Construction: All Systems are Go?

Signs, signs, everywhere signs…

It looks like the signals are mostly green for the returning construction industry.  According to a recent Bloomberg article, billings by architectural firms are picking up rapidly – in November billings increased more rapidly than any time in the last five years.  Architectural billings are a lead indicator for construction activity, typically occurring many months before construction begins. 

Home builders are once again active – a sight we haven’t seen for several years.   According to the National Association of Home Builders, more than 200 metro areas in December 2012 were considered improving housing markets, up from just 12 metro areas in September 2011. The index is based on housing permits, employment and home prices. 

The due diligence industry is also a lead indicator of real estate transactions and development, but in the much nearer term.  Our services are usually required 3-4 weeks before closing or development.   We have seen the demand for our construction risk management services increase substantially over the last few months, and we expect to see even greater demand in 2013.   

This time around, construction lenders are getting back into the game with tighter underwriting and construction risk management practices – doing more due diligence upfront such as Document & Cost Reviews, and then monitoring the project with Construction Progress Monitoring and Funds Control.

These tighter lending standards have been cited as one of the factors slowing down the housing recovery, but doing sound construction risk management is necessary for avoiding some of the snafus construction lenders found themselves during and after the last housing bubble.  

A thorough construction risk management program should include the following:

Prior to construction:

• Contractor evaluations – underwrites one of the most important players, the GC
• Document & Cost Review – evaluates the reasonableness of the project cost and schedule

During construction:

• Construction Progress Monitoring Inspections – monitors and reports on the progress of construction
• Funds Control – audit of the pay application request and progress of construction prior to disbursement of funds; also avoids comingling of funds

Construction risk management is also a more proactive risk management approach than payment or performance bonds, which are typically only used in worst case scenarios such as a default.  The CRM approach can help identify and correct issues right away before they become major problems.

Whether we continue to have a slow and steady recovery for the construction industry or a speedy one, a good construction risk management program will be an important tool for many lenders.