Your client has called with the great news that their loan has been approved, you can now move forward with construction! STOP: The client quickly explains your project must be reviewed and inspected by an approved third-party inspector, also referred to as a bank inspector. WHAT? WHY?
After the market crashed in 2007 and 2008, congress passed the Dodd-Frank Act, a United States federal law that places regulation of the financial industry in the hands of the government. One of the side effects of this act was the necessity for lenders to have projects over a certain value reviewed and monitored by an independent third-party inspector.
Too often this process becomes difficult and, dependent upon the third-party inspector, can become adversarial. Yet it doesn’t have to be, and if performed correctly, a seamless process for all.
Why Do I Need a Third-Party Inspector?
Your client’s lender is required to conduct these reviews and is not choosing to do this. A thorough review of the documents can often benefit not just the bank and owner but also the contractor. These reviews tend to unearth potential problems that can cause the project to go off the rails and sometimes into court.
Once engaged the third-party inspector will ask for the drawings, contracts, budget, geotechnical report, permits, schedule and environmental reports. What is the inspector looking for in this initial review, sometimes referred to as a Plan and Cost Review? Simply put the third-party inspector is looking for any anomalies that would cause the project to not meet the specific performance the bank expects or in the unlikely event the original team cannot complete the project. The third-party inspector will then profess an opinion as to whether the project can be completed within the expected parameters.
When the upfront review is complete the third-party inspector will provide comments to the lender regarding issues found in the documents or concerns with the cost. In most cases those comments will need to be addressed prior to the loan being closed. It is important to remember the faster the necessary information is turned around, the faster the loan can close and construction can begin.
After the loan closes, does the third-party inspector go away? No, the project then moves to the construction draw inspection management phase and in some cases funds control.
What is a Construction Draw Inspection?
Construction draw inspection management is the process that all lenders use to verify the amounts requested in a payment application are consistent with the progress in place on the job site. The contractor submits a payment application and the third-party inspector verifies the percent complete in the field.
Funds control takes this process a step further with the third-party inspector managing the lien waiver process and providing the issuance of the funds.
An organized payment application protocol can assure a smooth funding process. Here are a few simple ways to ensure a smooth payment application process:
Keep a checklist of all Notice to Owners and gather those lien waivers for the previous month far in advance so they can be turned over in one group with your payment applications.
Prepare your payment application with industry standards and recognized documents such as those endorsed by the AIA.
Be accurate with your billing assessment. Should the third-party inspector come out and find the line items are billed incorrectly it will slow the funding process down.
Double check the calculations on the payment applications – previous payments, retainage, etc.
Deliver all change orders in an approved format and ensure they have been properly executed. Account for the source of the funds for these change orders.
Upon receipt of your paperwork, the third-party inspector will come out and conduct a site inspection. During that inspection, they will record a photographic record of progress and evaluate the following:
The percentage of completion for each of the individual line items.
The status of permits and inspections.
All test reports and third-party inspections results.
Construction progress in relation to the current schedule.
With the above information in hand, the inspector will issue a report inclusive of citing any issues to the lender. The lender will then use this information to process the funding of the loan.
Always remember that while third-party inspectors protect the lender, their observations can also provide a streamlined process for payment. Ultimately, the lender is seeking assurance the project can be completed for the funds which remain to be disbursed and the collateral is not being impacted by any unforeseen circumstance.
Managing the disbursement of funds for a construction project requires a specific understanding of the complexities associated with construction lending. CCDI has an experienced dedicated team in construction risk management and will monitor this funds control process for you. Contact us to learn more about CCDI, Inc. and how we can assist with your next project.