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Considerations When Negotiating with Contractors For your Construction Project

As WBTV News has reported through their recent “Construction Corruption” series, there are 30,000 licensed contractors throughout the state of North Carolina. So far in 2019, 636 people have filed complaints to the state’s licensing board. Oftentimes home owners are losing tens of thousands of dollars and it’s on them to pay for any lawsuit with no guarantee of getting their money back.

These current statistics prove the need for an ADVOCATE when building a home or commercial institution – to keep from being “ripped off” by a contractor.

HOW TO SAVE MONEY ON YOUR CONSTRUCTION PROJECT AND AVOID OVERPAYMENTS TO BUILDER

When hiring a builder for the construction of your new home or commercial project, you hire a trustworthy builder whose background proves they can get the job done well. In most cases, a builder DOES act in the home owner’s interests, but not always. However, remember throughout the construction process, the builder will, first and foremost, act as its own advocate by representing his or her company’s interests over those of an owner or construction lender.

Before starting a construction project, builders submit a draw request (invoice) to owners based on work completed as of the invoice date.  The amount invoiced may or may not match work completed. This is particularly true for work pertaining to the start of construction for site clearing/grading, foundation and framing, which are complex components.  Owners, due to lack of experience, will routinely pay the invoiced amount, without knowing with certainty that the work billed for has actually been done or done in compliance with the plans and specifications.

In an actual situation (see invoice), Owners Construction Advocate confirmed an over billing by builder of $27,706 and the builder adjusted the invoice reflecting a $27,706 reduction. All turned out well for everyone due to OCA’s involvement.

However, in this case, if the builder would have defaulted after receiving the funds from the owner, the owner would have not only been out the amount over paid ($27,706), but also an equal additional amount ($27,706) to pay another builder to complete work originally billed for ($55,412 total). Serious scheduling delays will also be incurred at considerable cost.

THIS EXAMPLE SHOWS WHY YOU NEED OWNERS CONSTRUCTION ADVOCATE LOOKING OUT FOR YOUR INTERESTS!

Construction Lending Essentials: Draw Inspections

You work for a bank institution and made a construction loan. The new project is now underway. If all goes well, the builder will send draw requests for labor and materials according to your draw schedule, make steady progress and complete the project on time and on budget. Although many lenders are excellent at managing credit risk, construction loans require a deep understanding of construction completion risk.

A construction lending best practice used by most lenders is ordering draw inspections to validate progress in conjunction with disbursing funds.
During November 2019, Owners Construction Advocate completed 19 successful construction loan inspections for its banking clients. These inspections are critical to ensure that the Loan-to-Value percentages in their real estate lending portfolios do not exceed bank regulator guidelines. Owners Construction Advocate turned in all 19 with spot-on accurate percentage of completion and with supporting photos.

REDUCE RISK WITH DRAW INSPECTIONS

With experience overseeing over 8,000 construction loan inspections for financial institutions, Owners Construction Advocate follows along with the builder so that you can ensure the loan proceeds are going into the collateral on the loan, and to identify construction problems as early as possible.

Let’s say a builder falls behind. You, as the bank lender, risk disbursing money for work that hasn’t yet been completed, or worse, won’t ever be completed. The sooner you’re made aware, the sooner you can take corrective action or work with that builder to alleviate the situation. Draw inspections also prevent horror stories like a builder failing many City Building Inspections and the bank not being aware or requesting funds on a project that isn’t actually under construction. These are expensive mistakes that you don’t want to make.

You can mitigate these risks by scheduling regular draw inspections with experienced draw inspectors like Owners Construction Advocate who become your eyes and ears on the jobsite. During a draw inspection, they will determine if the builder has completed work according to what has been requested and determine the appropriate funds to be released.

WHAT TO EXPECT FROM DRAW INSPECTIONS

Owners Construction Advocate visits the work site to evaluate current progress against what has been reported. They look specifically to validate that all work items and materials included in a draw request are, in fact, in place, and assist in determining the appropriate release of funds. We work with banks to report on a number of items, including:

• Tracking that each line item or stage of construction is complete, as reported, by percentage
• Photographing materials present on-site and work put in place
• Assessing quality of work, reviewing structural components, scheduling progress, noting any concerns
• Provide narrative report

For your next construction loan, contact Owners Construction Advocate at 704-575-5154 to help you minimize risks and be your advocate.