9/24/2019
CE 610
Construction
Management
Instructor: Chrissa D. Roessner, P.E.
Session 04
Project Financing
'
• Money is an essential, cascading, -7
and depleting resource. Human Resources Labor
• An owner must have money to time
initiate construction
• The Contractor / Builder must have
CASH
money on hand or in reserve to Flow to fund a
maintain continuity of operations.
project
(
-
use own to
money
get the job Going
keep
-
construction
going
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state federal
Examples tr w
Public Flow
PRIVATE Flow Throog
- Gass
through
tax
• Funding Source (Bank, Private Funding)
Kaen • Funding Source (TTF, FHWA, Bonds)
$$$ • Owner / Developer
inheritance $$$ • Owner
tax Federal garment
• General Contractor • Contractor
$$$ $$$
• Subcontractors • Subcontractors
• Vendors • Vendors
$$$ • Suppliers $$$ • Suppliers
Rates are del time low
Long Term or Short Term
5. years less short term
LONG TERM - MORTGAGE SHORT TERM - CONSTRUCTION
--
These loans extend over a period of This funding extends over the
time, typically 10-30 years, with construction period of the project
amortization, for example
A short-term loan will be provided
Securing long-term funding is the by a lender upon the assurance
first objective of the owner that the principal and Interest will
term be paid back using long-term
longer funding
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Banks for what
Long Term Financing you need
Where to Go? The type and size of a project will
dictate which source of funding to
Real Estate Investment Trusts go to. Once a loan is approved,
Investment or Merchant Banks there may be a schedule of
payments that may mimic the
Commercial Banks project milestones.
Savings & Loan Associations
Government Agencies when
payment is due
International Development Banks
worth of
loaning money
Mortgage Steps
• Preliminary Commitment Issued (conditional)
Background check
• Final Commitment Issued
parties
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• Formal contract is signed by the borrower and lender Both
Borrower To construct the project following the approved plans and specifications.
Lender To provide funds agreed upon at the stated interest rate and time period at
the completion of construction and achievement of target occupancy.
lined oup tenants
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Lenders will require… Personal int
Financial Statements of Business
Personal Financial Statements of Principal Owners
Proof of Clear Title to Land & Appropriate Zoning
Preliminary Floor Plans & Elevations of the Project
Preliminary Cost Estimates ← cost
Design .ee -
Market Research Study to Verify Expected Income
=
Detailed Projected Income and Expense throughout the life of the loan
=
money Back
Return on Investment projections
How Much $ Is Needed?
Basis for Loan which would include line items of work and the estimate
Might also consider Architectural and Legal fees, and Surveying and Closing costs
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¥a Fan
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1987
Iron matured
Bonds
A bond is a promise by a borrower to pay back a sum of money some time in the
future.
Very common in the public sector.
funding
us
saving Bond interest
,
investors are paid
for
get money
Back ,
Government Bond exempt from taxes
pro in the event ofdafault
frailer the
Surety Bonds of product
-
insurance company
Protects the owner (in the event of Default or other)
-
Provided by a surety works
dihrecty
-
Contract between contractor and surety that describes
obligations and conditions Owner
A surety bond is not an insurance company
A surety bond serves as a guarantee of performance
Types: Bid, Performance, Payment, Maintenance
The Surety assumes no additional obligations
±
Surety Contractor
Required on public projects
Bid
performance does wonk
Payment get pain
maintain cc Kramm
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ten 5
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oof doux standing work
Surety Requirements
When a Contractor Applies for a New Project, the Surety will check…
1. Essential characteristics of the project
2. Uncompleted work on hand
3. Working capital & credit (financial picture)
4. 5-6% spread left on the table
5. Largest project completed
6. Terms of the contract ←
7. Amount of subcontracted work←
Performance Bonds
Primary protection for the owner
Guarantees the contract will be in accordance with the terms of contract
Customarily covers the warranty period required by the contract
100% of the contract value Don't want to spend
=
additional money
In the event of Default, the Surety may take over the project, let the owner rebid the
remaining work, and or work with the contractor to finish the project*
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Payment Bonds
Primary protection for 3rd party entities (vendors, suppliers, subcontractors, etc.)
Guarantees payment for labor and material
Protects private owners from liens
No liens in public work
Owners from liens on
the s state
Maintenance Bonds
The typical warranty period in a contract is one (1) year 3 or 5 years
In order to extend the warranty period a maintenance bond was developed
Binds the surety to corrected defined defects in the contracted work
landscape work
that would be defective
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Changes &
Increased
cost estimates
Cash Flow Construction
Costs +
projects
Payments to Monitoring
Vendors, and
Suppliers, Controlling
Subs Money
in + out
in =
make
Contractor
Must
Accurate
Cost
→ money
Monitor Estimates &
Cash Flow Projections
make sure
Retainage f
A typical contract provision between the owner and contractor that ensures …
The contractor will continue its construction effort
There exists a reserve fund to cover defective work, if applicable
Typical retainage on a building project is 10%; NJDOT uses 2%
Retainage may be released (decreased) at certain project milestones
All retainage is returned at project completion as long as all work is completed,
approved, and accepted.
NO go
.
at least academe
I To septennial in
with
the pouch list
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Changes &
Increased
Cash Flow Construction
Costs
Payments to Monitoring
Vendors, and
Suppliers, Controlling
Subs Money
Contractor Accurate
Must Cost
Monitor Estimates &
Cash Flow Projections
Retainage
A typical contract provision between the owner and contractor that ensures …
The contractor will continue its construction effort
There exists a reserve fund to cover defective work, if applicable
Typical retainage on a building project is 10%; NJDOT uses 2%
Retainage may be released (decreased) at certain project milestones
All retainage is returned at project completion as long as all work is completed,
approved, and accepted.
