The Construction Phase involves the actual “brick and mortar” work and the processing, approval and payment of the written payout requests of the contractor, sub-contractors and material suppliers.
You will recall that this series of blogs is focused on the three phases associated with a construction project: (1) Contract Phase; (2) Construction Phase; and (3) Post-Construction Phase. Each phase involves construction management paperwork you must understand and utilize. Last time, I discussed the essential elements of your construction contract where I described the scope of work, payment process, change orders and warranties.
Now, let’s move on to the second phase: “The Construction Phase.” This stage involves the actual “brick and mortar” work and the processing, approval and payment of the written payout requests of the contractor, sub-contractors and material suppliers (i.e. materialmen). For purposes of this blog, I will focus on the payout process and the construction management paperwork needed to complete the payments in an accurate, timely and comprehensive manner. Generally, the property owner will entrust a third party such as a bank or a title company to act as an escrow agent to handle the fiduciary duty of the payout process and the related construction management paperwork. This entrustment will be memorialized in a written Construction Escrow Agreement.
In basic terms, the Construction Management paperwork is comprised of an Owner’s Sworn Statement and the Contractor’s Sworn Statement. The Owner’s Statement contains the soft costs (e.g. architect, surveyor, legal), providing the project’s big picture. All of the construction’s hard costs will be listed in the Contractor’s Statement, which includes the cost of the subcontracted jobs, such as plumbing and electrical work.
Signed and notarized, these statements are similar to a budget. They inform the escrow agent how the money is to be allocated over the life of the construction project. With these statements in place, the escrow agent from the bank or title company can ensure payments are made and periodic inspections are done at the site to confirm that the work for each payout phase is completed and conforms to the architectural drawings and specifications.
As the project proceeds, the escrow agent will receive updated sworn statements from the contractor and sometimes from the owner that outline the payouts due on the job. In turn, the contractor must provide lien waivers and affidavits to show the amounts to be paid and identify any materials that have been used at the project. This documentation verifies exactly how the owner’s funds are spent throughout each phase of construction.
One Final Note
This paperwork is an essential safeguard and should always be examined carefully. Before you sign, have an attorney look over the documents and advise you on the most appropriate route to take.
Next time, I’ll examine the Construction Escrow Agreement in more detail.