Phase 5: Construction

At this point, you, your development team and community partners have already refined your development model, selected your development site, received regulatory approvals, and secured funding. This phase will begin to guide the execution of the vision and concept of the project. You are now able to articulate not only the general concept and vision for your project, but also specifics of what the property will look like when you are complete. You are ready to hire contractors and begin the construction process.

This section will include:

• Managing the Construction Process

• Developing a Construction Schedule

• Inspection, Hiring, and Reporting Considerations

• Managing your Construction Finances

But first, it might be helpful to go through an approach to this new phase:

Construction approach

The approach and technologies you use to construct your development will be key to consider before you begin your design process. Knowing that you prefer one approach over another will inform what is possible.

Onsite construction involves the development being built entirely at the development site, often referred to as a “stick-built” or “site-built” approach. This approach offers the greatest flexibility for your development, but in some cases may be the most expensive and/or time-consuming approach due to the labor required.

Offsite construction involves completing some aspects of construction in another location, often achieving some combination of faster production, reduced costs, greater material efficiency, and/or greater quality control. Offsite approaches include:

• Modular construction approaches that create entire rooms or housing units of a building that are shipped to the site and connected to form the final building. These structures are regulated by local building codes.

• Panelized systems in which individual, flat building elements such as wall segments, roof trusses, and other components are created offsite and then assembled onsite. These structures are regulated by local building codes.

Managing the construction process

Engaging your general contractor (GC) early in the design process, rather than after the schematic is finalized, can make your entire construction process more efficient, allowing you to account for and avoid potential cost or time-drivers later.

The recruitment of qualified contracts should happen through a process of requesting, reviewing, and awarding bids. Through a bid package, you will be able to articulate project specifics, timeline, and the type of contractor bids you seek. The bid package may also be referred to as a Request for Bid. When preparing your team be sure to consult with the TERO office as some have Indian Preference laws requiring Native contractors to be used on their projects when a non-native group is awarded a contract on their lands. There is usually a tier system of Native contractors and if there aren’t any local contractors that can fill the role of a subcontractor such as in a specialty trade then the TERO office will look into Tier 2, then Tier 3 for other Native contractors to fill that role.

A developer must collaboratively manage the construction process and finances with the GC. This set of tasks may also involve project managers (internal or contracted) or contract administrators who support project oversight. Since there are a variety of ways to divide these duties, it is important to discuss and set clear expectations of roles and responsibilities at the outset for how you will collaborate.

Design Build

In markets where demand for construction labor is high, it may be difficult to onboard your GC so early. In this case, you may wish to pursue alternative contracting procedures to create standards or incentives for accurate early-cost estimating. You may also consider the design-build construction process rather than the traditional bid construction process. With the design-build process, you only manage one contract consisting of all professionals and contractors, rather than managing separate contracts for the architect and contractor. This creates a more collaborative relationship between the architect and the contractor, although it sometimes conflicts with procurement processes outlined by regulatory groups like TERO. More information on contractor relationships may be found from the American Institute of Architects.

Requesting, reviewing, and awarding bids is how you will find your general contractor (GC) and subcontractors with specific areas of expertise, such as plumbing and electrical. When preparing the bid package, you will articulate project specifics, timeline, and the type of contractor bids you seek. The bid package may also be referred to as a Request for Qualifications or Request for Bid.

Your bid package can include the following:

• Work details and timeline: this should include architectural, structural, mechanical, electrical, and civil engineering work, plus materials, interior needs, and landscaping

• Site description

• Selection and contract process overviews

• Bid terms and conditions

• Whether Davis-Bacon or tribally determined wage rates are required for your development

• Instructions on what to include in a bid/proposal response, including any required documentation, such as licenses, notices, insurance, and bonding; different lenders may have differing requirements for insurance and bonding, so check with funders you have already selected

The process of solicitation and invitation can depend on your funders. For example, you may be required to post the bid package in certain news outlets. Some cities and local governments have minority- or women-owned and small business programs that can alert you to qualified firms that you can reach out to with a Request for Qualifications, sometimes called a Request for Bid (RFQ/ RFB). [71] [72] Prior to requesting bids, you may also need the services of an estimator to determine the approximate price of construction for your development. An estimate is less detailed than a bid.

Your project location may impact the number of bids you receive, depending on the local labor pool. Colorado developers interviewed for this guide noted that this can be a challenge in rural areas, where there aren’t large labor pools. Construction contractors from metro areas may face longer commutes to your project, or may require lodging, increasing your costs. If you only receive one bid, before moving forward with selection, you may want to research why and if any adjustments would make your development more desirable or feasible to contractors. Reach out to local developers and ask if they can provide insight or connection to local contractors to discuss why they did not bid on your development. If there are no other bidders based on given project need, demand, or location, you can continue with a single or sole-source procurement, with proper justification and documentation of why it is necessary. This is required if using HUD funding and may also be required by other funders. [73] You should note that a single or sole source bid still needs to be evaluated as if there are multiple bids.

As you receive proposals from contractors, make sure you have a formal record of each bid submitted. Sealed bids are publicly solicited for a firm fixed-price contract, either lump sum or unit price, that is awarded to the lowest cost responsible bidder whose bid conforms to all the material terms and conditions of the RFQ. Sealed bidding is the preferred method for procuring construction, supply, and non-complex service contracts[74]. Compile proposal information in a way that will streamline bid comparison.

When selecting a bid, consider several factors and questions, in addition to price:

• Qualifications and experience of the bidder: Have they completed similar projects before? Do they bring the expertise you need? Do they have necessary licenses to complete the work?

• Completeness and responsiveness: Did they provide everything you requested in your bid package?

• Alignment with project goals: You may have additional goals for your project like employing local labor or supporting businesses owned by women or minorities—are they aligned with these goals?

Key contract terms should be outlined in the bid package, including a request that contractors confirm they can agree to those terms. That will make it easier to execute the full contract after the contractor is selected. You may consider obtaining a Notice to Owner (NTO) or lien waiver from contractors at the outset. These are agreements that contractors make to waive their right to place a lien on the property in the event of nonpayment for their services. Lenders may want this documented to ensure there is no risk of contractors placing a lien on the property in the future, which may prevent you from repaying their loan.[75] You should also provide a formal letter to each contractor who submitted a bid to notify them if they were not selected.

Recruiting a Native Workforce

It has been mentioned that you will have to work very closely with your general contractor throughout the construction phase. Working with a local contractor helps ensure greater access and ease of communication at key points in the project. Hiring a local contractor whose employees live and shop in your community helps to keep the economic benefits of development and employment within your community. When considering a Native contractor, you are not only working to comply with guidance put forth by the TERO office, you are providing opportunities for natives to work.

Developing a construction schedule

One of the first steps steps to set up the construction process is to develop and set a construction schedule that is based on key construction milestones. Examples of milestones include pre-construction permitting and site work, foundation, framing, major installations (including HVAC, electrical, plumbing), interior finishes, fixtures and appliances, landscaping, and exterior work. The construction schedule should be developed with your general contractor or the construction manager your team selects through a competitive RFP process.

There is more than one way to organize a construction schedule and utilize it as a project management tool. A construction schedule can be organized by milestones, roles or workstreams and distributed to those who need to be aware of the timeline. Each schedule can also include details or dependencies before an item is completed or checked off.

Phased Development

To better facilitate the transition that occurs within a construction project, a phased approach allows yourself and your team to complete a smaller segment of the project before moving onto the next.

A phased approach may be beneficial in these cases:

• To prove your concept if you are pursuing a newer, more innovative building model

• To allow your project to start generating revenue faster, which can then be used to help finance later development phases

• To minimize tenant relocation during a renovation project—this is beneficial to tenants and could minimize overall cost

The disadvantages of phased construction include:

• Overall longer construction process, which might mean higher total costs (although it may also generate revenues to help offset those costs)

• Potentially increased transaction costs on supplies if you are not ordering for all phases of the project at once

• Additional coordination and complexity, including additional potential regulatory review and approval processes

Once a preliminary construction schedule has been developed, it is time to hold a pre-construction kick-off meeting with key development team members and stakeholders in the construction process. This will allow your architect, engineer, and consultants to review and finalize the assumptions made in the schedule and build a shared understanding of accountability for each member by role for the timeline.

The roles and responsibilities for each team member need to be clearly defined during the kick-off. There is also an opportunity to set standards and expectations around the process for project management. This includes inspection procedures, payment schedules, assumptions around permitting or inspection timelines and protocols around cultural context identified in the design phase.

Your construction timeline and approach may also undergo some changes during this process. The team may provide insight on improvements to features or processes that can simplify or expedite your timeline, which can reduce your overall project costs.

Inspection, hiring and reporting considerations

Awareness of the day-to-day construction progress will be important when reviewing and approving invoices. Your construction lender will also hire a construction inspector, at your expense, who will inspect the property at least monthly and confirm that construction invoices match the completed work.

Throughout construction, local building officials will conduct inspections to confirm that different elements of your project are satisfying building code requirements. You will need approval from local building officials at certain milestones before moving on to other phases of your project. Other partners also may require inspections at regular intervals, which could impact a project’s ability to proceed to a new phase. There may be instances where communities have not set or defined building codes. When this is the case, you should look to the standards defined by those closest to the community.

Confirming Tribal hiring (if required) and reporting requirements are met during the construction period is the responsibility of the general contractor (GC), or developer if you are also operating as a project GC. The GC will often be supported by a contract administrator who provides labor standards advice, ensures that contract language effectively represents the project’s legal requirements, and monitors compliance throughout the project by reviewing payroll reports and conducting interviews with contractors and construction workers. When a project receives public funding, the contract administrator will generally be a public employee. Additionally, the U.S. Department of Labor has independent authority to conduct investigations to confirm labor practices comply with federal standards.

Native developers also have the responsibility to ensure that the development follows code even if the Tribal Nation that you are working with hasn’t adopted codes to be followed and enforced. If you are uncertain what to do in this instance, there are many options to your team to choose from, including online resources. The International Code Council’s website can show you what the state and local municipalities codes are as well as the latest Building, Residential, Fire, Zoning, and others, including Pool codes. Simple outlines for codes (Basic View [codes.iccsafe.org]) can be adopted and implemented by a tribe at any point, and more thorough guidebooks that provide professional guidance on adhering to codes are available  for a price.

Any hiring requirements should be incorporated into subcontractor agreements and made clear in the initial bid package. Reporting processes should be established upfront and documented in the contract to ensure the GC and contract administrator have sufficient information about hiring and labor practices throughout the project. Davis-Bacon and Related Acts (DBRA) refers to federal regulations that require certain labor standards (i.e., Davis-Bacon standards) to federally assisted construction projects. Specifically, Davis-Bacon requires all contractors and subcontractors to pay employees the local “prevailing wages” at a minimum. Contractors and subcontractors are required to submit payroll records weekly to certify their compliance with this standard and post the applicable Davis-Bacon wage rate prominently on the job site. The Omnibus Indian Advancement Act allows tribes that choose to use Tribal Designated Wages (TDWs) in place of Davis-Bacon and/or HUD determined wage rates. If this is the case, a tribal law or regulation would be in place and have their own definition of what a prevailing rate is.

Keep in mind that when working on a reservation, work performed must be in compliance with Tribal Employment Rights ordinance, which mandates tribal requirements for Indian preference that all covered employers must comply with in order to be eligible to perform work on reservations. TERO Commission and staff have authority to enforce the TERO ordinance.

There are existing best practices and methods that you use to build the community’s capacity for development and tapping into the local workforce pipeline. Best practices include:

• Identifying the key players in the community, such as Navajo Workforce Agencies, local educational or trade institutions, and other local workforce development partners. These players can be a part of a larger strategic partnership to assist new employees gain valuable trade and work experience. This action will foster closer collaboration between yourself and tribal workforce or economic development initiatives.[76]

  [76]National Congress of American Indians. Empowering Tribal Workforce Development: Indian Country’s Policy Recommendations for the Federal Government (Version 2.0). Washington, DC: National Congress of American Indians. February 2020.

• Partnering with Native CDFIs and engagement with existing public authorities to advertise pathways to employment in the construction field.

• Providing workshop and Q&A sessions to assist local contractors that are navigating the RFQ/RFB process. There is also an opportunity to partner with local technical assistance service models that may be offered already by Native CDFIs.

There are several creative approaches to housing development are being explored in many tribal communities. Homes built on the Navajo reservation sourced local wheat bales and wood reclaimed from forests on tribal lands[77]. Pueblos in the southwest that need rehabilitation have used remanent of adobe walls by grinding them up and adding them to the mold for new earthen plaster, carrying on the original handiwork of pueblo people[78].

Tribal groups interested in this approach should consider whether the contractor they are working with has knowledge of using and sourcing traditional materials. Tapping the expertise of a designer or architect, as well as traditional craftsmen, culture-bearers, and tribal workforce development programs may assist or enhance this approach.

While exploring the effectiveness or promise of these approaches is beyond the scope of this guide, it is critical that you confirm that any construction approach you choose is allowable under local regulations and building codes in the jurisdiction you are working in. In many cases this is a limiting factor in exploring these alternative materials and methods. 

Managing Your Construction Finances

After you have assembled your financing and before construction work begins in earnest, you will close on your construction financing, also known as the “initial closing.” Construction financing closing may happen concurrently or after the pre-construction conference, so long as it occurs before the start of construction.

When you close on construction financing, the following will happen:

What are draw-downs?

• You can receive your first payment from your construction loan.

• You will pay your initial financing fees unless an extension or deferment has been granted.

• You and your lender will conduct a final review of all forms and exhibits to ensure accuracy of the terms.

• You and your lender will confirm their loan constitutes a first-priority lien on the property.

• You and your lender will confirm necessary steps have been taken to secure the property and prepare for construction, including confirming zoning compliance, building permits, utility services, and insurance coverage.

• Final copies of the funding agreement(s) and associated documentation will be circulated to all parties of the agreement(s) for their records.

Draw-downs, draws, or progress payments are amounts of your construction loan that you can access at different times in order to pay contractors. You will set your draw schedule with your lender. The schedule may be divided in equal amounts over set intervals (e.g., monthly payments) or it may be tied to completion of specific milestones (e.g., once those construction milestones are reached and confirmed via inspection by the lender, you will receive payment).

You or your GC may choose to retain a portion of the progress payment until the contracted work is complete to ensure it is completed on time and to your quality standards. This practice is known as “retainage.” Even with retainage, it is important to have clear, shared expectations with your contractor for how and when the work will be done to avoid cash flow issues or delays. Some states regulate retainage practices. Check your funding terms for details on any retainage regulations that may apply.

Contractors will submit invoices to you for their portions of the project, which you will review against your construction budget to monitor any potential cost overruns. This will allow you to track construction progress relative to budget spenddown. Set invoicing schedules with your contractors, such as requiring a monthly invoice submission, to assist with this process. Before each scheduled draw, you will submit a progress payment request and supporting documentation, such as contractor invoices, to trigger payment from the lender. Some lenders will require an inspection at the time of the draw request or milestone to confirm work completed.

Thorough documentation of contracts, invoices, and payments will be critical for your lenders and project funders and may be necessary for tax purposes, disputes, or legal matters. Also, document project communications well, making sure you have dated notes as record of decisions, particularly those with financial implications, even if they are by phone or in-person.

What are change orders?

Change orders are documentation of any changes to a contractor’s scope of work to which you agree. The change order should include details of the changes being made plus any cost or timeline implications and should be signed by both you and the contractor once approved. The change order process should be specified in your contracts and discussed at the predevelopment conference. When reviewing change orders, determine if costs incurred exceed your contingency budget or if they can be offset elsewhere. You also must ensure changes comply with existing funding terms and do not jeopardize any of your funding.

Funders may require regular updates during the construction process to ensure satisfactory progress and compliance with funding terms. They will confirm your actual progress reflects your application projections and their funding is being used for eligible purposes (per the funding agreement).

Before construction is complete, begin finding prospective tenants or homebuyers who will occupy your development. Do not wait until construction is complete because that will extend the length of your “lease-up” or sales period when your building is habitable but not occupied/fully occupied and will delay your revenue. This reduces your profitability and can impact your ability to repay financing.

 

As a developer, the faster your project starts generating income, the better. Real estate finances are impacted by the time value of money, because inflation, risk, and opportunity costs (other things you could use the money for) all increase over time. This is the reason we discount projected future cash flows when calculating expected rates of return (see Financial Modeling Tool and Guidance).

Some funding sources may also place restrictions on how quickly rental units should be leased. Developments supported with Housing Tax Credits are generally required to lease units within 90 to 120 days after the Certificate of Occupancy is issued (See Tsigo Bugheh Case Study). This leasing requirement is usually tied to the syndicator’s market absorption estimate, which determines the timing of equity payments.

Any time you are representing your development to the public is a chance to market it and its benefits to the community, including the concept stage through project completion. Targeted marketing to attract prospective tenants or homebuyers should begin in earnest six months prior to construction completion. You can choose to hire a marketing contractor to support or lead this work. If you contract out for property management services or hire property management staff, they will be responsible for marketing and lease-up. See Phase 6 for more information on property management. Even if you have a marketing or property management contractor, you should provide oversight to ensure that outreach, marketing, and tenant selection or homebuyer underwriting all comply with local, state, and federal laws, plus any funding terms governing the project.

Some funding sources may require you to create a marketing and outreach plan and, even if it is not required, this kind of planning document is useful for ensuring alignment between your marketing activities and your project goals and requirements.

A Certificate of Occupancy is issued by local building officials, certifying that your property is up to building code and safe for people to live in. A temporary certificate of occupancy (TCO) is issued for a portion of your development prior to completion. Once construction is complete, you will be ready for a final inspection from building officials after you have conducted your own final inspection and worked with your construction team to address any items added to the punch list. As you get close to the end of construction, you should contact the local building department to schedule the inspection.

The building department will likely have a specific process for these inspections and may require certain documentation before you can schedule the inspection to obtain your Certificate of Occupancy. Throughout the construction process, you should work proactively with the local building department to understand their processes and build a strong working relationship.

Ideally, you will have identified any potential code violations during previous inspections and your building inspector will be able to issue a Certificate of Occupancy after the last inspection. If minor violations are identified, you may be able to address them on the spot; otherwise, you will need to schedule a follow-up inspection, which could add weeks to your lease-up period.

After you have the Certificate of Occupancy and the development reaches stabilized occupancy, you can move forward with closing on the permanent financing. Lenders will differ on their definition of stabilized occupancy. Generally, it is a minimum percentage occupied for a certain number of days. Closing on permanent financing will include a review and verification of previous financing assumptions to ensure they are still accurate and sufficient to minimize lender risk. Information from the final round of inspections will be used to prepare a forecasted capital expenditure budget, which estimates the timing and cost of future repairs and system replacements. This will be used during closing on the permanent financing to ensure the replacement reserves are adequate for the expected needs.