Church Loan Approval and 5 Danger Zones for Managing Risk

Managing risk in preparation for a church's loan approval takes savvy and careful planning.


Tim Lawrence  ·  July 10, 2017

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Design-Bid-Build is the traditional process where the owner contracts with an architect to design the project, and solicits bids from general contractors based on the design plans. The best bid is chosen and the general contractor contracts with the owner to build the project for a lump sum cost. The general contractor hires subcontractors, and the architect typically administers the construction contract helping the owner manage the project.

In Design-Build, the owner contracts with a Design-Build firm [that] delivers both the design and the construction of the project for a specified cost. Like the general contractor, the Design-Build firm also hires the subcontractors.

In Construction Manager at Risk, a construction manager is hired by the owner, typically advising the owner throughout the design process, and then becoming the general contractor through a Guaranteed Maximum Price contract, and hiring the subcontractors. The owner contracts separately with the architect.

All of these delivery methods are typically acceptable to most lenders, and have certain protections inherent in them for owners.

The most important protection is that a firm has contracted to deliver the project at a specified or maximum price, and that this firm has the contractual relationships with the subcontractors. That way, if there is a problem with the subcontractor, the firm can step in and take care of the problem, and the liability lies with the firm, and not the owner.

Beware of project delivery scenarios that require the church to directly contract with subcontractors. This is referred to as Owner-Builder project delivery, and the owners basically act as their own general contractors.

There can be perceived cost savings with this approach, and it can seem particularly attractive to churches that may be on a tight budget in terms of money available to complete a project, or for churches wanting to build more for less. With Owner-Builder projects, since there is no general contractor, there is no need to build the contractors profit into the project costs.

This is significant, because that profit is typically in the 10 percent range. So Owner-Builder projects have the potential to cost less.

However, there is a reason that the General Contractor or Design-Build firm charges 10 perent. It’s because they are taking on the risk and liability of supervising the work of the subcontractors, and ultimately paying for any costs that might arise out of the subcontractor issues.

In addition, workers compensation and liability risks that are taken on by general contractors and Design-Build firms must now be taken on by the church in this scenario, creating additional risk.

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ARTICLE TOPICS

Other · Budgeting & Finance · Construction Loans · Finance · Loans · Risk Managment · All Topics


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