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In the business of commercial construction lending, risk mitigation is a top priority.    

Mitigating Risk in Construction Loans

September 20, 2018

In the business of commercial construction lending, risk mitigation is a top priority.

Lenders run the risk of losing some, most, or all of the loan they granted. Construction is complex and most projects see various ups and downs; changes in budget, schedule, or staff and delays can arise due to these changes, weather, or permitting issues. Miscommunication is a frequent challenge, as mentioned in our previous blog post, and can lead to discrepancies in materials and schedule.

Throughout a project’s life, however, the goal for all parties involved remains the same: complete the project on time, on or under budget, and turn a profit. Developers want to complete projects and begin profiting by selling or leasing the property, or operating their own business out of it. As lenders want to be reimbursed as speedily as possible, developer and lender goals are usually in alignment. However, budget and schedule overruns do occur. The most common causes are:


Materials

Lenders want to know that their loan is going toward agreed-upon project milestones. In the past, some lenders experienced difficulties with developers or contractors claiming to use more costly materials when actually purchasing cheaper materials, providing the developer or contractor additional profit at the expense of transparency with their lender. These discrepancies cause lenders to take on undue and unplanned monetary risk.

 CLM Blog 1[i]


Construction Delays

Bad weather, staffing issues, and other unavoidable circumstances often cause delays in construction.[ii] However, some delays may be the result of insufficient or poor project management. Permitting issues and project changes, if handled incorrectly, can also contribute to project delays. Proper permits need to be obtained for certain construction activities, such as signage or placement of sidewalks. Without completing this step, construction likely cannot proceed.

Missing scheduled milestones can be very costly and add to overall project costs, due to problems such as additional labor costs. No project can be perfect, however, having the resources and team to manage various hurdles can help mitigate construction cost increases.

CLM Blog 2[iii]    CLM Blog 3[iv]


Hire Confidence in Your Investment

Hiring a project manager to track project schedule, materials, budget, and documentation can help avoid project obstacles, and project managers can also assist in mediating any obstacles that occur. A project manager is the lender’s eyes and ears on a project from start to finish, particularly when hired to complete an up-front construction plan and cost report (CPCR) in addition to monthly construction monitoring reports (CMRs) and ensuring proper progression and successful completion of milestones. Working with such construction professionals when considering a loan agreement assists in ensuring the timeliness of a project, and thus the return on investment on any loan.


Consider EBI Consulting

EBI Consulting’s Construction Loan Monitoring (CLM) team consists of experienced construction professionals with expertise in construction lending. Our project managers work diligently to facilitate an on schedule, on budget construction process, and prioritizing the client while keeping all involved parties in mind. Additionally, EBI CLM project managers are able to adapt to any unforeseen circumstances.

For more information about EBI’s CLM team, read our August 2018 case study!



Sources

[i] http://pa2zion.com/service/construction-materials/

[ii] https://esub.com/top-5-causes-for-construction-delays-and-how-to-resolve-them/

[iii] http://www.ontarioconstructionlaw.com/category/delay-claims/

[iv] https://www.floridaconstructionconnection.com/your-summer-starts-here/blog_construction-summer-rain/