What should be reviewed during third-party construction

  • Aligning invoiced work with the project timeline and budget is a critical component of managing construction loan risk. In addition, the work should be completed in accordance with the building code and to the satisfaction of the customer. Often, construction lenders do not have the necessary time or experience to assess the quality of the work performed by the builder in question. For this reason, understanding what should be reviewed during third-party construction inspections is critical to ensuring that a construction loan management program is successful in its overall objectives.

    Building inspections, also known as construction progress inspections or draw inspections, are best described as a review of construction work and progress in order to ensure that the project is in compliance with the construction plans provided and that the size, value, and essential items outlined in the plans are being considered. Mechanical and electrical codes, legal issues in construction inspection, concrete and masonry, and structural integrity are all areas in which third-party inspectors are certified and experienced. After discussing the different types of inspections and the stages that a third-party inspector must go through in order to complete a report, we'll go over some of the elements of a construction site quality inspection   report in detail.

    Examining the various types of audits
    In total, there are five major site inspection types, including new construction home inspections, subdivision inspections, multifamily inspections, commercial inspections, and site development inspections, which deal with in-ground utilities, roads, signs and lights (including sound barriers and gates), common areas such as parks and parking lots, and other common areas. Aside from that, site development inspections are frequently carried out in conjunction with the other types of inspections.

    Flowchart of the Inspectors
    How will an inspector go about making sure the project is running smoothly and in accordance with the construction plan, and how will he go about creating a comprehensive report?

    First and foremost, the inspector will receive a copy of the draw package, which will include a request for payment from the borrower, the contractor, and/or the financial institution. In order to gain an in-depth understanding of the project's current status – including timeframes, construction schedules, and scope of work completed thus far – an inspector will review all previous and current draw records, as well as any drawings that have been submitted for approval.

    Having reviewed the documents, the next step is to conduct an on-site ISO9000 Quality System Audit of the construction project. Inspection of the mechanical, plumbing, and electrical phases of the project is performed using a construction site quality control checklist, which also includes an evaluation of framing, roofing, drywall, and sheathing amongst other things. This is followed by a construction site inspection report in which the viability and accuracy of the draw request are verified or disproven by the inspector. In addition to funding recommendations, the inspector will include them in his or her report.

    In some cases, a construction dispute pre shipment inspection china may be required, in which case a third-party inspector is tasked with producing an unbiased report that will help resolve any disputes that may arise between contractors, lenders, and clients.

    The top eight items to look for in third-party inspection reports for construction loan managers
    As a starting point, photographs of the project's progress to date should be taken and checked for accuracy. After confirming that the inspector visited the correct construction site (yes, mistakes like this can occur), the lender must compare photos taken during the inspection with previous drawings to determine whether tangible progress has been made.

    A review of the hard costs and retainage balances is performed in the second step. According to the results of this review, the lender can determine whether the project costs to date have been consistent with the original contract sum and whether they appear reasonable in light of previous requests and disbursements. The lender will also look to see if the retainage percentage (for example, 10%) corresponds to the amount of money that has been paid so far under the terms of the contract. In the course of conducting a funding analysis, the lender will look for any significant input errors between the draw funding line items and the G702, as well as checking to make sure that the provided receipts are correctly associated with the project and tallied to confirm the total amount. When comparing percent complete versus percent invoiced, it is critical that the lender examine loan-specific thresholds.

    Next, examine the percentage of the project that has been completed to date, as well as the percentage of contingency funds that have been used thus far in the project. The lender should review the list of prior draw requests to see how many have been completed over time, keeping an eye out for an increasing percentage of requests that have been completed each month. It is common practice in the construction industry to allocate a percentage of the total budget as contingency funding, with most projects utilizing a range of 5 percent to 10 percent. This amount will typically be sufficient to cover any additional expenses that may arise. Because of this, it is necessary to review the line item for contingency to ensure that the appropriate amount is set aside at the appropriate stage of the project.

    A review of current hard cost revisions based on change orders allows you to: a) determine whether the costs associated with a change order are consistent with those associated with the original change order; b) determine whether there has been a change in scope of work; and c) determine the impact of these changes on the overall budget and schedule. Before dispatching the inspector to the job site, it is critical that the change order accurately reflects the nature of the work being done.

    The number of weeks that the project is behind schedule must be determined, and the funding schedule line chart must be reviewed, which should show both ahead of schedule and behind schedule funding. The construction loan manager can determine whether there is enough interest reserves to pay out if the project runs over its scheduled completion date if the project is running behind schedule by calculating the interest reserves.

    The G703 document contains materials with a long lead time or that are stored off-site. Items purchased in advance are referred to as "stored materials," and they are kept either on the project site or at a separate "off-site" storage facility. Off-site stored materials can be thought of as anything that the builder cannot pick up at Home Depot because it is specific to the project and cannot be purchased there. The items included in this category include framing materials, roof trusses, custom timbers or beams, HVAC equipment, and custom windows, all of which should be safely stored in an insured facility close to the project site.

    What percentage of the total budget (including retainage) is left over for the project's completion? The list of prior draw requests, amount approved, retainage percent, percent requests and percent complete should be reviewed to determine if the percent completed each period is increasing and if the overall scheduled project timeline is being adhered to in order to make this determination.

    In order to determine the lien release status, it is necessary to confirm that the lien releases correspond to the stage of the construction process at which they were issued. It is necessary to have a release that is either conditional or unconditional in order to balance the amount of money that has been raised. These checks are carried out so that it is less likely that missing liens will be overlooked or overlooked altogether. It is also necessary to determine whether or not the general contractor has provided an unconditional lien release from prior draw requests, with language stating that the general contractor has paid all obligations relating to those payment applications, before proceeding.
    Last but not least

    Third-party construction site inspections are extremely important, regardless of the nature and scope of the construction project being carried out. A highly skilled and certified third-party inspector is an essential resource because he or she can vouch for the work that has been completed and deliver a detailed construction inspection report that both identifies and helps to move the project forward in the right direction. Being able to read and interpret the report is a critical skill in the construction loan management process.