Like anything you choose to undertake, construction financing has risk associated with it. Most of this risk factor comes from the actual project management and cash flow management of the project itself which also means that the risk can, in most cases, be managed more effectively be concentrating on certain areas.
The goal related to securing a construction mortgage is to provide the necessary capital to complete all or part of a construction project, so the impact of not having capital in place on a timely basis or not being able to deploy it when required can not only be costly to the bottom line of the project, but provide a real risk to the successful completion of the project in the hands and control of the original owner and contractor.
To mitigate the construction financing risk, there are a number of steps you can take or at least consider.
First, not all sources of construction financing are equal or relevant for every particular project or project phase. The project/lender match is always going to be important to ensure that if there are any challenges with the cash flow or work time line, that there is an ability on both sides to work through them.
Second, its important that the owner, builder, or developer acquiring the construction financing spends the necessary time up front to fully understand the lender’s draw administration process so that there is less chances of having a problem getting funds advanced in the middle of the ongoing work.
Third, those responsible for managing cash flow and completing project administration tasks need to stay on top of all lender or funder requirements through out the project to further reduce the construction financing risk quotient.
Fourth, in order to be better equipped for dealing with any construction financing issues when they may arise, the borrower should be working with an experienced construction mortgage broker who has a track record of being involved with completed projects and understands how to manage the interpersonal dynamics associated with the chosen capital provider.
Fifth, allowing for a reasonable contingency allowance and/or having access to a separate source of capital for the contingency allowance can help alleviate or reduce the construction financing risks associated with draw advance delays, project overruns, and draw cut backs.