Construction

At this point your development team has already worked to refine the development model, secured and evaluated your development site, received regulatory approvals, and secured funding. You are able to articulate not only the general concept and vision for your project but know the specifics of what the property will look like when you are complete. It is now time to hire contractors and begin the construction process.

Managing the Construction Process

Construction Approach

The approach and technologies you use to construct your development will be key to consider before you begin your design process. Knowing that you prefer one approach over another will inform you what is possible.

Onsite construction involves the development being built entirely at the development site, often referred to as a “stick-built” or “site-built” approach. This approach offers the greatest flexibility for your development, but in some cases may be the most expensive and/or time-consuming approach due to the labor required.

Offsite construction involves completing some aspects of construction in another location, often achieving some combination of faster production, reduced costs, greater material efficiency, and/or greater quality control.

Offsite approaches include:

Modular construction approaches create entire rooms or housing units of a building that are shipped to the site and connected to form the final building. These structures are regulated by local building codes.
Panelized systems in which individual, flat building elements such as wall segments, roof trusses, and other components are created offsite and then assembled onsite. These structures are regulated by local building codes.

Engaging your general contractor (GC) early in the design process, rather than after the schematic is finalized, can make your entire construction process more efficient, allowing you to account for and avoid potential cost or time-drivers later.

Recruiting Qualified Contractors

The recruitment of qualified contractors will occur through a process of requesting, reviewing, and awarding bids. When preparing your bid package, be sure to consult with primary project funders that may be participating at the state and local level. If funding from HUD or USDA is being used, please be sure to understand their procurement requirements.

This is how you will find your general contractor (GC) and subcontractors with specific areas of expertise, such as plumbing and electrical. Through a bid package, you will be able to articulate project specifics, timeline, and the type of contractor bids you seek. The bid package may also be referred to as a Request for Bid or Request for Qualification. A developer must collaboratively manage the construction process and finances with the GC. This set of tasks may also involve project managers (internal or contracted) or contract administrators who support project oversight. Since there are a variety of ways to divide these duties, it is important to discuss and set clear expectations of roles and responsibilities at the outset for how you will collaborate.

Your bid package can include the following:

Work details and timeline: this should include architectural, structural, mechanical, electrical, and civil engineering work, plus materials, interior needs, and landscaping
Site description
Selection and contract process overviews
Bid terms and conditions
Whether Davis-Bacon wages and compliance are required for your development
Instructions on what to include in a bid/proposal response, including any required documentation, such as licenses, notices, insurance, and bonding (different lenders may have differing requirements for insurance and bonding, so check with funders you have already selected)

The process of solicitation and invitation can depend on your funders. For example, you may be required to post the RFP in certain news outlets. The Mississippi Development Authority and some cities have minority- or women-owned and small business programs that can alert you to qualified firms that you can reach out to with the RFQ. Prior to soliciting bids, you may have needed the services of an estimator to determine the approximate cost of construction for your development. An estimate is less detailed than a bid and can help ensure that your financial model is more accurate. That said, please be aware that some funders will not allow you to use the same contractor that provided your estimate to then provide a bid for construction.

Your project location may impact the number of bids you receive, depending on the local labor pool. This can be a challenge in rural areas, which are drawing from smaller labor pools. Construction contractors from metro areas may face longer commutes to your project, or may require lodging, increasing your costs. If you only receive one bid, before moving forward with selection, you may want to research why and if any adjustments would make your development more desirable or feasible to contractors. Reach out to local developers and ask if they can provide insight or connection to local contractors to discuss why they did not bid on your development. If there are no other bidders based on given project need, demand, or location, you can continue with a single or sole-source procurement, with proper justification and documentation of why it is necessary. This is required if using HUD funding and may also be required by other funders. You should note that a single or sole source bid still needs to be evaluated as if there are multiple bids.

As you receive proposals from contractors, make sure you have a formal record of each bid submitted. Sealed bids are publicly solicited for a firm fixed-price contract, either lump sum or unit price, that is awarded to the lowest cost responsible bidder whose bid conforms to all the material terms and conditions of the RFQ. Sealed bidding is the preferred method for procuring construction, supply, and non-complex service contracts. Compile proposal information in a way that will streamline bid comparison.

When selecting a bid, consider several factors and questions, in addition to price:

Qualifications and experience of the bidder: Have they completed similar projects before? Do they bring the expertise you need? Do they have the necessary licenses to complete the work?
Completeness and responsiveness: Did they provide everything you requested in your bid package?
Alignment with project goals: You may have additional goals for your project like employing local labor or supporting businesses owned by women or minorities—are they aligned with these goals?

Key contract terms should be outlined in the bid package, including a request that contractors confirm they can agree to those terms. That will make it easier to execute the full contract after the contractor is selected. You may consider obtaining a Notice to Owner (NTO) or lien waiver from contractors at the outset. These are agreements that contractors make to waive their right to place a lien on the property in the event of nonpayment for their services. Lenders may want this documented to ensure there is no risk of contractors placing a lien on the property in the future, which may prevent you from repaying their loan. You should also provide a formal letter to each contractor who submitted a bid to notify them if they were not selected.

Developing a Construction Schedule

One of the first steps in the construction process is to develop and set a construction schedule based on key construction milestones. Examples of milestones include pre-construction, permitting and site work, foundation, framing, major installations (including HVAC, electrical, plumbing), interior finishes, fixtures and appliances, landscaping, and exterior work. The construction schedule should be developed with your general contractor and the construction manager your team selects through a competitive RFP process.

There is more than one way to organize a construction schedule and utilize it as a project management tool. A construction schedule can be organized by milestones, roles or workstreams and distributed to those who need to be aware of the timeline. Each schedule can also include details or dependencies before an item is completed or checked off.

Phased Development

A phased approach allows you and your team to complete smaller segments of the project before moving onto the next.

A phased approach may be beneficial in these cases:

To prove your concept if you are pursuing a newer, more innovative building model
To allow your project to start generating revenue faster, which can then be used to help finance later development phases
To minimize tenant relocation during a renovation project—this is beneficial to tenants and could minimize overall cost
To allow your project’s costs to fit within funding limitations

The disadvantages of phased construction include:

Overall longer construction process, which might mean higher total costs (although it may also generate revenues to help offset those costs)
Potentially increased transaction costs on supplies if you are not ordering for all phases of the project at once
Additional coordination and complexity, including additional potential regulatory review and approval processes

Prefabrication and Modular Housing

Using prefabrication, meaning conducting construction operations offsite and then moving building components to the site, can reduce your overall construction timeline if your offsite location allows for more efficient production, taking advantage of easier access to skilled labor, materials, or equipment. However, prefabricated construction may also introduce potential for delays, particularly during the transportation process or during the building permitting process, since regulations are often not designed specifically for prefabricated construction and local officials may not have as much experience reviewing similar projects. For example, lenders may have difficulty funding modular construction since it is not considered part of their collateral until the building components reach the site.

Pre-Construction Kickoff

Once a preliminary construction schedule has been developed, it is time to hold a preconstruction kick-off meeting with key development team members and stakeholders in the construction process. This will allow your architect, engineer, and consultants to review and finalize the assumptions made in the schedule and build a shared understanding of accountability for each member by role for the timeline.

The roles and responsibilities for each team member need to be clearly defined during the kick-off. There is also an opportunity to set standards and expectations around the process for project management. This includes inspection procedures, payment schedules, assumptions around permitting or inspection timelines and other items identified in the design phase.

Your construction timeline and approach may also undergo some changes during this process. The team may provide insight on improvements to features or processes that can simplify or expedient your timeline, which can reduce your overall project costs.

Anticipate delays and be realistic about your construction schedule to help avoid issues down the line. Typical items that can cause delays include weather, contractor availability, material shipping (supply chain), failed inspections, and miscommunications with development team members. It is also important to consider any timeline limitations you may face due to the location, nature, or size of your site. For example, your development could be delayed by hurricanes or excessive heat. Also consider local building officials’ approval timelines, accounting for the typical progress inspection timeframe with your local code enforcement department. More information on the key milestones to account for inspections from local building officials is provided below.

No matter how effective your construction schedule is, you will likely still need to change orders, or adjustments to contractors’ scopes of work. Sometimes this may cause delays or cost increases, which is why it is important to have cost contingencies and clear processes on change orders established at the start of the project. Whenever a change order is needed, collect written justification from the contractor and document the agreed-upon scope of changes and schedule impacts before the adjusted work begins. You may include a liquidated damages clause in your construction contract, which provides you relief if the construction completion date is delayed beyond the date in your contract.

Inspection, Hiring and Reporting Considerations

Awareness of the day-to-day construction progress will be important when reviewing and approving invoices. Your construction lender will also hire a construction inspector, at the project’s expense, who will inspect the property at least monthly and confirm that construction invoices match the completed work.

Throughout construction local building officials will conduct inspections to confirm that different elements of your project are satisfying building code requirements. You will need approval from local building officials at certain milestones before moving on to other phases of your project. Other partners also may require inspections at regular intervals, which could impact a project’s ability to proceed to a new phase.

Confirming reporting requirements are met during the construction period is the responsibility of the general contractor (or developer if you are also operating as project GC). The GC will often be supported by a contract administrator who provides labor standards advice, ensures that contract language effectively represents the project’s legal requirements, and monitors compliance throughout the project by reviewing payroll reports and conducting interviews with contractors and construction workers. When a project receives public funding, the contract administrator will generally be a public employee. Additionally, the U.S. Department of Labor has independent authority to conduct investigations to confirm labor practices comply with federal standards.

Any hiring requirements should be incorporated into subcontractor agreements and made clear in the initial bid package. Reporting processes should be established upfront and documented in the contract to ensure the GC and contract administrator have sufficient information about hiring and labor practices throughout the project.

Davis-Bacon Compliance

If your project has federal funding, you may be required to comply with Davis-Bacon and Related Acts (DBRA). DBRA refers to federal regulations that require certain labor standards (i.e Davis-Bacon standards) to federally assisted construction projects. Specifically, Davis-Bacon requires all contractors and subcontractors to pay employees the local “prevailing wages” at a minimum. Contractors and subcontractors are required to submit payroll records weekly to certify their compliance with this standard and post the applicable Davis-Bacon wage rate prominently on the job site.

Managing Your Construction Finances

After you have assembled your financing and before construction work begins in earnest, you will close on your construction financing, also known as the “initial closing.” Construction financing closing may happen concurrently or after the pre-construction conference, so long as it occurs before the start of construction.

When you close on construction financing, the following will happen:

You can receive your first payment from your construction loan.
You will pay your initial financing fees unless an extension or deferment has been granted.
You and your lender will conduct a final review of all forms and exhibits to ensure accuracy of the terms.
You and your lender will confirm their loan constitutes a first-priority lien on the property.
You and your lender will confirm necessary steps have been taken to secure the property and prepare for construction, including confirming zoning compliance, building permits, utility services, and insurance coverage.
Final copies of the funding agreement(s) and associated documentation will be circulated to all parties of the agreement(s) for their records.

Construction Draws

Draw-downs, draws, or progress payments are amounts of your construction loan that you can access at various points to pay contractors. You will set your draw schedule with your lender. The schedule may be divided in equal amounts over set intervals (e.g., monthly payments) or it may be tied to completion of specific milestones (e.g., once those construction milestones are reached and confirmed via inspection by the lender, you will receive payment).

You or your GC may choose to retain a portion of the progress payment until the contracted work is complete to ensure it is completed on time and to your quality standards. This practice is known as “retainage.” Even with retainage, it is important to have clear, shared expectations with your contractor for how and when the work will be done to avoid cash flow issues or delays. Check your funding terms for details on any retainage regulations that may apply.

Contractors will submit invoices to you for their portions of the project, which you will review against your construction budget to monitor any potential cost overruns. This will allow you to track construction progress relative to budget spenddown. Set invoicing schedules with your contractors, such as requiring a monthly invoice submission, to assist with this process. Before each scheduled draw, you will submit a progress payment request and supporting documentation, such as contractor invoices, to trigger payment from the lender. Some lenders will require an inspection at the time of the draw request or milestone to confirm work completed.

Thorough documentation of contracts, invoices, and payments will be critical for your lenders and project funders and may be necessary for tax purposes, disputes, or legal matters. Document project communications well, making sure you have dated notes as records of decisions, particularly those with financial implications, even if they are by phone or in-person.

Funders may require regular updates during the construction process to ensure satisfactory progress and compliance with funding terms. They will confirm your actual progress reflects your application projections and their funding is being used for eligible purposes (per the funding agreement).

Change Orders

Change orders are documentation of any changes to a contractor’s scope of work to which you agree. The change order should include details of the changes being made plus any cost or timeline implications and should be signed by both you and the contractor once approved. The change order process should be specified in your contracts and discussed at the predevelopment conference. When reviewing change orders, determine if costs incurred exceed your contingency budget or if they can be offset elsewhere. You also must ensure changes comply with existing funding terms and do not jeopardize any of your funding.

Marketing and Lease-Up

Before construction is complete, begin finding prospective tenants or homebuyers who will occupy your development. Do not wait until construction is finished because that will extend the length of your “lease-up” or sales period when your building is habitable but not occupied/fully occupied and will delay your closing. The longer you remain in construction financing, the lower the profitability, which can impact your ability to repay financing.

As a developer, the faster your project starts generating income, the better. Real estate finances are impacted by the time value of money, because inflation, risk, and opportunity costs (other things you could use the money for) all increase over time. This is the reason we discount projected future cash flows when calculating expected rates of return (see Financial Modeling Tool).

Some funding sources may also place restrictions on how quickly rental units should be leased. Developments supported with Housing Tax Credits are generally required to lease units within 90 to 120 days after the Certificate of Occupancy is issued. This leasing requirement is usually tied to the syndicator’s market absorption estimate, which determines the timing of equity payments.

Any time you are representing your development to the public is a chance to market it and its benefits to the community, including the concept stage through project completion. Targeted marketing to attract prospective tenants or homebuyers should begin in earnest six months prior to construction completion. You can choose to hire a marketing contractor to support or lead this work. If you contract out for property management services or hire property management staff, they will be responsible for marketing and lease-up. Even if you have a marketing or property management contractor, you should provide oversight to ensure that outreach, marketing, and tenant selection or homebuyer underwriting all comply with local, state, and federal laws, plus any funding terms governing the project.

Some funding sources may require you to create a marketing and outreach plan and, even if it is not required, this kind of planning document is useful for ensuring alignment between your marketing activities and your project goals and requirements.

Obtaining Your Certificate of Occupancy

A Certificate of Occupancy is issued by local building officials, certifying that your property is up to current building codes and safe for people to live in. The building department will likely have a specific process for these inspections and may require certain documentation before you can schedule the inspection to obtain your Certificate of Occupancy. Throughout the construction process, you should work proactively with the local building department to understand their processes and build a strong working relationship. Prior to the Certificate of Occupancy inspection, you should have conducted a final inspection and worked with the construction team to address any items on the developer’s punch list.

Ideally, you will have identified any potential code violations during previous inspections and your building inspector will be able to issue a Certificate of Occupancy after the last inspection. If minor violations are identified, you may be able to address them on the spot; otherwise, you will need to schedule a follow-up inspection, which could add weeks to your lease-up period. A Temporary Certificate of Occupancy (TCO) may also be issued for a portion of your development, if there is a matter that cannot be quickly resolved, and you need to start lease-up before the final Certificate of Occupancy can be issued.

After you have the Certificate of Occupancy and the development reaches stabilized occupancy, you can move forward with closing on permanent financing. Lenders will differ on their definition of stabilized occupancy. Generally, it is a minimum percentage occupied for a certain number of days. Closing on permanent financing will include a review and verification of previous financing assumptions to ensure they are still accurate and sufficient to minimize lender risk. Information from the final round of inspections will be used to prepare a forecasted capital expenditure budget, which estimates the timing and cost of future repairs and system replacements. This will be used during closing on the permanent financing to ensure the replacement reserves are adequate for the expected needs.