chapter 8: Project Construction

Learning Objective: Users will understand key decisions they will need to make during the construction process.

Overview of the construction process

By now, you have worked with your team and community partners to choose and refine your development model; you have selected, secured, and prepared (or are actively securing and preparing) your development site; and you have received regulatory and funding approvals. You are now able to articulate the general concept and vision for your project and the specifics of what the property will look like when you are complete. You are ready to hire contractors and begin the construction process.

Construction management tasks

As a developer, you have two sets of core tasks: (1) requesting and awarding bids, and (2) selecting a contractor to be part of your development team. See Chapter 3: Housing Development Models, Team, and Roles, for information on building your development team.

Requesting, reviewing, and awarding bids is how you will find your general contractor (GC) and subcontractors with specific areas of expertise, such as plumbing and electrical. When preparing the bid package, you will 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 “RFB.” An example is included in the Sample Documents and Templates.

Your bid package should include:

• 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 wage rates 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 bid package in certain news outlets. Some cities and local governments have minority- or women-owned and small business programs that can alert you to qualified firms that you can contact with an RFB. [17] [18] Prior to requesting bids, you may also need the services of an estimator to determine the approximate price of construction for your development. An estimate is less detailed than a bid.

Your project location may impact the number of bids you receive, depending on the local labor pool. Colorado developers interviewed for this guide noted that this can be a challenge in rural areas, where there aren’t large 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 you may want to research why and if any adjustments would make your development more desirable or feasible to contractors. Contact 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. [19] 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 RFB. 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 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.[20] You should also provide a formal letter to each contractor who submitted a bid to notify them if they were not selected.

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. However, in markets where demand for construction labor is high, it may be difficult to onboard your GC so early. In this case, you may wish to pursue alternative contracting procedures to create standards or incentives for accurate early-cost estimating. You may also consider the design-build construction process rather than the traditional bid construction process. With the design-build process, you only manage one contract consisting of all professionals and contractors, rather than managing separate contracts for the architect and contractor. This creates a more collaborative relationship between the architect and the contractor, although it sometimes conflicts with procurement processes. More information on contractor relationships may be found from the American Institute of Architects.

You will also have to collaboratively manage the construction process and finances. This set of tasks will be done collaboratively with your GC and may also involve construction managers 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 at the outset for how you will collaborate.

Managing Your construction process and timeline

Setting your construction schedule

You will work with your GC or construction manager to set your construction schedule, which will likely be organized around key phases of construction. Examples include pre-construction permitting and site work, foundation, framing, major installations (including HVAC, electrical, plumbing), interior finishes, fixtures and appliances, landscaping, and exterior work.

Your schedule will likely look very different for new construction versus rehab projects, but one is not necessarily always faster than the other. For example, a rehab construction timeline may move more quickly through the initial development phases because there is less site and substructure preparation (assuming the substructure is sound), but there may be more complexity introduced in later phases as you work within the existing structure to renovate. You may also encounter unexpected issues during a rehab, which can cause delays and increase costs. The construction schedule for a rehab project will also impact the relocation plan for tenants and it’s important to determine what relocation laws, such as the Uniform Relocation Act, apply to your development.[21] You may consider procuring assistance with relocation from a relocation specialist.

You may want multiple construction schedules to use as project management tools, such as a schedule organized by phases, a schedule organized by roles, and a schedule organized by workstreams. The schedule should note dependencies, such as when inspections will be needed, before you can move into the next phase of construction.

Hold a pre-construction meeting with key stakeholders, such as your architect, engineer, and consultants, for them to review the construction schedule before it is finalized to check your assumptions and build shared accountability for the timeline. Stakeholders may also help you identify opportunities for greater efficiency that can lower costs or avoid increasing costs.

This pre-construction conference is also when you, your contractor, and the architect will clarify roles and responsibilities, payment schedules, and how processes for project management, such as inspection procedures and how change orders or delays, will be handled. The size and complexity of your project will impact the timing of your construction process. For example, larger projects will generally take more time; newer, innovative construction types may face longer permitting or inspection timelines; and a project with many custom finishes will take longer at the final stages.

Be prepared to adjust your development model as you build your schedule and identify timeline implications of different choices. You may find more expedient options, or you may choose to eliminate features that are extending your timeline, which can reduce your overall project costs.

Phased construction is an approach that allows you to start and complete a smaller segment of your project before moving onto the next. Phased construction 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

The disadvantages of phased construction include:

• Overall longer construction process, which might mean higher total costs (although it may also generate savings to help offset those costs)

• Potentially increased 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

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. Fannie Mae provides more information on considerations related to prefabricated or modular construction here.

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, 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 winter snowstorms or you may not have enough parking room for concurrent contractor vehicles. 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 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.

Inspections, hiring, and reporting requirements

As a developer, it’s important to be aware of daily construction activities and progress. Have a project manager on staff who can fulfill this role, so you can clearly communicate progress to lenders and funders. If you are not able to provide a project manager on staff, you may consider hiring an owner’s representative who represents your needs during the entire construction process while serving in a monitoring role. In partnership with your GC, all contractor activities should be reviewed and approved for completeness and quality. This process usually involves a construction “punch list” on which your GC will list any unaddressed items that should have been included in the work, based on the initial scope. This may be used at certain milestones and/or at the end of the project before the final inspection is certified. You, your GC, and contractors will then come to an agreement on how to address the items on the punch list. If there is a substantial issue, this may require a change order.

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 your expense, who will inspect the property at least monthly and confirm that construction invoices match the completed work.If your development is supported with Housing Tax Credits, the equity syndicator will likely have their own inspector as well.

At other points, 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, such as USDA, also may require inspections at regular intervals, which could impact a project’s ability to proceed to a new phase.

The milestones when building officials will be involved include:

• Pre-construction: reviewing drawings and specifications and investigating the construction site, including drainage, elevation, placement of buildings, etc.

• During construction: reviewing and approving floor framing, wall framing, roofs and ceilings, chimneys, and other structural elements

• Post-construction: conducting a comprehensive inspection and issuing certificate of occupancy (see below)

Confirming public hiring and 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 and Related Acts (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.

Final inspection will occur after all work is completed. At this stage you will:

• collect warranties and lien waivers from all contractors and suppliers,

• make a final punch list and resolve items, and

• issue certificate of final inspection. Either you or your architect will certify that this inspection is completed and the development is ready for move-in.

At your final inspection, it’s recommended to join the inspector so that you can understand any issues they identify and ask clarifying questions. If any items need correction, you will need to bring back your contractors or complete the work directly before having your property re-inspected. It may even be possible to make small corrections, such as screwing in a missing socket cover, while the inspector is onsite. After your final inspection, local building officials will confirm the building satisfies all relevant building codes. If everything is up to code, they will issue a certificate of occupancy and your development will be officially ready for residents to move in.

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.

Draw-downs, draws, or progress payments are amounts of your construction loan that you are able to access at different times in order to pay contractors. You will set your draw schedule with your lender. The schedule may be divided in equal amounts over set intervals, such as monthly payments, or it may be tied to completion of specific milestones. 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.

Some states regulate retainage practices. Colorado regulates retainage on public and privately funded projects. Generally retainage is capped at 5 percent for public projects and for private projects in excess of $150,000 except for single family and multifamily dwellings of four units or less. 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. Also, document project communications well, making sure you have dated notes as record of decisions, particularly those with financial implications, even if they are by phone or in-person.

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.

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