Fraud is a concern in almost any industry, but the area of construction seems to be particularly susceptible to this malady. As a fairlyrecent study has shown, the amount of losses caused by fraud in construction industry is almost double the overall industry average. With a large number of moving pieces, both physical and financial, construction projects that aren’t closely monitored leave a lot of room for attempts at manipulation.
Every loan-funded construction project will require a number of periodic onsite inspections. As the lending institution provides the funds for the construction project, it is in its utmost interest to ensure that the funds are used according to the project plan and that the work is progressing at the projected pace.
Complicated and multi-faceted endeavors with a large number of involved parties, construction projects encompass a broad range of potentially risky points that can result in grave financial consequences if the project is managed improperly. Lien waivers certainly fall into this risk category.
Construction projects are complicated endeavors with numerous participants and processes. This is why it is nearly impossible to predict the exact amount of costs involved. Regardless of the amount of time and attention dedicated to budget planning, no matter how big or small your construction project, you will likely deviate from the initial plan. Chances are that, somewhere down the line, some things will need to be modified. That’s where change orders and reallocations come in.
Construction projects and loans obtained to finance them contain a number of articles that may seem trivial at first but can lead to serious complications and problems if not given proper care and planning. Stored materials are a perfect example, both from the lender and borrower perspective as well as when dealing with contractors.
What is Retainage?
Retainage is the withholding of a portion of the funds that are due to a contractor or subcontractor until the construction project is finished. It is meant to serve as a financial incentive and an assurance that the contractor will complete the project in a satisfactory manner.
Retainage has been a standard practice in construction projects in the U.S. for a full century. Nowadays, it is a requirement on practically all construction loans. On public construction projects, retainage is prescribed by state laws with fixed percentages and release conditions, while on private projects it is regulated by the terms of the contract.
In the realm of construction loans, retainage is a bit of a controversial term. It is often painted as a burden placed on the owners and contractors by the lending institution, even though it primarily serves to provide added assurance that the construction project will be completed. But, before we get ahead of ourselves, let’s first define what we’re talking about.
Choosing a loan for your construction project is one of the most important decisions you will make. It is a long-term agreement with sizeable financial implications, and it is essential that you find a reliable partner that will ensure a tidy, transparent and stress-free process. Financial terms are the main point of focus, but you must also consider the lender’s reputation and their ability to assist you through the various stages of the construction project.