Part 1: Price Increases
As part one of a three-part series covering church construction pitfalls, we will address the escalating issue of price increases and how they can be detrimental to a church project. Shawn Fink, Church Loan Consultant, and Brad Gillam, Construction Loan Manager, weigh in to provide professional insights on the topic.
Unexpected price increases are a major issue for churches financing a construction project. Frequently, a contractor’s actual bid is significantly higher than the original estimate. If a church receives a loan based on the initial estimate, it may not have enough funds to complete the project. Or, if the loan was approved at the amount estimated, but the actual bid comes in considerably higher, the church may not qualify for the increased amount.
“Going from estimate to bid is when the cost increase can happen due to many factors, such as city code compliance issues, increased cost of building materials due to potential trade tariffs, and a tightening labor market,” explains Shawn. “The current market is a feeding frenzy among contractors.” “Contractor prices,” says Shawn, “are inflated due to high demand. In most cases, it’s more cost efficient to buy an existing building and do basic renovations compared to new construction.”
To safeguard your church from a situation in which the loan will not cover the entire construction project, Brad also suggests being wary of “cost-plus” contracts, which are bids based on whatever the project ends up costing, plus a contractor fee, typically around 10%. “I’d like to stress the importance of obtaining a guaranteed max price (GMP) contract. Without a maximum price, the church is leaving the project open-ended, and if there are unforeseen cost increases, the church will be responsible for paying them.” A hybrid option, which several churches use, is a cost-plus contract with a GMP in place. This provides a safety net with pricing but also provides the church the ability to see all associated construction costs – a benefit common to cost-plus contracts. Regardless of the contract type, be on the lookout for “escalation cost protection” and other additions to the contract that may cause the church to be liable for increased costs and not the builder.
With so many factors to consider and potential pitfalls during the construction process, it helps to have wise counsel and a partner that understands the process. Brad said, “One of the things pastors appreciate about AG Financial is that they receive a lot of value with their church loan. In addition to the financing, they’re able to save time and money with our construction consultation. It’s exciting to see how we’ve helped so many churches navigate the process and avoid unnecessary cost increases.”
“Let me also address the idea of financially planning for a large project,” Shawn said. He encourages churches to start building cash reserves for a construction project as early as five years out. In addition to setting aside cash, Shawn also recommends sharing the vision for the project and raising additional funds internally. Shawn’s advice to churches is to determine the total source of funds (money you have, can raise, and can borrow) and debt capacity, then begin the capital campaign before securing a loan or consulting an architect. “Don’t commit to a project cost if you don’t have the money in your pocket or the ability to service a mortgage payment,” advises Shawn.
When asked about timing the start of a project based on potentially lower labor and material costs, Shawn mentioned that it could help, but ultimately, “when the Lord says step out of the boat, it’s time to step out of the boat.”
For more resources on church construction, get our Church Construction 101 white paper.
Click here to read Part 2 of this series where we cover source and use.
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