The U.S. construction industry represents a significant portion of the national economy. In 2020, 4.1% of the national GDP came from the construction industry. That adds up to about $1.23 billion.
Construction projects are highly structured endeavors, with multiple parties involved, each with a specific role. Typically, these parties include builders and lenders.
One of the builder’s first jobs is to assess the project’s material and labor requirements and forward them to the construction loan lender. The lender’s job is to distribute funds based on these requests.
To confirm the validity of the builder’s requests and to check the progress of the project, the lender orders a construction draw inspection. In this article, we will discuss these assessments and why they are essential in order for construction projects to move forward smoothly.
Table of Contents:
1. What Are Construction Draw Inspections?
Construction projects can be residential or commercial and typically involve a builder and a lender. The builder assesses the project requirements and sends draw requests for the required materials and labor. The lender disburses funds based on these requests.
To ensure the funds requested are accounted for and the project is meeting its deadlines, the lender hires a specialized neutral third party to conduct a construction draw inspection. Northwest Construction Control is an example. As construction grants are given out in portions, instead of in a single bulk amount, the checks let the lender ensure that the funds being paid out match the work being done on the construction site.
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2. Why Construction Draw Inspections Are Important
Because construction loans aren’t secured with collateral, they pose high risks to the lenders. This creates the need for regular inspections to ensure that the money is being spent on pre-agreed terms. The checks allow lenders to evaluate the progress on the construction site and assess whether it is meeting deadlines. This keeps the lender updated and ensures no more money is tied up than necessary.
Lenders can keep track of their funds by doing a line-by-line analysis of the capital granted, the project’s progress as seen by on-site representatives, and the resulting cost. This mitigates risk and provides transparency.
Additionally, these inspections help to ensure that the appropriate funds are available to the builders. Inspectors monitor all needs. They ensure that the contractor and builders are paid on time and that they have the money they need to keep building without delay.
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3. What a Contractor Should Expect During Inspection
The lender issues the inspection once the contractor has submitted the draw. It is in the interest of both the lender and the contractor to finish the examination as soon as possible to ensure the project can move forward smoothly.
First, the contractor should schedule the review as soon as possible; otherwise, the lender might suspect a problem. The contractor must be on the site when the inspection occurs. Once the inspector arrives, the contractor should answer any questions the inspector might ask, such as how much time it will take to complete the project, what the building schedule is, what risks or delays might occur that would affect progress and what work has been done so far.
The inspector will look for specific features, including the overall progress, the quality and quantity of on-site material, the timeline, the invoices and any complaints.
A contractor is already obligated to report any problems and the progress on the site, but the inspection is a little more detail oriented. The inspector’s job is to assess whether the work is sufficient to proceed with the payments.
Contractors should expect the inspector to take photos for documentation. Inspectors will also take notes and ask a lot of questions. Then, the materials gathered will be sent to the bank for review. The documentation must accurately reflect the progress of the work to ensure it is valid.
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4. Issues During Inspections
Contractors are often intimidated by draw inspections, but certain practices on their part can prolong the process rather than quicken it. This can pose issues for the lender as well. Some practices to avoid are:
Overbilling can arise when the contractor charges for future work along with the completed work. Such cases are generally discovered in inspection reports and cost more time as reports are revised and compared with on-site work. The next payment can be delayed as a result.
In such a case, inspectors must take more time revising and resubmitting the draws to the bank. This process wastes the time of the contractor and the investor. To avoid this, it is better to submit draw requests for finished work only. This way, both parties can work simultaneously, saving time.
B. Lack of Collaboration
Contractors may be under the impression that inspectors only visit to challenge draws and hinder profits, but that is not true. Completed construction benefits both the lender and borrower, and inspectors merely exist to monitor the progress. It is essential to remember that the lender is taking a risk, and regular evaluations are the only way they can ensure that their funds are being used appropriately.
Contractors must be open about all potential hindrances and any current issues with funds. They need to work with the inspector. This way, all stakeholders will stay on the same page. That helps to reduce risk and makes it easier to solve problems as they arise.
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5. What happens when the draw and work completed do not match?
Discrepancies between the draw and completed work often arise from errors, work delays, and billing issues, like over-billing. In cases like mistakes and overbilling, the contractor will be asked to submit the draw again.
If the contractor believes the billing to be correct and justified, however, they will have to back up their claims and provide the supporting documentation. If the inspector is not satisfied with the provided resources, they will ask the contractor to create a new draw agreement.
Construction draw inspections ensure that the lenders’ investments are protected; they evaluate whether the work matches the funds that have been paid out. While third-party inspections are often intimidating for contractors, the best way to ease the process is for contractors to collaborate with inspectors as much as they can. Being honest and providing the resources the inspector asks for allows contractors to manage the whole situation smoothly and efficiently.
When choosing an inspector, it is essential to consider the scale of the projects they have previously worked on. While residential construction undertakings aren’t as lengthy, if your institution is providing a loan for a larger commercial project, you must ensure that the hired company has expertise in dealing with large-scale projects that span a year or more.
With an experienced inspection company, your finances will be safer, and the borrower’s progress will be monitored more effectively.
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