If your project financing includes banking with a commercial real estate lender, chances are your lender will require the services of a bank inspector. The borrower may have some say in this matter as to whom this will be. As an alternative, borrowers and lenders should give consideration to partnering in this requirement and hire an independent (third-party) construction consultant as a construction monitor in lieu of the typical bank inspector. A most important distinction to recognize between a construction monitor serving all parties versus a bank inspector is that the bank inspector reports his findings only to the bank.
When lenders and borrowers involved in construction projects (including renovations, expansions, and repositionings) team up to hire a construction monitor, the entire project team (borrowers, investors, lenders, developers, architects, and contractors included) share in the benefits. The construction monitor acts as an independent third party providing hard-cost pre-closing due diligence, and monthly site inspections.
The typical bank inspector cannot offer the level of services that a construction monitor provides. Their fees are reflective of this as they must bid in a competitive situation and, therefore, must limit their expenses/time to the absolute minimum. A construction monitor, as a rule of thumb, will be at least twice the cost of the bank’s inspector. However, on an hourly basis and total benefit analysis, the construction monitor is the best value for all.
As an objective third party and a part of the project team, the construction monitor gains the benefit of having comprehensive first-hand knowledge of the project. Generally, the bank inspector is more of an outsider, typically not a party to the OAC (owner, architect, and contractor) meetings or copied in on project correspondence.
Since the construction monitor is a neutral party, they are in the best positon to, and most often do, lead the OAC meetings. This helps ensure open and honest discussions about quality and compliance, schedule, change orders, budgets, and project administration accountabilities. As a respected member and neutral party of the project team, they can help facilitate the team through rough waters when tempers flare and relationships are tested. They cannot direct any work, but can advise the owner and project team on conflict resolution or about new technologies and approaches to building solutions that even their local contractor may not yet know about.
A professional construction monitor can also help assure complete and fair contract administration by the owner and the architect in accordance with the terms of standard industry/AIA contracts. Complete and accurate contract administration, including tracking of weather delays, resolution of design and construction issues as they occur, proper payment and retainage procedures, proper contract close-out procedures, and assuring all parties are performing their duties as outlined in the contract documents, is key to minimizing claims and lawsuits after the fact that are costly and time consuming for all concerned.
The construction monitor’s monthly site inspection reports are provided to the project team as well as to the lenders and investors. Since the construction monitor’s reports are reviewed by all, they are held to a higher standard and must prove to be accurate. These reports must also be objective and comprehensive in their analysis related to the construction schedule, compliance, payment approvals, construction and administrative issues and resolve, and change order and total hard cost budget status. Since the bank inspector’s time is typically limited to a site inspection and a briefing from a project team member, the information they can report on is often incomplete and may even prove to be misleading.
This concept of a neutral third-party construction monitor helps ensure all parties are receiving the same objective information at the same time. When all parties are receiving timely and accurate information, they are in the best position to perform in accordance with their contract. A construction monitor can help ensure the final building product meets the owner’s expectations of quality, and is completed on schedule and within budget. When this occurs, the project and financial teams will too meet their financial goals. For those situations where the lender will not partner with the borrower in hiring a construction monitor, the borrower can still, in the cost-benefit analysis, justify hiring the construction monitor to report to his project team and other reports.
In future month’s newsletters we will share perspectives about independent third-party construction monitors from various team members including the lender, developer, equity partners, contractors, and architects!