Bank on the Plan
by Brian Hoban
In 1772, an Irish-born architect won a contest to design the “President’s House.” Some thought that President Washington had become frustrated with a Frenchman’s delay in producing plans for the home, so he opened the design of the home to a competition. The delays prevented Washington from ever living in the home.
After the British destroyed the original home, it was rebuilt under that same winning architect’s supervision and was later called the White House.
Known for his construction supervision, the architect also stepped in to oversee the construction of the U.S. Capitol Building.
This story illustrates how construction has been a complicated and sensitive process for centuries, but that doesn’t mean every project is destined for trouble.
As a construction financier, I take an ownership’s view of the property and try to understand how the construction plan has been developed to avoid these problems.
The selection of the general contractor or construction manager is at the top of the list. Thoroughly investigating a contractor’s ability and experience in producing a particular design can avoid disappointments in the final product. Physically inspecting existing projects and checking personal references can help manage the expectations between the builder and the owner.
Just as selecting the wrong contactor can crumble a project, underestimating the budget can crush a pocket book. Thus, formulating a balanced budget is crucial to the construction process.
Bankers aren’t construction experts so we rely on advice from professionals and try to use a common sense approach to understanding the budget. Whether or not the overall budget makes sense is determined by the income the property can generate.
Once that number is established, the budget itemization becomes the focus. It is important to know which major subcontractors have been chosen and why. Were they simply the lowest bidder, or do they have a reputation for providing quality service? The non-performance of a low
bid subcontractor is a serious and common issue that can create cost overruns and delays.
Soft costs, such as architectural and legal fees, play a significant role in the budget as well. Including an estimate for contingencies and interest carry is just as important as including the cost of the foundation. It is hard to recall a construction plan that did not require changes to the design or the delivery date of the building. As a banker viewing the project through the eyes of the owner, I take comfort in knowing that the budget has been designed to absorb movement in the plan.
The contract that will govern the cost of construction can take a number of forms. A fixed-price contract is one way to mitigate common financial risks such as material price increases, subcontractor non-performance, and labor shortages. However, the owner will pay a premium to the contractor for that assurance.
Construction progress monitoring is where the “beam meets the brick” with construction financing. As funds are disbursed throughout construction, two things must be periodically confirmed: what stage of work has been completed and has that specific contractor been paid?
Non-payment for work completed on real property can result in liens against the property, which depending on a few circumstances, can trump ownership interests.
Depending on the size and scope of the project, a professional should be engaged to monitor the construction process. Among other things, this process involves site inspections, payment confirmations, and the collection of lien waivers for payments made to subcontractors.
Now I have no idea if the $232,371.83 cost of the White House construction was financed or if the construction payment process 200 years ago was “pay as work is completed.” But I do think that the Irish-born architect, James Hoban, was grossly underpaid at $500.00 for the winning design.
Brain Hoban is Senior Vice President, Enterprise Bank & Trust.
P | 913.234.6426
E | BHoban@enterprisebank.com