The Schedule of Values: don’t skim over this important document

Kevin Deasy, CPA
Chief Executive Officer
Dayhill Group

A project owner typically negotiates with a contractor over several months to finalize a construction project’s scope, schedule, price, and other important project details.  Then the culmination of these efforts gets memorialized in the construction contract.  Among the many details that are outlined in the contract is a Schedule of Values.

The Schedule of Values is often seen by the owner simply as a schedule used as part of the payment application when the contractor submits the monthly pay application.  While it certainly functions in this capacity, an owner should be careful to review the Schedule of Values as it would the other important components of the construction contract.

An owner may view the Schedule of Values and see some items that look a bit high but then see others that seem well priced, and overall, the lump sum is a price the owner is happy with.  So why worry about individual line items if the lump sum price is satisfactory?

Some of the potential problems with a Schedule of Values that contains line items with values that don’t match well with the market value of what that line item should be priced at can come into play if the contractor is terminated or if there are change orders.

It is common for a contractor to put more profit in the scope items that will be completed early in the construction schedule and less profit, sometimes no profit, in the items near the end of the construction schedule.  Why does a contractor do this?  Generally, it’s done so the contractor can use the owner’s money to help cash flow the project.  As an owner, you are either not aware of this practice or perhaps you accept this practice because you want to help the contractor.  But what if you need to part ways with the contractor in the middle of the project?  And the remaining items on the schedule of values have very little profit in them?  The chance of the owner getting a new contractor to complete the remaining work for the money left is going to be very difficult.  Even if the Owner can find another contractor to do the work for the remaining contract value, is it fair that the first contractor received payment on the items that had bigger profit margins?  Side note: If a contactor is in funds control, the profit and overhead is paid out based on the actual cost of the line items and not the “value” placed on them.

Another thing to consider is a change to the scope of work that results in a change to the contract value (change order).  Almost every project has them.  It is very important that there is language in the contract that is very specific as to how a change order is priced.  You certainly don’t want the price tied to an inflated Schedule of Values line item.

These are just some of the reasons that overlooking the importance of analyzing the Schedule of Values can cause an owner heartburn down the road.  It’s easy to understand why this document may get overlooked after months of negotiation and deal fatigue but it is certainly worth taking a hard look at.  The Schedule of Values can be created to handle cash flow concerns and still maintain credible values on the line items in the Schedule of Values.

Some Thoughts on Lien Releases

Anthony “Bud” Stewart
VP, Funds Control Division Dayhill Group

Does the Lien Release in your hand “tell a story”? 

Is there a tale that you need to hear?  Is there trouble brewing? 

Depending upon the viewer’s perspective, a Lien Release is seen as a receipt of payment, a protection from a lien, or a defense against a payment claim.  A properly executed Lien Release is all of these things. 

The party executing the release is acknowledging the receipt of payment and stating that the payment was credited to the contractor’s obligations on the project which is identified on the Lien Release.  This is basic.

When I evaluate a Lien Release, I demand that it function as intended, but I expect much more than basic.

At a bare minimum, a Lien Release must satisfy the interests of the Contractor, the Surety and Lender, but a well-crafted release is also a valuable communication vehicle.  As a professional funds administrator, I utilize a Lien Release that identifies the “Name of Project”, the “Name of Subcontractor/Supplier” and the “Name of Project”, as is common with standard (i.e., basic) Lien Releases.  However, my release form tells me much more. 

On my release form, the subcontractor attests that it has satisfied its obligations to all parties that have provided the subcontractor with labor, material or equipment on the project (“2nd Tier”).  It also identifies the contract amount, the amount paid and the balance remaining on the contract.  It also specifies the amount to be paid at the time the release is executed.  By executing my Lien Release, on which this information is provided, the subcontractor is attesting that they are in agreement with the contractor as to any open obligations, or lack of same.

By executing my release form, the subcontractor is confirming the contract amount and balance remaining.  With this information, I can verify the contractor’s budgets, as well as their cost to complete.

My release form may tell another story.  Why won’t the subcontractor execute my release form?  Probably not because they haven’t received payment, or haven’t applied that payment to our project.  It could be that they owe 2nd Tier parties.  Or, possibly they don’t agree with the contract amount and/or the balance left on that contract.  This is an indicator of possible trouble coming.  That is also a story you need to hear.

So, what is your Lien Release telling you?

How to Mitigate Construction Lending Risk

 

 

Today’s lenders face high hurdles when it comes to mitigating risk on large-scale, long-term construction loans. From the contract phase to the final payment, the right tools are available to enable the successful completion of even the most complex projects.  Here’s what you need to know.

Lender Risks

Inappropriate Funding

Inappropriate funding is a risk that begins early, usually during the contract phase, in the lifecycle of a loan. This costly hazard to lenders occurs when a loan value is too little or too great for a given project. When a project is undervalued by the contractor, it can lead quickly to project completion delays or even outright failure. When a contractor or developer inflates the project cost, either on purpose or because of inexperience, it opens the lender up to recovering less than the loan value in the event of default. Either scenario leaves the lender with liability.

Funding Incomplete Work

Ideally, construction funding occurs on as-completed terms.  This means that the contractor may request a draw on the available funds according to the contract terms based on the level of completion.  Without a representative on the job site, lenders are left to trust the word of the contractor, which can be risky.  When payments are made in the blind, a contractor could walk away from the job not having completed the work. This leaves lenders open to having to finance the work a second time or project failure.

Subcontractor Non-Payment

When construction loans are paid directly to the general contractor, as they typically are, the general contractor will use the funds to pay expenses and overhead and then will pay the subcontractors on the project.  Where things can go awry is when the general contractor is unscrupulous or has higher than anticipated expenses, and then chooses not to pay his subcontractors.  In this case, the subcontractors have the option to file a lien against the property, which ultimately becomes the owner and lender’s liability.

Any one of the aforementioned pitfalls can leave lenders high and dry, but fortunately, there are ways to mitigate these risks.

 

Mitigate Lending Risks

While there is inherent risk in writing construction loans, lenders can avoid the snags and snares with the right mitigation tools.

Plan and Cost Review is the critical third-party report that helps lenders during the loan underwriting stage to determine if a project can be built as proposed by the borrower.  A proper Plan and Cost analysis evaluates project-related documentation combined with a project’s feasibility and potential risk factors. It will point out discrepancies in project cost, missing permits, and the lack of due diligence reporting such as environmental site inspections, geological surveys and other pre-construction studies.  Dayhill’s Plan and Cost Review is a recommended service for any commercial construction lender desiring a comprehensive look into the viability of the project at the cost stated before agreeing to fund it.

Site Inspection is the preferred method of determining if a contractor’s draw request is reasonable based on the level of completion of the project. This service puts a third party representative at the site after every draw request to ensure the work or materials being billed have been performed or are on site. Dayhill’s Site Inspection service provides lenders with a detailed report complete with photos and an analysis of whether the billing is appropriate. Dayhill provides recommendations when there are discrepancies to help lenders avoid the risks associated with funding incomplete work.

Funds Control is hands down the best way to mitigate payment risk that arises when a general contractor is dishonest, committing job borrow or is otherwise financially unstable. Funds control uses a third party disbursement administrator who the lender entrusts to make payments to subcontractors and suppliers on their behalf.  Dayhill’s flagship service VERIPAY: Intelligent Funds Control is a  transparent service that lenders have trusted for over 10 years. All escrowed funds are secured in project-specific, non-interest-bearing accounts backed by the FDIC. With VERIPAY, lenders are ensured that funds are disbursed appropriately to mitigate payment risk.

Dayhill offers unparalleled integrity and transparency affording lenders the edge required to stay ahead of the game.  To learn more about how to minimize construction lending risk, read The Value of a Property Condition Assessment

The Value of a Property Condition Assessment

 

A Property Condition Assessment, or PCA, offers an in-depth look at a property to survey the current condition of the building or asset and to reveal any short-term or long-term repair and replacement needs. Many commercial lenders employ this proactive approach to avoid potential risk later in the life of a loan that uses an existing building as collateral. 

During a PCA, a qualified engineer will interview someone with detailed knowledge of the property to learn about the age and maintenance of the various systems and components.  They will also perform a field inspection using ASTM standards as a benchmark to determine the condition of the following:

  • Mechanical, Electrical, and Plumbing Components and Systems
  • Building Envelope
  • Structural Components
  • Interior Elements
  • Roofing
  • Vertical Transportation
  • Life Safety Mechanisms

The field inspector will not inspect concealed spaces or otherwise inaccessible areas of a building.

In addition to reporting on the physical aspects of the property, the investigator will provide a complete cost analysis of the costs to repair or replace any portion of the property based on current construction costs in the area where the property is located.  The information garnered from this evaluation is a valuable tool used to ascertain investment and capital risks on a building and its systems when a borrower is using the asset as collateral or when a lender is lending money for improvements to the building or building systems.

Lenders who employ Dayhill’s PCA are always happy that they did. It offers a greater understanding of the property in question so they can make informed decisions about their construction lending. 

Philadelphia Business Journal names Village at Valley Forge/King of Prussia Town Center Project of the Year

Dayhill Group was pleased to be a part of this project by mitigating its lender client’s risk, providing underwriting support via a Plan and Cost Review, and providing construction monitoring services that were performed throughout the life of the project. We are excited to see what the future holds for this revitalization endeavor in King of Prussia.

King of Prussia gets a downtown

 

New Horizons

Dayhill Group provides risk management services on diverse construction projects. The Dayhill team carefully combines its experience in the construction industry with its knowledge of current risk factors facing today’s lenders and owners to formulate an approach that addresses the unique needs of each project. It is their expertise and commitment to a higher standard of service that has Dayhill poised to play a prominent role in construction risk mitigation for projects across America.

Pictured: 141,000 S.F. Bryn Mawr Medical Arts Pavilion, Bryn Mawr, PA

Dayhill Group provided Funds Administration and Site Inspection services for the lender of this project.

https://www.dayhillgroup.com/services/

Revitalizing History

Dayhill Group provides risk management services on diverse construction projects. The Dayhill team carefully combines its experience in the construction industry with its knowledge of current risk factors facing today’s lenders and owners to formulate an approach that addresses the unique needs of each project. It is their expertise and commitment to a higher standard of service that has Dayhill poised to play a prominent role in construction risk mitigation for projects across America.

 

Pictured: Built in 1865, the Louella House has a rich history that has enveloped its three stories and more than 20,000 square feet of living space. Situated on one and one-half acres in historic Wayne, PA, the house has grown from its original use as a single family home to become a hotel, a boarding school for girls and a 25-apartment residence. Its most recent renovation has transformed it into 12 luxury condominium residences that uniquely combine Wayne’s historic architecture with innovative restoration techniques.

Dayhill Group provided a Plan and Cost Review and Site Inspection services for the lender of this historic restoration project.

Visionary Leadership

Dayhill Group is poised to help you acquire project financing through our vast network of lenders and investors. This service introduces you to the varied representatives who specialize in providing financing for diverse project types.  By specifically targeting only those lenders who meet your needs, we will save you time and money while we maximize your opportunity for success.

Dayhill can also provide you with energy development services. With experience in diverse sectors of renewable energy, our finance professionals will develop the right solution for your renewable project needs.

Pictured:  Solar panels added as shown will offset 99 percent of the Lancaster Solid Waste Management Authority’s Transfer Station Complex’s  electrical usage.

Dayhill Group provided energy development and project financing services for this project.

Minimizing Risk

Dayhill Group provides risk management services on diverse construction projects. The Dayhill team carefully combines its experience in the construction industry with its knowledge of current risk factors facing today’s lenders and owners to formulate an approach that addresses the unique needs of each project. It is their expertise and commitment to a higher standard of service that has Dayhill poised to play a prominent role in construction risk mitigation for projects across America.


Pictured: The first certified Passive House project in Philadelphia, PA
Architect: Plumbob / Developer: Onion Flats

Dayhill Group provided funds administration services for this project.

Creating Opportunities

Dayhill Group provides risk management services on diverse construction projects. The Dayhill team carefully combines its experience in the construction industry with its knowledge of current risk factors facing today’s lenders and owners to formulate an approach that addresses the unique needs of each project. It is their expertise and commitment to a higher standard of service that has Dayhill poised to play a prominent role in construction risk mitigation for projects across America.

Pictured: 1.5 MW DC commercial-grade, roof mount solar project
using thin-film technology in Woodbridge, NJ.

Dayhill Group provides owner’s representative and funds administration services for this project.