Question

Construction contractors necessarily rely on the creditworthiness of project owners. Construction requires considerable capital. A contractor needs to know the owner will be able to make progress payments. On private projects, much of the construction capital is borrowed. This raises a question: Does a construction lender have an obligation to keep a contractor informed of the project owner’s financial condition?

This was illustrated in a recent case involving a residential development. The project owner defaulted on a separate construction loan on an unrelated project. This material change in the owner’s financial condition caused the lender to stop advancing funds for the residential project. Neither the owner nor the lender informed the contractor. The contractor continued working for another month, to its considerable financial detriment. Contractors, to be sure, have an obligation to research the financial capability of the private project owners with whom they do business. But due diligence cannot reveal everything. And it certainly cannot account for events which have not yet occurred.

Discussion: As arisk management precaution,should a contractor seek assurance of payment from the project owner’s construction lender on a regular basis? Wouldn't the confidentiality of owner's financial records prevent the lender from sharing much of the information? Discuss.

Answer 1

As we know that construction industries are mainly large scale industries due to its project work completed on time and investing huge amount of money, every construction industry is just stable due to their work is going on time.

To increase the speed of construction we need to supply continuous cash flow to each unit who has major and minor contributions toward the work.
When it comes to project owners financial condition: If a contractor wants to clear that tender he has to work the least tender amount so he can work on the project. but a contractor cannot directly ask project owners for their financial condition, but he can avail of the history of completed work to understand the capital payment cash flow based on their past work so he can handle the project based on the situation.

if he has to require additional agreement for the safety purpose so he can withdraw..

For continuous operation of the project, we have to maintain daily progress reports and coordinate with site engineers and project managers so he can update them with the management of weekly cash flow and intended to collect all the necessary payments for all the laborers.

That being said, some of the most prominent provisions that may affect the construction process of your building are:

(1)   Scope of Work/Performance Duties Provision

(2)   Securing the Parties’ Performance Provision

(3)   Payment Provision

(4)   Project Changes and Change Orders Provision

(5)   Delays Provision

contractor can not seeks assurance of payment from the project owner’s construction lender on a regular basis:-

The allocation of risks is a key consideration in all contracts. Parties to construction contracts would usually aim to include clauses restricting and sharing their respective risks, tasks, responsibilities, and obligations.

These regulations can be arbitrary in their attempts to transfer obligations from one party to another, and should, therefore, be closely scrutinized during the time of conversion.

In an attempt to reduce the funding risks, borrowers may look directly to the contractor for various guarantees, certifications, and agreements about the construction and completion of the project.

construction financing: -a construction loan is simply a loan made for the security of a real estate mortgage, the proceeds of which are paid out periodically or desired time as mention in agreement to cover the hard and soft costs of construction. They may be among the most complicated real estate loans and include the construction contractor's activities intimately.

Understanding the financing of construction can help the contractor provide additional value to its clients and enhance its competitive position to deal with cash flow.