When it comes to financial burdens in the construction industry, responsibility swiftly shifts from party to party as the project builds steam and heads toward its proposed deadline. Unfortunately, these financial burdens can create skepticism between parties, since negligence and culpability are shared by all parties when one party makes a financial gaffe.
In part one, the Naples contractor lawyers at Cotney Construction Law introduced shifting financial burdens in the construction industry. Now, we will continue to discuss this important topic while focusing on owner credit, contractor options, and risks.
Naturally, owners possess superior credit ratings which allows them to more easily secure loans at a preferable borrowing rate. However, there are some exceptions, such as construction projects located in developing countries. Depending on the precise circumstances of a project, the owner may prefer to advance periodic payments to the contractor for a reduction in the contract price. This strategy is commonly used in large-scale construction projects because by fronting part of the financial risk, owners can reduce the overall cost of construction while ensuring the contractor that they will be paid in a timely manner.
Financing Choices for Contractors
Deciding which type of financing is best suited for a particular project is often the contractor’s responsibility. Unfortunately, contractors do not have the ability to utilize all available financing options. Owners do not typically participate in the formulation of cost estimates for construction contracts. By excluding the owner in this discussion, you limit your ability to reduce project costs, but you are afforded the option to control your profits more directly. If the financial feasibility of a project is called into question, a premium to hedge the risk should be drafted into the cost estimation for the owner and contractor.
Ambitious projects with long project timelines are inherently more risky than smaller, shorter projects. If you are working with a novice owner, and they try to evade financial risks by placing the burden of financing on you, the contractor, you should increase the contract prices to reflect the risk premium. You must establish the necessary project framework to ensure that the owner cannot escape participating in the project unless they want to risk runaway costs and exorbitant litigation. For small projects, the owner likely lacks the expertise necessary to evaluate project financing alternatives or explore innovative financing schemes. Thus, you may find yourself responsible for handling the financial burden of the project.
In order to avoid financial burdens on future projects, you should interface with all pertinent parties to ensure that the financial burdens are clearly defined before construction starts.
Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.