Key Considerations When Selecting a Contractor for a Bank-Financed Construction Loan

When taking out a construction mortgage loan from a bank in Kenya, selecting the right contractor is crucial for ensuring the project progresses smoothly and remains within budget. Some banks provide a panel of approved contractors, while others allow borrowers to choose their own contractor. It’s important to understand the implications of each option and how the contractor’s selection affects the loan process.

Key Considerations When Selecting a Contractor for a Bank-Financed Construction Loan:

• Qualifications and Registration: In Kenya, contractors must be registered with the National Construction Authority (NCA). Banks typically require contractors to be on the NCA’s list, ensuring that they are qualified and meet industry standards. If you choose a contractor outside of a bank’s panel, the bank may ask for proof of their qualifications and registration.
• Fit for Project Needs: The contractor must have the appropriate expertise for the specific type of project you’re financing. Whether it’s residential or commercial, a contractor with experience in the relevant field will ensure that the construction meets both regulatory standards and the loan conditions.
• Safety and Risk Management: Contractors must adhere to safety regulations as outlined by the Occupational Safety and Health Act (OSHA) and other relevant local laws. The bank may require the contractor to provide safety plans before financing is approved, as proper safety management reduces risks that could delay the project or cause unexpected costs.
• Legal and Contractual Terms: The bank will require a clear contract that outlines payment terms, timelines, and milestones. If you’re selecting your own contractor, make sure the contract complies with the terms outlined by the bank, such as a clear scope of work, payment schedules, and penalties for any delays.

Steps for Choosing a Contractor for a Construction Mortgage Loan:

1. Agree on Evaluation Criteria: Banks typically have their own evaluation process for contractors, especially for those on their approved panels. If you choose your own contractor, make sure they meet the criteria set by the bank, including experience, financial stability, and qualifications.
2. Obtain Pre-Tender Estimates: Banks may request pre-tender estimates or detailed cost breakdowns to ensure the loan amount is sufficient to cover construction costs. Getting estimates from multiple contractors allows you to compare pricing and ensure that the costs align with the financing provided.
3. Due Diligence and Referrals: Even if a bank has a panel of contractors, it’s a good idea to check their previous work and get feedback from clients who have worked with them. This ensures the contractor has a good track record in completing projects within budget and on time.
4. Select Contractors from Bank Panel (if applicable): If the bank has a panel of approved contractors, choose from this list. Using a contractor from the panel can expedite the loan approval process and may offer some added security for the bank and borrower.
5. Choose Your Own Contractor (if allowed): If the bank permits you to select your own contractor, ensure the contractor is properly vetted and their qualifications are up to the bank’s standards. You may also need to submit additional documentation to verify the contractor’s eligibility.
6. Negotiate and Finalize Contract Terms: Once you’ve selected a contractor, make sure the contract includes all details related to the scope of work, payment schedules, timelines, and penalties for delays. These terms should align with the bank’s disbursement conditions.

Payment and Disbursement Stages:

For bank-financed construction loans, disbursements are typically made in stages based on the completion of specific milestones or phases of the project. This ensures that the bank only releases funds when certain parts of the construction are completed and verified. Common milestones include:

• Initial Foundation Work
• Roofing Completion
• External and Internal Finishing
• Final Completion and Handover

Each stage requires the contractor to provide proof of work completed, and an inspector or bank representative may visit the site to verify the progress. Payments are made only after these milestones are met, and they may be subject to a retention fee to ensure the final quality of work.

When working with a contractor on a bank-financed construction loan, expect to make an initial down payment, which should not exceed 20% of the total project cost. This is in line with standard industry practices and ensures that the borrower has a financial stake in the project before disbursements begin. The payment structure should clearly define the amounts released at each milestone and specify any penalties for project delays, changes to scope, or incomplete work.

A reputable contractor with the right expertise can ensure your project progresses smoothly and meets the bank’s milestones for disbursement. You can avoid delays, budget overruns, and potential legal issues, ultimately leading to a successful and efficient construction project.