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Events


IAGA SUMMIT Macau 2018


“guaranteed maximum price” or “GMP” contract, that claim can be misleading. Only a certain portion of the hard costs are covered by GMP contracts. For example, GMP contracts typically provide for “allowances” with respect to the portion of the plans and specifications that are not complete at the time construction commences. Since developers typically rush to commence construction as soon as possible, the plans and specifications can be as low as 60 or 70 per cent complete, which creates a significant risk of cost overruns with respect to the remaining portion. In fact, in more than 30 years, we have never seen plans and specifications 100 per cent complete at the time the financing is being raised.


Similarly, the GMP contract typically contains “allowances” for all the FF&E, as well as all the finishes, which can comprise a substantial portion of the costs in these types of projects. An allowance is merely an estimate of the cost of the item. For example, the actual interior finish of the casino floor is often not designed until late in the project. An allowance for interiors may be stated as “X dollars per square foot.” If the actual finish chosen by the owner exceeds that cost, then the cost differential becomes the owner’s (and, consequently, the lender’s) problem to solve. In well-established gaming jurisdictions, estimating the cost per square foot of an interior finish based on prior projects may be relatively easy. However, this becomes a much more difficult exercise


in emerging markets such as Vietnam, where a project of the same scope and size may be unprecedented. Materials that are not commonly used locally may be difficult or expensive to obtain. Materials available locally may not be available in the quantity or quality required. Local labour forces may not be experienced in construction techniques for large-scale projects. In addition, given that large-scale casino projects can take up to three years to complete, labour and materials costs can increase significantly between the time the project breaks ground and the actual opening date. Similarly, timing of construction may be difficult to predict in emerging jurisdictions because there is a lack of comparable projects and potentially a lack of skilled labour for these types of construction projects.


Delays in development automatically add costs to a project because of the time value of money. For example, in some of the earlier Macau projects, the timing and availability of labour was a concern because Macau is a relatively small island. Although a large work force was available in Mainland China, the ability of that work force to commute to Macau and the related logistics were uncertain initially, and infrastructure had to be constructed to ensure the availability of labour. Any construction financing has to budget for the cost of capitalised interest during the construction period; extensive delays could cause a project to run out of money because the amount set aside for capitalised interest is insufficient.


In well-established gaming


jurisdictions, estimating the cost per square foot of an


interior finish based on prior projects may be relatively


easy. However, this becomes a much more difficult exercise in emerging


markets, where a project of the same scope and size may be unprecedented.


IAGA


The International Association of Gaming Advisors (IAGA) will hold its 37th annual International Gaming Summit May 14 - 16 at the Four Seasons Macao in Macau, China.


NEWSWIRE / INTERACTIVE /MARKET DATA P81


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