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Successful Management and Risk Mitigation in Construction Lending

Successful Management and Risk Mitigation in Construction Lending

The COVID-19 Pandemic has created an entirely new and unforeseen set of difficulties for commercial lending. This is particularly true with construction loans. Few projects continued without issue through the height of the pandemic. Many more were shut down and are only now coming back online.

Even in an ideal economic environment, construction lending presents a unique set of difficulties and risk. Project delays, issues with contractors and subcontracts, and most significant, cost overruns—all present hurdles to the completion of the construction project. Now more than ever, mitigating or eliminating cost overruns and ensuring a timely completion of the project are paramount. Manpower shortages and disruption in supply chain are now foreseeable risks that must be managed in the construction process. It is necessary for lenders to adopt and implement sound construction risk management practices. By engaging a construction risk management consultant, lenders can optimize their construction loan programs while also mitigating risk.

Completion Commitment is a proactive approach to managing the risk associated with construction lending through a full suite of construction management services:

  • Document & Cost Review (DCR) – ensuring projects are contractable, costs and schedules are realistic, and payments are set up properly
  • Contractor Evaluation (CE) – assessing qualifications and capabilities (which includes past performance experience, staffing levels, access to equipment, financial stability and current workload), approach, and deliverables of the contractors proposed for the project
  • Construction Progress Monitoring (CPM) – inspection to confirm that the progress of the project matches up with the funds being requested. It also verifies that the work is generally consistent with the plans and specifications initially proposed.
  • Funds Control/Fund Disbursement (FC/FD) – managing the disbursement of funds during construction projects as a third party-working with the borrower and lender to ensure projects remain on budget and lien free while preventing money mismanagement and improper billing.
  • Professional Services for Course Correction – stepping in, as necessary, as a proactive approach to help correct deviations to the schedule or budget necessary to take the project through a successful completion.

The proactive nature of these Completion Commitment and Risk Management services significantly reduces the risk of default and loss. Sound practices can also act to minimize disruptions attributable to unanticipated events such as the COVID-19 Pandemic. By engaging a consultant that can take these everyday issues off of their plate, lenders can further mitigate risk and successfully fund the construction project through to completion.