building contractor. At this stage, the Club should answer the following questions: Q1: Building upon the analysis done during the preliminary appraisal, what is the justification for the project? Clubs need to consider in detail: affordability; benefits to members; increase to patronage/revenue; benefits to community; special features being considered; necessity such as market demands, compliance upgrade, wear and tear, diversification of income, operational efficiencies, maintenance problems, etc; and conformity with the Club s medium to long term business plans and goals. Q2: Is there any design component? Clubs need to consider the design in the form of drawings and/or specifications that are needed to obtain approvals from authorities (if required) and to describe quality, extent, visual and other requirements of the Club. Consultants should be briefed on the Club s chosen procurement methodology to ensure 2 Note: such tenders can be sought in a number of formats. For example, lump sum, negotiated or novated (where the remainder of the design/documentation responsibility is novated or transferred to the contractor). documentation is appropriate to the Club s contractual needs. Q3: Does the Club have the resources to manage, supervise and accept construction risk? It often requires a high level of expertise to properly design, document and construct. Managing capital works projects is not part of Clubs core activities, so outside expertise may be required. In determining the Club s role, the Board should be aware that: a project manager who is an employee will need to be qualified 3 and be allocated sufficient resources and time; the Club will be deemed as being the Principal Contractor under the Work Health and Safety Act 2011 and will require a safety system and management practices which comply with Work Health and Safety Act 2011, and NSW Government Work Health and Safety Management System Guidelines 4 ; special insurances will be required; the Club will require expertise to properly manage the human resources needed on a construction project such as checking trade contractors credentials (work cover authority, insurances, workers compensation declaration forms, etc); and the Club will require qualified resources to establish formal contacts with trade contractors and purchase agreements with suppliers which establish scope, risk allocation, price, 3 4 E.g. hold a builders licence issued by the NSW Department of Fair Trading and be properly trained in the management of Workplace Health and Safety in a major capital works environment The majority of capital works projects undertaken by Clubs involve at least some refurbishment of their current premises. This carries with it a high occupational health and safety risk and the need for complex staging to minimise the disruption to normal trading.
MAJOR CAPITAL WORKS terms of payment, quality, time, warranties, maintenance requirements and other obligations. Q4: Has the Club addressed the key financial issues? A thorough financial analysis needs to be prepared at this stage quantifying financial costs (both current and ongoing capital) and specifying sources of funding. Key factors to consider in determining whether the Club should undertake the project are: Interest Coverage Ratio on Loans this is a calculation of the number of times interest owed is covered by EBITDA; Maximum Debt Level this is usually determined by a multiple of EBITDA. Financial institutions usually have a minimum benchmark. Note: It is important that the institution s lending criteria be properly understood; Cash flow this needs to be monitored closely so that the repayment can be met; Return on investment the Club should determine in advance how it intends to measure the results projected to flow from the expenditure. Not all major capital works will be measurable in strict dollar terms. For example, the return on a Club s investment in a sports field will be difficult to quantify in financial terms. However, major capital works that are planned to deliver commercial returns should be readily quantifiable; and Impact on current operations quantify potential disruption to business (e.g. gaming floor, car park etc). Information to Members Once the detailed appraisal has been completed and a decision made to proceed, members should be presented with information that addresses at a minimum, the 4w s (what, when, where, and why). Sufficient information should be provided to give members a clear understanding of the scope and nature of the project. 8. PROJECT IMPLEMENTATION Once the major capital works project is fully defined, documented and approved, further implementation can commence. For larger projects, Clubs should select an independent expert 5 to act on their behalf to manage the delivery of major capital works projects. The independent expert should, on behalf of the Club, arrange the employment of necessary consultants to define, design, document and gain approvals for the project. They should obtain at least three independent quotations for all sub/trade contractor and supplier works. In some circumstances the Club and independent expert may form the opinion that the lowest tendered price does not conform to the needs of the Club. An example may be the capacity of the service provider to perform the necessary works within time, cost and ability, including Work Health and Safety. In that circumstance, the next lowest price should be used, providing it conforms to the needs of the Club. 5 An independent expert could for example be an experienced quantity surveyor. It is suggested that clubs use the Business Register on the Australian Institute of Quantity Surveyors (AIQS) website www.aiqs.com.au to locate an AIQS member who is subject to the AIQS Code of Conduct, professional indemnity insurance requirements and professional standards of practice
BEST PRACTICE GUIDELINES When making a decision it is important that Clubs document the reasons why, and why not, a particular action was taken. For example, Clubs should document why an organisation was suitable and why another was not suitable. Selection of Third Parties In most cases Clubs will need the expertise of a number of outside specialist organisations to enable major capital works projects to be defined, documented, cost-planned and approved. Third parties include consultants, architects, engineers, suppliers, builders, managing contractors, project managers and sub/trade contractors, among others. 6 A combination of price criteria and non price criteria may be used to select these third parties. The selection criteria should be documented then conscientiously applied. For example, selection criteria for a construction project should establish whether the company is a qualified construction company that can act as the Principal Contractor. Club Directors need to ensure the company: has necessary insurances (professional indemnity, contract works, public liability and workers compensation); holds a builder s licence; has an occupational health and safety system in place which complies with Work Health and Safety Act 2011, and NSW Government Work Health and Safety Management System Guidelines edition 4 (or the most recent); has a track record, references, experience, etc; and 6 is to be formally evaluated against the non price criteria listed below. ClubsNSW can provide a list of suppliers with extensive expertise and knowledge of the club industry. Clubs may make a selection by comparing capable organisations using non price criteria, provided that fees and charges are reviewed by a qualified independent 7 quantity surveyor (with relevant experience) engaged by the Club. Non price selection criteria typically include: Intellectual property from past work; Industry knowledge and specialty expertise 8 ; Adequacy of insurances; References/reputation; Financial viability; Resources available/capacity to perform; Work Health and Safety compliance; Unique product or services; Industrial and workplace relations; Qualifications (e.g. builder s licence); Contractual adequacy; Guarantees/risk taking offered; No conflicts of interest with Board and management; Transparency of costs; and Weighing against other alternatives. Subject to the above points, Clubs can negotiate with one company to achieve a desired outcome, provided that fees and charges by the company are reviewed by a qualified independent quantity surveyor (with relevant experience) engaged by the Club. Clubs may also employ an independent specialist at key milestones throughout the project to undertake an audit role by checking progress is as expected. 7 8 A quantity surveyor is usually required by banks if debt funding is involved. Due to the unique nature of the Club industry, industry knowledge and experience should be highly valued
Where a Club settles on a bid that was not the lowest price, reasons for the decision should be documented. Clubs should refer to the Guideline for Procurement of Goods and Services for detailed guidance in this area. MAJOR CAPITAL WORKS