Construction Management at Community Lenders:
Why use an independent construction monitoring firm?

During 2010 and early 2011, LCS held meetings across its footprint with all sizes and types of lending institutions. The focus of the conversations was to listen to the Lender’s needs in order to develop a process and service that would assist Lending Institutions in controlling risk management under their Construction Monitoring Policy Guidelines.

During these meeting LCS received one very consistent message: “The Regulators have taken a keen interest in and have spent a considerable amount of time reviewing construction lending and property condition assessment reports, policies and procedures”

According to the OCC Comptrollers Handbook for Commercial Real Estate and Construction Lending: If internal expertise is not available, banks should consider retaining an independent construction consulting firm to provide construction monitoring services to perform this critical function.

The FDIC has expressed concerns about trends in the underwriting and management of CRE risks including construction monitoring activities. Examiners are considering these issues in their assessment of a bank's risk management practices. The FDIC requires commercial construction loan monitoring in order to carefully manage the risks to the Bank at various points of completion throughout the commercial construction loan process.

The NCUA (National Credit Union Administration) states that detailed cost estimates and building plans should be obtained from the Borrower for review before approval of the loan. Funds should be released in stages based on the percentage of project progress that can be verified by on-site inspections. On-site inspections should be made only by qualified individuals.

The FDIC, OCC, OTS, the Board of Governors of the Federal Reserve System, and the NCUA have released similar guidance for commercial construction loan monitoring.

Using a professional construction monitoring firm allows the Lender to not only out-source the liability for the management of this complicated process but also assures that the bank is meeting the requirements of the various regulators.

The process generally followed is to require a Plan, Specification and Cost Review of the entire project, before the project begins. This first step is to assure that the bank is not over funding the project and that the project can indeed be completed for the costs estimated by the Borrower and its team of professionals (architect, construction manager and/or general contractor).

That initial review should include comments on the adequacy of the plans and specifications in protecting the borrower and lender from obtuse liability exposure as well as offering a review and comment on the permitting process and contract provisions. Contract details and documents should include but not be limited to a clear description and understanding of the anticipated project, completion schedules, insurance requirements, retainage requirements, and costs.

A typical loan construction budget should include an amount that is allocated for contingencies that crop up on virtually every construction project such as unknown or hidden conditions, changes that might be required by local municipal code requirements, or delays in the schedule due to weather, labor unrest or availability of materials.

The initial review of plans, specifications and cost by an experienced consultant can reduce the possibility of overruns and scheduling issues (that may affect interest reserve) as well as provide a suggested contingency amount that reflects the project and contract conditions.

During the project Lender’s generally disburse construction loan funds based on a progress payment schedule agreed to at the outset of the project.

Payment requests should be submitted based on the percentage of completion to date. A Lender must monitor the funds being disbursed and assure that the work has been completed so as to assure that sufficient funds are available to complete the project.

The lender should obtain accurate and timely inspection reports reflecting the status of the project and early notification if the project is not proceeding as planned.

A lender should obtain consistent reports (likely from its consultant) addressing the following tasks during a construction project:

• Description of Work completed
• Costs-to-date
• Cost-to-complete
• Construction schedules and deadlines
• Balance of loan funds remaining

An established loan administration process that continually monitors each project's progress, costs, and loan advances is essential if a lender is to effectively control its commercial construction loan program.

LCS provides these valuable services to many of its lending clients every day.

The LCS construction services division has expanded over the years to better serve our growing national, regional, and community client base comprising lenders, developers, insurance companies, and financiers of real property transactions. Our staff of over 40 construction, environmental, and field management personnel are perfectly situated to serve your construction monitoring needs.

LCS is unique in the industry because we think like a Lender due to the fact that many of our Senior Staff are former senior executives at major financial institutions. We have been on your side of the table and clearly understand the Lender’s needs.

LCS has the knowledge and expertise to work through construction loan projects with you from start to finish, saving you time and money all while protecting the lender from liability and assuring compliance to regulatory requirements .

For more information about LCS construction services and our new Construction Monitoring Set Fee Packages please contact us today at

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