Does money make the world go round? Well, it certainly does as far as the world of construction is concerned. The national average cost of constructing a decent home (sans the land price) is around $329,000. The final cost depends upon factors like property type, materials used, location, current labor demand, and personal preferences for customization. Construction contractors must provide their clients with an estimate for project delivery under budget.
As per Deloitte’s 2024 Engineering and Construction Industry Outlook report, nominal spending in this industry is maintaining a steady upward path. There is an increased focus on sustainability and energy efficiency. No matter the project, contractors require a consistent flow of funds to maintain work progress.
A major reason why construction projects default is payment-related issues. The risk of liens is tackled through a proactive approach called funds control. The aim is to protect all parties by ensuring –
- Loan proceeds are not diverted to other projects without authorization
- Payments are made on time (not delayed or ahead of schedule)
- There are no duplicate requests or errors
Being such a crucial aspect of a construction project, funds control must receive utmost priority. In this article, we will discuss 4 best funds control practices for project risk management.
Identifying and Resolving Payment Request Discrepancies
The entire process of funds control usually begins with an agreement between the construction risk management firm and the contractor. According to North American Construction Services, the risk management team may get involved in reconciling previous funds or controlling the remaining money.
The team will receive and review all payment requests, monitor construction progress, get lien waivers from sub-contractors, and disburse the funds to relevant parties. An important step that can help avoid future errors or double requests is to provide the client with real-time budget information.
This means all documentation must be reviewed thoroughly (including lien releases and invoices) for any payment discrepancies. Even the reallocation of funds must be checked for front-loading or upfront payments before completion of the project.
With real-time details of whether or not the project is progressing within the pre-approved budget, the manager can make necessary adjustments. It will also lead to more effective collaboration and better decision-making.
Ongoing Funds Management
McKinsey & Company considers the architecture, engineering, and construction market to be among the largest in the world (standing at $12 trillion). The value is driven by the fact that most construction projects are huge (with thousands and millions of dollars at stake).
While a construction project is underway, there are plenty of payments to take care of. It is possible to face any delays, misses, and errors. Given the size of each project, a single payment delay or error has the potential to disrupt the entire timeline.
As a result, ongoing funds management is a must. Those looking to take on larger projects can click here to understand funds control better. But it all starts with timely payments for the existing projects. On-time payments must be made to not only the general contractor but also material suppliers, vendors, and sub-contractors.
That way, it is possible to keep track and ensure that no money gets used up for other line items. This lowers the risk of work being halted due to payment delays or depletion of loan funds.
Paperwork Management
Lenders of any construction project rely heavily on proper paperwork (both incoming and outgoing) to track work progress. The third best practice for effective funds control in project protection is to organize all documentation (preferably through electronic record-keeping).
This is especially indispensable in cases where the project is audited. When we speak of paperwork management, it includes all kinds of documents like invoices, lien releases, contracts, signatures, and other papers the lenders require.
Aligning Payments with Construction Progress
Consider this – if payments are made ahead of time in a construction project, it becomes extremely difficult to disburse funds effectively. After all, any discrepancies later on cannot be rectified (or may halt the progress).
This is why it is important to align payments with the project’s progress. It is only possible through early detection. In other words, construction progress monitoring must be undertaken. This process involves regular progress-related feedback and site inspection.
It gives an idea of whether the project is moving forward as per the loan agreement and pre-determined timeline. The stored materials can be evaluated on or off the site as well as the funds status can be checked (to ensure the project meets its completion date).
Effective construction risk management is all about partnering with the right firm. An experienced company with a team that has a diverse portfolio and in-depth industry knowledge will manage the project efficiently from start to finish. They will implement the best practices to ensure timely project completion and adequate risk mitigation.
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