In commercial construction lending, the plan and cost review (PCR) is a standard part of the underwriting process. So standard, that most lenders don’t think much about who provides the PCR or what’s in it, so long as it gets done.
That’s a mistake.
A thorough, accurate, and expert PCR can prevent costly mistakes, while a poorly conducted PCR may provide little to no protection at all. Unlike property condition assessments, environmental assessments, and many other services designed to mitigate lender risk, the PCR is not regulated by ASTM or any other recognized standards. In short, this important part of your risk mitigation effort is offered by providers on a “buyer beware” basis, and it pays to understand what you’re buying and who is providing it.
Here are 5 criteria to look for when hiring a PCR provider, to ensure you get what you pay for.
More than ever, lending on a construction project is complex and loaded with multiple risk factors. Successfully constructing a commercial building today not only requires knowledge of construction techniques and building systems integration, but also a myriad of other skills including legal practices (associated with construction contracts); construction cost management (addressing both hard construction costs and numerous project soft costs); and regulatory expertise (related to building, land-use and environmental permit approvals). A correctly conducted PCR will look at everything from the Owner/Contractor construction contract to the construction schedule, for appropriateness in terms of cost, constructability, and contractor competence.
Because commercial construction is so complex, every project is unique. If your PCR provider does not have extensive experience in all phases of the construction process, they can’t provide the comprehensive assessment that you need in order to determine the project’s level of risk.
A PCR provider with substantial, long-term construction experience will identify and report any red flag issues and potential problem areas.
In addition to longevity of experience, your PCR provider should have their thumb on the current construction market. You’re trusting them to measure the appropriateness of the cost of each element of the project, as well as the appropriateness of the draw schedule. To do this effectively, they need to know what are the current market material and labor costs in a rapidly changing environment, and what will be the impact to those costs if construction is delayed or prolonged by the design professionals, contractor, or your borrower.
In addition to general construction expertise, as previously mentioned, it pays to hire a PCR provider with on-staff cross-disciplinary expertise, including both knowledge and experience with legal contracts. Construction contracts are complex. In executing Owner/Contractor Agreements your borrower may often make commitments to the contractor that are not in the lender’s best interests. An experienced PCR provider will recognize potential problems in the contract and advise appropriately to protect the lender.
Many lenders make the mistake of underestimating the importance of reputation when hiring a PCR provider. Unfortunately, because the industry is not regulated the way many other underwriting services are, it’s easy for disreputable organizations to make a quick buck providing substandard services. Before hiring a provider, check that they are respected in the industry by their peers and by other lenders who have worked with them. A reputable firm should be willing to give you contact information for existing lending institutions they work with. In addition, a qualified vendor should carry professional and liability insurance coverages, which extend to the lender.
PCR reports can vary in degree of thoroughness. Expect your provider to provide a high degree of detail on all three C’s: Cost appropriateness, constructability, and contingencies. A thorough report should not only look at the construction drawings, contracts and schedule of values, but also geotechnical engineering reports, construction schedule, permits (if available), land-use conformance, environmental reports, and contractor qualification statements.
It’s also important that your provider be able to promptly accommodate the specific reporting needs of your lending institution. Every institution’s requirements are different, and you want to work with someone who has knowledge and experience in meeting your specific requirements in a timely manner.
At GLE, we’ve been providing PCR services for more than two decades. Our cross-disciplinary team boasts extensive, current construction experience, and our reputation is unparalleled. Contact us today to speak with one of our PCR experts.