1. FINAL PAYMENTS

HB-1-3560

CHAPTER 9: PROJECT CONSTRUCTION

9.1 INTRODUCTION

Management of construction is the borrower’s responsibility. However, the Agency will

monitor construction to ensure that it complies with the project plans and specifications and to

protect the government’s security interest. Consequently, the Agency plays an active oversight

role in the construction process, from reviewing planning documents to inspecting construction

work. This chapter describes the Agency’s procedures for carrying out these responsibilities. It

summarizes the requirements established under RD Instruction 1924-A, and RD Instruction

1924-C.

The chapter is organized as follows:

• Section 1 describes construction requirements, including construction standards,

contracting methods, contractor requirements, and cost certification procedures.

• Section 2 describes the contracting procedures from the invitation to bid through the

preconstruction conference and the notice to proceed.

• Section 3 describes the Agency’s responsibilities during construction, including

inspections, concurrence in change orders and contractor payments, and the contract

close-out process.

9.2 OVERVIEW OF THE AGENCY’S ROLE IN THE CONSTRUCTION PROCESS

The Agency’s involvement in the construction process begins with the submission of the

initial application. The State Architect reviews all construction documents, beginning with the

preliminary planning documents and concluding with the final plans, specifications and cost

estimate. The State Architect will advise the loan approval official on acceptability of the project

design, specifications, and cost estimates before the loan is closed or construction begins

(whichever occurs first). The State Architect will also consult with the State Environmental

Coordinator regarding any mitigation measures required by the environmental review, which

may affect project plans and specifications. The State Architect acts in an advisory role to the

processing and approval officials, unless specifically delegated responsibility for “approval” of

design, contracts, etc.

The Agency concurs in the borrower’s selection of a contractor and in the construction

contract. The Agency requires that a preconstruction conference be held, as described in

Paragraph 9.11.

During construction, the Agency assumes an oversight role, performing inspections and

concurring in change orders and contractor payments. The Agency also performs a final

inspection before contract close-out.

(

Note: The Agency’s role in construction oversight does not diminish the role of the

project architect hired by the borrower. The project architect is responsible to the borrower for

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ensuring that the project is constructed according to the Agency-accepted plans and

specifications. The project architect’s responsibilities include regular inspections, payment

certifications, change order approvals, and other oversight of construction activities.)

9.3 CONSTRUCTION FINANCING

There are two methods of financing construction: interim financing and multiple

advances.

• Interim financing. If the borrower obtains interim financing, an interim lender

provides the funds for construction and the Agency does not close its loan until after

construction. The Agency prefers to use interim financing whenever possible since it

is, in essence, financing a finished product.

• Multiple advances. If the borrower obtains multiple advances, the Agency advances

funds to the borrower to pay for construction as the work progresses. If multiple

advances are used, the borrower must document that interim financing is not available

at suitable rates or terms.

These methods are described in Chapters 4 and 5. Regardless of the method used, the

Agency will assist in monitoring the construction process as described in this chapter.

9.4 IDENTIFY-OF-INTEREST RELATIONSHIPS

If any parties in the construction process have an identity-of-interest (IOI) relationship

with the borrower, the following steps must be taken:

• The borrower must disclose the IOI relationship to the Agency;

• The construction costs must compare favorably with projects not involving an IOI;

and

• The contractor must certify all actual costs in accordance with cost certification

procedures described in Paragraph 9.8.

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SECTION 1: CONSTRUCTION REQUIREMENTS

9.5 CONSTRUCTION STANDARDS

Construction standards are prescribed in RD Instruction 1924-A. Projects must be

designed to meet or exceed:

• The development standard adopted by the Agency in the State where the project is

located;

• Agency thermal performance standards; and

• Applicable state and local laws, ordinances, codes, and regulations.

Land and site development must meet the standards and requirements in RD Instruction

1924-C. These requirements are discussed in Chapter 3. The project architect must certify that

the final plans and specifications comply with these standards prior to Agency approval of the

loan. Form RD 1924-25, Plan Certification, must be used for this purpose. In addition, the

project architect must also certify that the project has been designed in accordance with all

applicable accessibility standards and guidelines. These standards may include, but not be

limited to, the Uniform Federal Accessibility Standards (UFAS), the Fair Housing Act

Accessibility Guidelines (FHA/AG), the Americans with Disabilities Act Accessibility

Guidelines (ADA/AG), and any applicable State or local requirements.

9.6 METHODS OF CONSTRUCTION

There are three methods of constructing Multi-Family Housing projects: competitive bid

contracts, negotiated bid contracts, and owner-builder.

A. Competitive Bid

All construction contracts must be awarded by competitive bid unless an exception is

granted for a negotiated contract or the owner-builder method of construction, as

described in Paragraphs 9.6 B and C.

For competitive bidding, the borrower provides public notice inviting contractors to

submit a bid within a specified time frame. Contracts are selected based on cost and

awarded to the lowest responsible bidder.

The contractor and the contract price must have Agency concurrence. The contractor

must be licensed as required by the State and must not be on the list of debarred

contractors. Unless waived by an interim lender, the contractor must provide a

performance and payment bond or an acceptable alternative as described in RD

Instruction 1924-A.

The competitive bidding process is discussed further in Paragraph 9.9.

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B. Negotiated Contract

Borrowers may request an exception

from competitive bidding if they prefer to

use a specific contractor or if the

competitive bidding process does not yield

an acceptable bid. Negotiated contracts are

often used by borrowers with a

construction company having an IOI. The

State Director may grant an exception only

if the following conditions are met:

Competitive Bids and

Negotiated Contracts

At times of high-construction

activity when construction prices tend to be

higher, negotiated bids may provide lower

costs. At times of low-construction

activity, competitive bidding is more likely

to yield lower costs.

• The cost under the negotiated contract compares favorably with similar and recent

construction in the market area;

• The proposed contractor is a reliable contractor and licensed to perform the

construction work in accordance with local requirements where the project is located;

and

• The reasons for requesting the exception from competitive bidding are documented.

The information required for a written request to grant an exception to the

competitive bidding requirements must be in accordance with RD Instruction 1924-A.

C. Owner-Builder [RD Instruction 1924.13(e)(2)]

The Owner-builder method of construction is used when the construction company is

identical to the borrower/owner entity. Owner-builders must be qualified to perform the

construction work and show that they are licensed in accordance with local requirements

where the project is located. There is NO written agreement or contract between the

borrower and the construction company to build the project. However, there will be

separate contracts with companies to perform portions of the work, such as plumbing and

electrical systems.

Before granting an exception to allow an owner-builder arrangement, the Loan

Originator and the State Architect/Engineer will review the borrower’s written request,

drawings, specifications, and cost estimates to determine whether the arrangement is in

the best interest of all parties. All borrowers with owner-builder construction

arrangements are required to certify the final construction costs as described in Paragraph

9.8.

The information to be included in the borrower’s written request must be in

accordance with RD Instruction 1924-A.

9.7 CONTRACTOR REQUIREMENTS

The Agency must ensure that the contractor meets the requirements described below.

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A. Debarment and Suspensions

All contractors submitting a bid in excess of $25,000 must certify that they are not

currently debarred or suspended from participating in Federally funded programs. The

certification statement is included on Form AD 1048, Certification Regarding

Debarment. Failure to submit the certification is grounds to reject the bid. It is the

Agency’s responsibility to check the list of debarred and suspended contractors to make

sure the contractor is not listed there (even if the contractor has submitted the

certification).

B. Insurance

The contractor must have property and liability insurance for construction to protect

the borrower and contractor from a variety of losses. The construction contract must not

become valid until proof of insurance is received by the Agency. The amount of

coverage and the other insurance provisions of the coverage must be in accordance with

the project’s construction documents.

C. Payment and Performance Bonds

Payment and performance bonds covering the contractor’s work must be executed

prior to the start of any construction. The bonds must each have a face value of 100

percent of the construction contract. These surety bonds must only be obtained from a

corporate bonding company listed on the current U.S. Department of Treasury Circular

570 (published annually in the Federal Register), as holding a certificate of authority, as

an acceptable surety on Federal bonds, and as legally doing business in the State where

the project is located.

If interim financing is involved, the interim lender may waive the bonding

requirement. The waiver must be in writing and attached to the contract documents.

An alternative to the bonding requirement is a letter of credit. Requirements for

letters of credit are discussed in Paragraph 9.7 D.

D. Letters Of Credit

In lieu of payment and performance bonds, the lender (or in the case of multiple

advances, the Agency) may accept an unconditional and irrevocable letter of credit issued

by another lending institution to secure the completion of construction. The letter of

credit must equal the amount of the construction contract and must remain in effect until

the date of final acceptance of work by the owner and the lender (or the Agency). In

addition, the letter of credit must stipulate that the lending institution that issued the letter

of credit, upon written notification by the owner or lender (or the Agency) of the

contractor’s failure to perform under the terms of the contract, will provide payment up to

the amount of the contract to satisfy all prior debts incurred by the contractor in

performing the contract and all funds necessary to complete the work.

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An irrevocable Letter of Credit issued by a bank or other approved financial

institution must meet strict credit quality requirements (see Exhibit 9-1 for credit quality

requirements) and be for 100 percent of the construction contract. Further requirements

for letters of credit include:

• The issuing institution must not be an affiliate of the lender, unless it has an

acceptable rating from an approved rating agency, which is not an affiliate of the

lender;

• Federal Home Loan District Bank-enhancement of a member bank letter of credit is

an acceptable method for meeting Agency credit standards;

• Rural Development, USDA, must be named as the sole beneficiary;

• The term must be a minimum of 1 year; and

• The form of the letter of credit and the sight draft must be reviewed and approved by

the Agency.

Exhibit 9-1

Credit Quality Requirements for Letters of Credit

Rating Agency Type of Collateral Rating

Thomson’s Bankwatch N/A B or better

S&P Long-term senior debt, if rated,

or long-term bank deposit

A or better

Moody’s Long-term senior debt, if rated,

or long-term bank deposit

A or better

E. Warranties

At the time the project is determined ready for occupancy, the contractor must

execute Form RD 1924-19, Builder’s Warranty, providing a 12-month warranty on work

performed and materials supplied.

F. Compliance with Civil Rights Requirements

The applicant/borrower must comply with all applicable civil rights requirements. A

partial list includes:

• Architectural Barriers Act (ABA);

• Section 504 of the Rehabilitation Act of 1973 and UFAS;

• Americans with Disabilities Act and ADA/AG;

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• Fair Housing Act and FHA/AG;

• Executive Order 11246; and

• Any State or local requirements.

9.8 COST CERTIFICATION

In certain cases the borrower, contractor, subcontractors, and suppliers must each provide

a certification of the actual costs of construction. Appropriate circumstances for cost

certification include:

• All situations where there is an IOI; and

• Other cases deemed appropriate by the Agency. For example, the Agency may

request cost certifications to assist in cost tracking and help determine whether bids

on future projects are reasonable.

• Cost Certification will be performed in accordance with § 1924.13 (e)(1)(v).

The actual direct costs to the company with an IOI with the borrower must be reported on

Form RD 1924-13, Estimate and Certificate of Actual Cost and audited by a licensed Certified

Public Accountant (CPA) in accordance with Government audit standards (GAS). The audit

may be contracted out by the Agency.

Reviewing construction costs is an ongoing process for Agency staff, beginning with the

preliminary cost estimate provided in the initial application through the final payment to the

contractor.

A short summary of the cost review process is provided in Exhibit 9-2.

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Exhibit 9-2

Overview of the Cost Review Process

The Loan Processing Staff will:

y Compare the applicant’s preliminary cost estimate to historic costs and

nationally recognized cost databases and discuss any concerns with the

applicant.

y Review the applicant’s cost estimate provided on Form RD 1924-13,

and ensure any previous concerns were addressed satisfactorily.

y Review payment requests and change orders to check arithmetic and

verify that totals do not exceed contract limits.

y Review the final payment request and the cost certification provided on

Form RD 1924-13.

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SECTION 2: CONTRACTING PROCEDURES

9.9 COMPETITIVE BIDDING PROCEDURES

The borrower is responsible for following proper bidding procedures in accordance with

RD Instruction 1924-A. Generally, the project architect oversees the bid invitation and selection

process. The Agency serves only in an oversight role to ensure that proper bidding procedures

are followed.

The purpose of competitive bidding is to obtain acceptable construction services for the

lowest costs possible. To be successful, the process must maximize open and free competition.

Conditions must not exist or be established that would give preference to a specific bidder or

type of bidder. If no acceptable bids are received, the borrower may competitively rebid the

contract or proceed to a negotiated bid, subject to Agency approval.

A. Contents of the Bidding Package

For competitive bids, the project architect prepares documents to be distributed in the

bidding package. The bidding package must include the items listed in RD Instruction

1924.13(e)(1)(ii).

B. Distribution of the Bidding Packages

The invitation to bid must be distributed to all interested parties. The borrower may

send the invitation directly to specific contractors from whom bids are desired, but public

notice must always be required so that other contractors have an opportunity to bid.

Prospective bidders can be informed of requests for bids through publication in local

newspapers, plans services and similar services.

9.10 AGENCY CONCURRENCE IN THE CONTRACT

Normally, the borrower, project architect, bidders, and interested persons attend a bid

opening. An RD representative should attend each bid opening. The RD representative is an

observer, not a referee, and as such cannot waive bidding requirements and should not address

any questions concerning bid acceptability, responsiveness of bids, responsibility of bidders, etc.

A. Review of the Bid

The borrower must submit the following for Agency review:

• A bid summary that shows the project architect’s estimate of costs and all bids

submitted.

• A revised final cost breakdown on Form RD 1924-13.

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• The project architect’s recommendation. (If the project architect does not recommend

that the bid be awarded to the lowest bidder, the recommendation must include a

justification for an award to a higher bidder, or, to accept no bids.); and

• Documentation of the borrower’s decision (copy of the bid selected).

Loan Processing Staff should review the bid documentation to confirm the following

items:

• The selected bid is properly completed including the bid bond;

• Based on the revised final Form RD 1924-13, there is enough money is to cover the

construction costs; and

• The project architect has provided sufficient justification for the borrower’s bid

selection.

After these items have been reviewed, the Agency should advise the borrower in

writing of any problems or of its concurrence with the bid award.

B. Contract Documents

The borrower may use the construction contract form published by the American

Institute of Architects (AIA Document A-101) with the Agency-approved amendment

(RD Instruction 1924-A, Guide 1, Attachment 6). RD Instruction 1924-A also references

use of Agency forms for MFH and other more complex projects. Other contract

documents, acceptable to the Loan Approval Official and containing the requirements of

RD Instruction 1901-E may be used provided they are customarily used in the area and

protect the interest of the borrower and the Government. In such cases, the OGC should

be consulted.

The construction contract must contain the nondiscrimination language required by

Executive Order 11246 and regulations issued by the Department of Labor (DOL). That

language may be found in the DOL regulations at 41 CFR 60 [§ 60-1.4(b)] and on pages

2 through 4 of Form RD 1924-6, Construction Contract.

A contract is signed and concurred in by the State Director (or his/her delegate) after

it is signed by the borrower and contractor. The Agency is not a party to the contract and

does not incur any liability under it, but still must ensure that the borrower and the

contractor comply with all applicable regulatory requirements.

Loan Processing Staff should maintain all construction-related documents in the

borrower’s construction file. A complete list of contract documents is provided in

Exhibit 9-3. See RD Instruction 1924-A for more guidance on contract documents

(1924.13(e)(1)(ii) and Guide 1).

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9.11 PRECONSTRUCTION CONFERENCE

Once the contract is awarded and executed, all interested parties must attend a

preconstruction conference. The conference serves to clarify arrangements and expectations in

advance to avoid conflicts later in the construction process. Form RD 1924-16, Record of

Preconstruction Conference, or an industry equivalent may be used as a guide for an agenda.

The preconstruction conference should include the borrower, contractor, architect, lender

representatives (if interim financing was obtained), and an Agency representative. The project

architect should lead this meeting. It should cover, at a minimum, the following items:

• Responsibilities of all parties, including the contractor, the Agency, and the borrower,

including identifying the authorized representatives for each entity;

• The work to be undertaken;

• Applicable wage rates and The United States Equal Employment Opportunity

Commission (EEOC) requirements;

• The U.S. Department of Labor Occupational Safety and Health Administration

(OSHA) requirements;

• Contractor’s use of the site (parking, security, permits, dust control);

• Protection of stored materials;

• Mitigation measures required by the environmental review;

• Procedures to be used for inspection, change orders, and payment requests;

• Timeframes for starting and completing work;

• Requests for extending contract times;

• The contract agreement and any subcontracts;

• Dispute resolution procedures; and

• Close-out procedures.

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Exhibit 9-3

Contract Documents

• Advertisement for Bidders;

• Instructions for Bidders;

• Bid;

• Bid Bond;

• Form RD 400-6, Compliance Statement

• Notice of Award;

• Form AD 1048, Certification Regarding Debarment and Suspension

• RD Instruction 1940-Q, Exhibit A-1, Disclosure of Lobbying Activities

• Agreement between Owner and Contractor

• Certificate of Owner’s Attorney;

• Contract Concurrence;

• Payment Bond;

• Performance Bond;

• Notice to Proceed;

• General Conditions of the Construction Contract ;

• Form RD 3560-31, Identity of Interest Disclosure/Qualification Certificate;

• Drawings and specifications;

• Contract Change Order;

• Payment request or certification;

• Labor Standards Provisions, only for projects subject to Davis-Bacon

•

Wage determinations (Department of Labor); and

•

Form RD 1924-19 Builder’s Warranty, or equivalent.

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9.12 NOTICE TO PROCEED

The Notice to Proceed establishes the contractor’s permission to proceed with

construction. It gives the contractor permission to go to the borrower’s land and begin work, and

it identifies the start date for the time period of the contract. It is issued by the borrower after the

contract has been executed and the preconstruction conference has concluded. It is signed by the

borrower and the contractor. The Notice to Proceed should not be issued until the Agency loan

is closed (for multiple advances) or the interim lender has concurred (for interim financing).

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Who Performs Inspections?

Several parties have an interest in the

satisfactory completion of project construction

and, therefore, conduct inspections.

y The project architect has the primary

responsibility for performing regular

inspections. These inspections should take

place at least monthly and serve to

document partial payment requests.

y An Agency representative with sufficient

knowledge of MFH construction should also

inspect the property on a monthly basis and

as needed. It is good practice for the

Agency architect to coordinate with the

project architect to perform joint inspections

and to time these inspections with partial

payment requests.

y The interim lender (if there is one) is also

encouraged to make inspections of the

SECTION 3: CONSTRUCTION OVERSIGHT

9.13 PROGRESS INSPECTIONS

The borrower maintains full responsibility for the quality of construction; however, the

Agency must still take steps to protect the value of its investment. Consequently, the Agency

must conduct periodic progress inspections to ensure that work is proceeding as planned. These

inspections must be performed by persons with knowledge of MFH construction and experience

in conducting Agency inspections.

A. Timing of Inspections

Inspections must take place prior

to authorization of partial payments,

normally at least monthly. In

addition, the following three

inspections must take place for each

building:

• The initial inspection must be

made just prior to or during the

placement of concrete footings or

monolithic footings and floor

slabs.

• Another inspection must be made

when the building is enclosed;

structural members are still

exposed; roughing in for heating,

plumbing, and electrical work is in

place and visible; and wall

insulation and vapor barriers are

installed. Customarily, this is

prior to installation of brick veneer or any interior finish materials.

• The final inspection must be made when all development has been completed and the

project is ready for occupancy for its intended use.

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B. Inspection Procedures

Actual construction work needs to be inspected to determine and verify that terms and

conditions of the construction contract are met. The project plans and specifications

signed by all parties are used to judge the acceptability of the work. Items that do not

meet these or other contract documents must be either removed, corrected, or in some

cases accepted with an adjusted price.

The Agency inspector must use Form RD 1924-12, Inspection Report.

• The inspection report must provide a description of the conditions seen, especially

those that differ from the plan and specifications. Discrepancies with the plans and

specifications must be brought to the attention of the project architect and

documented until the issue is resolved.

• For inspections prior to making payment, the inspector must confirm the estimated

values of work completed and properly stored materials and itemize the percent of

work complete for each task. Payments must be adjusted if there are any

discrepancies.

• If environmental mitigation measures are required and included in the construction

contract, the inspector must document compliance with such measures on the report.

Noncompliance with mitigation measures should be reported promptly to the Loan

Originator.

• A (pre-final) inspection must be made to determine if the project is ready for

occupancy. If so, the project architect must issue a Certificate of Substantial

Completion and submit a written report (punch list) of the work yet to be completed

to the owner, the contractor, and the Agency. The project architect should notify the

Agency in sufficient time for the Agency to participate in the inspection. The owner,

project architect, Approval Official, and State Architect should jointly participate in

the inspection. The Agency should receive a copy of all inspections from applicable

regulatory authorities at this time.

• The inspection report must be signed by the Agency inspector.

• Copies of all inspection reports (by the Agency inspector, the project architect, and

any other inspectors, e.g., local, State, fire marshal) should all be kept in the

construction file by the Agency.

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9.14 CHANGE ORDERS

Change orders are used to address changes in: facility design; labor or material or their

cost; or the time requirement of the project. They are used when an owner, the project architect,

or local authorities require changes in the work or other unforeseen circumstances require a

change in the contract’s scope of work. Any changes that occur after a contract is executed and

affect project design, materials, costs, scope, or schedule must be documented as a contract

change order. The owner, with the assistance of the project architect, will obtain Agency

concurrence in writing for all change orders

prior to the performance of the work. The change

order becomes a part of the construction contract. Form RD 1924-7, Contract Change Order, or

its equivalent must be used. Changes that are deemed minor and do not affect costs should be

documented as field orders by the project architect.)

• Generally, total changes to the work should not exceed 20 percent of the original

contract cost. If changes exceed this threshold, an increase in performance and

payment bonds will be necessary.

• The change order must be supported by a cost breakdown, including any profit and

overhead. No additional profit or overhead is allowed in IOI cases if either totals

more than the amounts included in the final Agency-approved cost estimate on Form

RD 1924-13.

• If the change orders result in an increase in project costs, there are several ways to

pay for these costs:

◊ The borrower finds the funds elsewhere.

◊ Costs are reduced from another part of the project, and a deductive change order

is executed to document that change. Where funds are derived from reductions in

other portions of the work it is critical to assure that these changes to not affect

the overall value of the project. It may be necessary to refer such changes to the

appraiser for this determination.

◊ In rare cases, the Agency may make a subsequent loan. Subsequent loans may

only be made to complete, improve, repair, or make modifications to a project.

Subsequent loan funds may not be used to reimburse an owner for additional

contributions that were made to complete a project. In addition, no commitment

for additional funds will be made by the Agency unless, and until, additional

funds have actually been obligated. Finally, if a subsequent loan is made, the

borrower equity and initial operating capital contribution requirements apply, and

the total amount of the combined loans may not exceed 95 percent of the

appraised value, or total development cost, whichever is less.

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◊ No increase in per-unit development cost will be approved, whether the

circumstance causing the cost increase occurs before, during, or after the

construction period, unless these conditions were unforeseen factors beyond the

owner’s control; design changes that were required by the Agency or local

government; or changes in financing that were approved by the Agency. Any

increase in cost must be approved by Rural Development in writing before the

expense is incurred.

◊ Under no circumstances will a cost increase request be approved without

concurrent agreement between Rural Development and the applicant/borrower as

to how the cost increase will be funded. In most cases, this will mean that the

owner will need to contribute additional funds.

• If the change orders result in a decrease in project costs:

◊ Unused funds may be used to cover certain other eligible project costs only if they

were unknown to the borrower at the time the loan was approved.

◊ Otherwise, the amount of the loan will be decreased and the funds deobligated.

• Change orders do not generally require preparation of Form RD 1940-22,

Environmental Checklist for Categorical Exclusions or amendment of the original

environmental assessment, provided that the action will not alter the purpose,

operation, location, or design of the project as originally approved.

9.15 PARTIAL PAYMENTS

The borrower and the Agency must take proper precautions to ensure that all payments

made to the contractor are properly applied against bills for materials and labor procured under

the contract.

Form RD 1924-18, AIA Form G702, or other professionally recognized form that

contains architect certification and approval, approval of the borrower, and conditional

concurrence of Agency must be used. If the Agency form is not used, Agency concurrence

language must be added to the form used.

The following procedures must be used in approving construction payments:

• Payment requests are submitted by the contractor to the owner. The request must

include a statement showing total amount owed to date for material and labor

procured under the contract. It may also include evidence showing that previous

partial payments were applied properly. The payment requests should provide the

same breakdown of construction costs as the final and approved cost estimate before

construction began.

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• The breakdown of cost items in the payment requests must be the same used in the

final Agency-approved cost estimate on Form RD 1924-13.

• The project architect and the borrower must review the request and confirm its

accuracy, based on a site inspection, before signing and forwarding it to the Agency.

• Payment requests may include costs associated with a change order only when the

change order is approved by the Agency. Each approved change order should be

entered as a separate cost line item on the request form.

• The Agency will concur with the or require revision to the amount of partial payment

based on a site inspection.

• The borrower must retain a percentage of the amount due the contractor in

accordance with RD Instruction 1924-A until all work has been completed and

accepted. The surety company that issued the payment and performance bonds, if

applicable, must provide a written consent for the retainage to be released. Retention

percentages must be clearly articulated in the construction contract. When

construction is determined to be substantially complete, but some work remains to be

completed, an amount adequate to cover any remaining work items must be withheld

from the contractor. See Paragraph 9.17 for a discussion of final payments at contract

close-out.

9.16 OBTAINING THE CHECK FOR MULTIPLE ADVANCES

Once the Agency has approved the payment request, the Loan Servicer must order the

check using AMAS. Note that the check request will take approximately

5 days from request to

receipt.

When the check is received it is deposited in the supervised bank account in accordance

with RD Instruction 1902-A. As work is completed, the Agency can release these funds to the

borrower. If all work for that payment request is completed at the time of check receipt, the

entire amount of the check can be released immediately to the borrower.

It is important to monitor the maximum debt limit (MDL) for the loan. The Loan

Servicer should insure that that the disbursed amount plus accrued interest does not exceed the

MDL.

9.17 CONTRACT CLOSE-OUT

When work is complete, the contract is closed out—all payments are made and all claims

are released. However, prior to close-out, the Agency and the borrower must ensure that all

work was performed according to the contract and that it meets acceptable standards.

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A. Final Inspection

The project architect should coordinate the final inspection with all parties, including

the Agency and the interim lender's fee inspector (if applicable), so that all inspectors

may be present on the site at the same time. A final inspection must be conducted before

the final payment to the contractor to ensure that all work is performed according to

project plans and specifications and meets all applicable codes and quality standards. If

the project is receiving interim financing, the Agency loan must not be closed until this

inspection is performed.

A final inspection is conducted when all construction work is completed, including

any punch-list items, and the project is fully ready for its intended use. The owner shall

acknowledge final acceptance by signing an Agency inspection report. The final

inspection will be made at the earliest possible date after completion of the planned

development. When several buildings are involved, inspections may be made upon

completion of each building. No inspection will be recorded as a final inspection until all

deficiencies or nonconforming conditions have been corrected. When codes and

ordinances require inspections by local authorities, their final acceptance will be required

prior to the Agency's final inspection and acceptance.

B. Final Payment

The final payment to the constructor will be based on the results of the final

inspection. Before the final payment can be made, the final documents as listed below

must executed:

• Form RD 1924-9, Certificate of Contractor’s Release, or other professionally

recognized form.

• Form RD 1924-10, Release by Claimants, or other professionally recognized form.

• Form RD 1924-19, Builder’s Warranty or equivalent, and any related documents

required by the contract.

• Acceptance by responsible public authority. When local or state codes and ordinance

require inspections, final acceptance by the local authority will be required prior to

final inspection. A certificate of occupancy may be evidence of this inspection.

• Final Certificate of Payment by the project architect.

• Cost certification, if applicable.

If work cannot be completed due to weather or other extenuating circumstances (e.g.,

landscaping work that cannot be done during the winter), the borrower will withhold

funds to ensure completion of the work. Usually, the amount withheld is 1.5 to 2 times

the dollar value of the work completed. (This serves as an incentive to the contractor to

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HB-1-3560

return and complete the work.)

Interim funds remaining because of early completion of construction will be returned.

The leftover interest may be used for certain other eligible loan purposes critical to the

completion of the project that were unknown to the applicant and contractor at the time

the loan was approved.

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(02-24-05) SPECIAL PN