Two months ago I reported about a new "just holding hands" partnership between Associated General Contractors (AGC) and the Associated Builders and Contractors (ABC) in Tennessee. Although not a partnership, AGC established a task force in early 1999 with members from AGC, the American Subcontractors Association (ASA) and the Associated Specialty Contractors (ASC). Last week, the powerhouse group released its updated Guide to Construction Financing: Second Edition (pdf).
The 26-page publication explains the construction financing process while addressing both the opportunities and pitfalls for the contractor. According to the AGC, it is "intended to serve as a reference to get contractors thinking about the risks associated with project financing."
How does the contractor get involved in construction financing? Easy. It is not unreasonable to come across the contractor who, looking to expand its business, agrees to reduce its fee for an interest in the project. Nor is it unreasonable to find the developer who goes into default and the bank takes over the project, ordering the contractor back to work. Or what about the contractor who decides to change the project delivery method to Construction Management At-Risk and consequently helps the owner get financing? In each of these examples, the contractor becomes entangled in the construction financing process.
The Guide is a must-read for contractors. Some of the best practices for contractors include:
- Know your owner-developer and the structure of their organization
- Review the "pay when paid" or "pay if paid" laws in the states you are conducting business. (For a fee, there is a AGC State Law Matrix that outlines this information.)
- Be aware of "creative financing" practices
- Be cautious of an owner’s request for upfront deposits or "investments" in the the project
- Know and understand the default terms of the loan documents
- Perform title and lien searches at the onset and periodically throughout the project
Finally, some of the red flags that you should be worried about include: incomplete plans and specifications; owner caused delays at the front end; payment slow-down or defaults; inexperienced owners; change in lender involvement; and abnormal invoicing requests.