The Basics of Stored Materials in Construction
Construction projects and loans contain complicated details that are important to monitor. Ignoring these details can lead to serious complications and problems if not given proper attention and planning. Stored materials are a perfect example of a critical element in a development project, impacting everyone involved in a project.
What Are Stored Materials?
Stored materials are items purchased ahead of their planned use in a construction project. Purchasing all construction materials on a day-to-day basis would be logistically impossible in most cases and exceedingly expensive. This is why many materials are commonly bought in advance and stored for later use. It all seems simple enough, but mismanaging stored materials can lead to difficulties in loan negotiations. Let’s take a closer look.
Why Are Stored Materials Important?
Construction materials generally take up a third of total construction costs, which is why it's essential that they're stored and managed properly. Once purchased, stored materials can be kept on-site or off-site. This distinction is important because, depending on the location of the materials, a capital partner may prescribe different measures of assurance for their protection. Such measures, ranging from different models of insurance to regular inspections, can vary between capital partners.
From the perspective of a project owner, purchasing materials in advance (and commonly in bulk) is beneficial because it reduces costs and enables a smooth, uninterrupted construction process. While it may seem that lower costs and efficient construction are in the best interest of all involved parties, the capital partner will wish to minimize the risk of any damages and losses to the stored materials and the resulting financial implications.
Capital Partner Objective: Risk Management
Stored materials represent a major risk for the capital partner, which is why lending institutions are generally cautious about allowing funds for the purchase of materials. They tend to request a great degree of control over how the funds are used and how the materials are stored and insured.
The primary concern with stored materials is the risk of their loss, whether through physical damage, theft, or deterioration due to inadequate storage. Any such loss can have a dramatic impact on the construction project’s overall budget and may result in delays due to unpaid expenses or contractor disputes. In order to protect their interests, capital partners will often look to restrict the funds for stored materials and seek assurances that the materials are paid, accounted for, stored properly, and protected from any losses. Such assurances may include:
- Insurance of stored materials
- Proof of ownership by the borrower
- A log of stored materials, sometimes including periodic photos of materials
- Occasional inspections
- Storage in “trusted” facilities under specific conditions
- Time limits for the use of stored materials
Additionally, stored materials can complicate matters for capital partners in case of borrower default, especially if there are any outstanding payments to be made to vendors, storage facilities, or other parties. To prevent such instances, the capital partner may require specific terms in the agreement that provide them with legal rights over the stored materials in case of a default.
Borrower Objective: Cost-Effective Construction
As an intermediary between the capital partner and the general contractor, the borrower (usually a project owner) will wish to secure an uninterrupted flow of funds in order to allow the contractor to purchase the necessary materials in a timely manner and at a favorable cost. Additionally, the borrower will look to minimize the costs of any assurances required by the capital partner. The borrower will have to negotiate agreement terms that allow financial flexibility and reasonable expenses for the management of stored materials.
Borrowers might seek to limit restrictions on the funding of stored materials and reduce the capital partner's requirements regarding their insurance and storage. This can be achieved through various terms, such as:
- Setting a cut-off total value of stored materials on which the restrictions can be applied
- More reasonable time limits for which materials can be stored
- Minimizing the amount (and the cost) of any assurances
- Allowing exceptions
Tracking stored materials may feel overwhelming, especially without the right tools. Software like Rabbet Real Estate Development Management gives project owners one place to track, monitor, and share updates on the status of stored materials. Using a software solution built for the real estate development industry gives project owners a more reliable way to protect stored materials and maximize their project outcomes.
