Finances are the lifeblood of a construction project. Proper planning and control of financing require detailed budgeting and scheduling with thorough descriptions and cost estimates. Streamlined processes and communication paths between the stakeholders are also essential. From the lender’s perspective, it’s important that the project is on track while avoiding cost escalation and minimizing the financial risk of delays.
To achieve this, lenders can hire a construction project management assessment consultant to keep an eye on the project. By relying on the insights from a highly experienced expert in construction or RE development, lenders get valuable construction risk management support in the success of the project and profit gain.
How do you avoid construction claims, delays, and disputes?
The following are some ways the lender can help the project avoid delays and disputes:
Setting clear responsibilities for all parties in the construction contract
Most risks involved with the project are allocated to the parties involved with the construction contract. Therefore, it’s vital that all parties who have agreed to it are aware of and understand their responsibilities over the course of construction. When confusion arises over coordinating a contingency or what comes after a milestone, the risk of delay at that point increases.
To minimize confusion, the lender can do the following:
- Check that lender-owner requirements for payment timing and conditions are flowing down through all other project contracts
- Check that contingencies and dispute resolution provisions and proceedings are consistent
- Ensure that terminology is consistent with current industry practices
Verifying that the construction schedule is clear and realistic
The construction schedule, along with the construction contract(s) is among the most important documents in construction project management. Based on the contract’s terms, the schedule’s milestone will govern the timing of the distribution and ultimately the timeframe of the loans.
For those financing the construction project, it’s prudent that they can understand and can verify that the schedule is realistic. A well- or poorly-made schedule is one of the indicators of the construction team’s readiness to build a project and can be used to evaluate the project’s internal risks.
Finance managers seeking to maximize the return on the firm’s capital should keep an eye for project schedule updates. In well-managed projects, the schedule is a living document during construction and depending on the scenarios, the milestones may slide back or be reached early. It’s one thing to have funds waiting weeks or months earning no interest, but it’s another thing to have them tied up and inadvertently cause a delay of payment claim.
Using a cloud-based project management platform
In the industry, there are numerous technologies used to monitor construction projects. Some of them are specialized like Inspec®, a quality assurance tool, which allows inspectors to identify and track issues in real time.
On the project management side, there are also cloud-based construction management platforms like Procore that offer a wide range of tools to facilitate the construction team’s collaboration.
Possible benefits of using specialized platforms
The main advantage of these new platforms is the automatic sharing of information to the right people, plus the ability to track the tasks that need to be done. This can expedite solutions to solve issues that may lead to construction claims and delays that impede the project.
By giving the lender or their project assessment consultant access to the construction management platform, they can review project updates such as meeting minutes, drone footage, plan changes, and more. This makes draw inspections easier with less administrative cost. In some cloud-based platforms, it’s possible to set up a workflow whereby the contractor can request payments which the owner and lender can review, approve, and wire funds.
If the construction team isn’t using such a platform, the construction lender could make it a requirement to use one.
Preparing for excusable delays and unforeseen changes
The larger the project, the higher the likelihood of changes. Changes inevitably affect costs and timelines. Some of these changes are caused by factors and forces that no one has control over (such as the weather). However, there are ways to minimize the delay changes bring, regardless of whether they fall under excusable or inexcusable delays.
In the scenario of a major unforeseen change, the construction lender needs to be in the loop for how to respond. This is where the construction experience of the finance team or their project assessment consultant really counts. With strong construction risk management experience, the team can quickly determine the expected magnitude of extra costs early on.
The support of experienced professionals can also help with planning contingencies with the construction team to keep costs in check as much as reasonably possible. Both of these benefits help lenders prepare and avoid scenarios of insufficient financial resources, which minimizes the risk delay claims from their end.
Being prepared to review, approve, and wire extra funds for change orders may seem counterintuitive to some finance managers. However, when you do the math on how much the change order costs vs the per diem costs of a critical path delay of construction, the benefits quickly become apparent.
Legislation regarding construction loans is complex, ever evolving, and highly regulated. It’s absolutely necessary to keep a close eye on all the documents that record compliance, in part to avoid delays and additional costs. One example would be collecting lien waivers from the contractor and trades after they received payment. Insurance policies also have to be closely monitored to avoid damage liability.
Contact VERTEX for construction risk management in the U.S., Canada & Mexico
VERTEX is a team of highly qualified professionals in all construction specialties, including project assessment and project rescue services for owners and lenders. We provide unique access to lifetimes of active on-field experience to support your project goals and manage risks, such as avoiding delay in construction. Reach out to us today to find out more about our services.
This article was originally published by Xpera Group which is now part of The Vertex Companies, LLC.