Better Protection through Tightened Risk Management Practices
Earlier this year, we reported a rapid pick up in construction activity. The recovery of the residential housing market has been steady since 2011 – led initially by a rise in multi-family and student housing construction, and later boosted by a revived demand for single-family homes. The US Census Bureau’s latest residential construction figures for May 2013 show a steep increase in multi-family housing starts (up 28.6% from May 2012), and a steady rise in single family-housing starts (up 16.3% from the year before).
Recent figures published in early June by the National Association of Home Builders (NAHB) also show a continued increase in construction deals: based on housing permits, employment and home prices, 263 housing markets in the US are now considered to be on the mend, up from 200 in December 2012. This is the fifth consecutive month in which more than 70 percent of U.S. metros are considered to be improving.
Commercial construction – the next phase in the recovery?
It looks like even the commercial construction industry is set to follow. Indeed, commercial building starts and permit statistics across the US have shown moderate but real growth for several consecutive months now, which is echoed by what we’re seeing at Partner.
The due diligence industry is a lead indicator of activity in the construction market, and recently we’ve experienced a significant increase in the demand for our due diligence services in commercial, medical and hospitality construction.
An increasingly active construction industry is creating a greater demand for better Risk Management Assessment services, so we expect the need for our Construction Risk Management (CRM) services to continue to increase over the coming months too. US construction lenders seemed to have learned their lesson from the last housing bubble and are now protecting themselves with tighter lending standards, more thorough underwriting, and strong construction risk management practices.
CRM – protecting your construction endeavors
CRM provides an all-inclusive, proactive approach that incorporates both engineering and financial functions. It is not only more cost-effective than a traditional payment-and-performance bond, but also far more comprehensive and reliable for all parties involved.
A comprehensive CRM program should be in place prior to construction to help identify potential problems right off the bat. For example, a Document & Cost Review will evaluate the schedule and budget in place at the outset of the project. One of the most common problems we see during a Document & Cost Review is that there is no contingency in place so the budget is too low. Another important screening tool prior to the start of construction is a Contractor Evaluation, which is an in-depth review of the general contractor’s qualifications and capabilities to complete the project.
During construction, the monthly Construction Progress Monitoring Site Inspections are a critical tool to keep track of the progress of the project – providing you an experienced set of eyes and ears out at the site on a regular basis. An important corresponding service to the site inspections is an accounting component called Funds Control –a thorough audit of the GC’s pay application request, in relation to the actual line item percentage completion, and the subsequent disbursement of the loan proceeds to the subcontractor and supplier level. Used together, Construction Progress Monitoring and Funds Control helps to identify and correct potential construction issues immediately before they become a major problem.
History has shown that the vast majority of construction project defaults are payment related, not performance related, so the CRM program directs its efforts at the crux of the problem.
The greatest appeal of CRM is its potential to provide the construction industry with a safer and more pro-active approach to protecting against problems and losses. In today’s tighter credit environment, and with increased regulatory oversight, a proactive approach to managing construction projects is simply a better way of doing business.