Among the most important aspects of this procedure is the inspection from Phyllis Lucius's blog

Several chapters in Malcolm Gladwell's book Outliers discuss the fact that the vast majority of airline accidents can be traced back to seven errors that culminate in the event. Problem construction loans are the result of a series of events that are similar to one another. Although the symptoms and solutions are readily apparent, they are not always communicated to the lender in a timely manner, which can result in both financial and client relationship issues.

There are two distinct operational points that must be considered when a construction loan is in progress, regardless of whether the loan is for residential or commercial construction or the size of the loan. The first step is to conduct a field inspection. During this process, a third party, who is typically hired by the bank, assesses the project and provides the bank with an update on its progress and status. The second operation point occurs after the ISO9000 Quality System Audit process has been completed and involves the actual process of funding from within the institution's own resources. The focus of this article is on the field inspection component of the lending process, which is also referred to as the construction draw inspection in some circles.

First, consider the typical work flow associated with a third party performing a construction draw inspection in order to recommend funding for a pay application. Beginning with the receipt of the actual payment application from a borrower, a contractor, or the bank, the payment process can be initiated. Following that, a review of the documents submitted as well as a brief review of any previously submitted information will take place. After gaining an understanding of the situation through this information analysis, the third-party inspector visits the project and submits an opinion on the accuracy of the pay application, as well as a recommendation for funding, as appropriate. The four steps are, in essence, as follows: receipt, review, inspection, and advice.

Step 1: Obtaining a receipt
What is it that could possibly go wrong during the receipting process? There are a number of things. Without a standard protocol, transmission of the pay application to the inspector may fall through the cracks, resulting in delayed payments, which may have a negative impact on the construction timeline. When applying for large builder lines or revolving lines of credit, it is possible that the incorrect collateral will be referenced, causing the process to be delayed and resulting in unnecessary re-inspection fees. It is possible that a break in the delivery chain will occur, for example, if a critical team member is absent without the rest of the team being aware of it.

Step 2: Conduct a review
The third party bears the majority of the responsibility during the review phase of the process. When the third-party inspector arrives at this stage, he or she needs to be completely familiar with all of the elements of the pay application. The quality inspection must begin by ensuring that the amount of the previous draw has been accurately reflected in the amount of the current draw. As a result, the inspector must determine whether or not the draw contains any elements that require additional attention, such as change orders, unaccounted for materials, deposits, allowances, or anomalous retainage percentages. Prior to visiting the project, it is necessary to thoroughly vet and understand these considerations in order to conduct an accurate inspection.

Step 3: Conduct an inspection
Among the most important aspects of this procedure is the inspection. Assuming that the review elements have been taken into consideration, it is during this phase that the progress of the site is documented. An institution must ensure that the inspector is both qualified to look at the project and is not restricted by technological limitations in his or her ability to conduct and offer site specific observations during the inspection. It has been reported that simple phone apps are being used to provide a controlled and limited project snapshot. A project inspector must consider a variety of factors depending on the stage of completion at which the project is being evaluated. Observations of manpower, municipal inspection comments, quality of work, progress of phases, site conditions, and security are all aspects that can serve as early warning signs of future problems.

Step 4: Provide guidance
Third parties are required to communicate with the bank during this stage to share their observations and opinions. At this point, the bank is typically leaning into the inspector, and indirectly, the client is doing the same. The importance of communicating the project's current status in a clear and concise manner cannot be overstated. The use of a standardized format allows the bank to scan a report quickly and easily, allowing them to make the appropriate funding decision. It is possible that the funding decision will have an adverse effect on the value of the collateral if the inspector does not clearly articulate the issues. When there is a lack of overall clear project understanding and confidence in the funding decision, a project can start to veer off course and into territory that is difficult to recover from.

It is critical for a bank to work with a pre-qualified inspection firm that is familiar with the specific construction project at hand when performing construction inspections. A protocol should be established from the beginning that provides a standardized playing field while also allowing for flexibility in their reporting technology to address the many atypical conditions that can affect the loan's performance. Simple operational steps such as those outlined above can help ensure that your next construction project is a success, regardless of the current market conditions.