Top Five Uses of Construction Loan Management Software

Contract Simply is now Rabbet. We’re the same company – just with a new name – building the only intelligent construction finance platform. The content of this post has been preserved with the Contract Simply name.

We find that the Fed typically reports about half of the actual lending commitments. So, with U.S. commercial real estate and land development lending volume approaching $660B (add another $200B for residential), one might assume that the amount of work and oversight required to execute a successful construction project in which all parties of the loan process are satisfied, is a tad high. Which is a gross understatement because a single draw request not only has to go through the hands of numerous professionals, but the process of working towards successful completion of a project without any legal disputes such as a mechanic’s lien is a slow, time-consuming, and painful process.

With real estate and land development lending volume reaching more than 330 billion dollars in the US – and we find what is on their books is about half of their commitments – one might assume that the amount of work and oversight required to execute a successful construction project in which all parties of the loan process are satisfied, is a tad high. Which is a gross understatement because a single draw request not only has to go through the hands of numerous professionals, but the process of working towards successful completion of a project without any legal disputes such as a mechanic’s lien is a slow, time-consuming, and painful process.

Well, not anymore that is.

Construction loan management software aims to simplify every step of the construction loan process. Automating numerous mundane tasks associated with managing construction loans, payment disbursements and tracking (with every lien release automatically tied in with the payment), managing project timelines, document management and approvals, and of course, transparency for all stakeholders, from lenders to borrowers to contractors.

But these are just some of the advantages that a construction loan management platform brings to the table. Today, let’s focus on the top five ways lenders can use construction loan management software to track, automate, organize, expedite, and other fancy positive words that will save you time and money.

1. Collecting, Parsing, Analyzing, and Structuring Draw Documentation

If you have tackled any construction draw request up until now, then you must have come face to face with the seemingly insurmountable quantity of documentation that accompanies every internal and external request, every decision, every action and it seems, every thought as well. From draw disbursement requests, the AIA G702, the AIA G703, invoices, to lien releases and many more important documents that need to be processed and approved, automating manual administration tasks seems to be the Deus ex Machina that everyone prays for. Especially the lenders.

Recent developments in the implementation of machine learning in banking have made life infinitely easier for lenders by automating numerous processes, eliminating the risk of human error, and making hours-long tasks manageable in a matter of seconds. Let’s take a look at a machine learning in banking use case, shall we?

First Federal: Machine Learning in Banking Use Case

While the construction draw process used to be a nightmare for First Federal, they adopted construction loan management software to digitize all documentation, authorizations, and reporting from paper and Excel into a transparent and version-controlled platform. The software helps them efficiently analyze the many PDFs, emails, and other documents of a single draw request with the help of machine learning that uses an algorithm to parse the data and search for errors along the way. The application of machine learning makes the entire process not only short and efficient but practical as well as it removes the “human error” factor from the equation. Plus, they embrace an integrated file manager that houses all construction files and documents in one place — organized, digitized, archived, shareable, and downloadable.

2. Obtaining Approvals

Anyone who’s ever filed a construction loan draw request has experienced firsthand just how long and seemingly unending the approval process tends to be, as the draw request needs to be approved by numerous individuals working within both the borrower and lender teams. Some of the actors in this process include the construction loan administrator, the third-party inspector, the title company, real estate developer, contractors, and other stakeholders.

Not only does handling and processing draw requests require tracking countless emails and numerous spreadsheets, but it always runs the risk of encountering the dreaded human error. This is where both machine learning and automated notifications built into construction loan software come into play.

Construction loan software aims to make this process pain-free for lenders and borrowers alike by tracking, coordinating, and collecting approvals from a centralized and organized location. In fact, digital draw schedules and project budgets automatically reconcile numerous opposing problems and challenges in the construction loan management process. Identifying and surfacing these issues means errors are addressed immediately, expediting approvals and thus saving time and money for all participants.

3. Centralizing Information

Have you seen the amount of documentation needed to manage the construction loan process from inception to completion? Does the mere thought give you the chills, and perhaps even a nightmare at times? Paperwork can be scary, that’s for sure, and with tens and hundreds of emails, PDFs, and spreadsheets to work with and keep track off, it’s no wonder that there is a need for centralized construction loan management platform where you can monitor and optimize every process.

With a single, organized repository containing every document, approval, critical draw disbursements info and more, you can efficiently and effectively keep track of everything that’s going on in the project. It’s something like keeping track of your shipment across the world, only here you’re tracking how the project is going, regulatory compliance, and whether or not all parties are getting what they need for lien-free completion.

4. Running Construction Loan Management Reports

Construction loan management software also allows you to run a variety of reports as the project progresses using this awesome (for the lack of a better word) centralized platform and associated database. What does this mean?

Well, if you want to know cash flow projections for the next month, you can just run a report. You can do the same for a myriad of other processes, such as finding missing lien releases and assessing your composition, all with the use of draw software and real-time analytics.

Want to know about different report types? No worries, here they are, as easy as reporting and risk management can get, allowing you to access the information you need quickly and produce detailed reports everyone will benefit from:

• First off, there’s the Draw Processing Report. This report is your comprehensive overview of all aspects relating to construction draws in a specified period, such as approval dates, days to process, dates funds withdrawn, etc. One of our lenders recently discovered through their Draw Processing Report that the time to process draw packages went from 19 days on their first draw down to 1.6 days on their most recent draw. Like First Federal use case above, this is an example of how quickly lenders and borrowers adopt to construction loan software. And, how immediately they begin to realize efficiencies.

• Next, there is Portfolio Composition Report that details the types of projects, locations, loan and projects sizes, and more.
• The Loan Payments by Division Report breaks down all draw requests by project and type of cost over a specified period. Tracking this information goes a long way to prevent fraudulent activity by monitoring labor, supplies and material costs; cash flow; suspicious line items; and change orders. This report also provides proper checks and balances aligned with compliance requirements.
• Next, we have the Cash Equity Over Time Report that tracks the equity contributions and requirements per loan. Over time, of course, as the name implies.
• A pain point for many construction loan administrators is how to monitor lien activity. The Lien Releases Report is used to track the status on conditional and unconditional lien releases for every invoice broken out by project over a specified timeframe. The report prevents issues from falling through the cracks by digitizing a process once managed through email and Excel spreadsheets.
• Lastly, we have the Retainage Report that tracks the retainage status and “withheld to date” for every line item broken out by project over a specified time.

5. Distributing Payments

At its essence, construction loan management software is designed to make draw processing a breeze by tracking finances on all fronts, including how much was spent, who was paid and who is still waiting to be paid, how much capital is needed and how much of it will be disbursed over time, etc. Bringing real-time information to the table with digital draw processing is the best way to manage construction loans from both risk mitigation and financial standpoints.

“With today’s improved technology and smartphone adoption, lenders are now disbursing payments to an account similar to an escrow account where developers and contractors can then initiate payments to the approved recipients. This level of control maintains the contractor’s payment leverage while preventing diversion of funds.”

Will Mitchell, Quoted in PaymentsSource

What does this mean for you? For one, you can avoid contractor’s liens and lien disputes due to missing or “lost” payments by simply tracking everything from a centralized location. Managing the draw payment process and payment disbursements have never been easier, and loan disbursement schedule can finally be organized and automated with ease.

What’s more, with the use of Contract Simply’s award-winning CSPay feature, you can automate payment processing and enable rapid and efficient payment stream between lenders, developers, contractors, and subcontractors, never losing an invoice or having to resolve a payment issue again. The great thing is that every payment is tied in with the unconditional lien release, so there is no way anyone can dangle a mechanic’s lien over anyone’s head while construction loan administration software is around. Neat, isn’t it?

To conclude this oh-so-informative article

Considering the volume of construction loans in the US along with the fact that construction lending is a process that entails many cumbersome tasks involving paperwork, numerous relevant parties, and more, there is a need for lenders to incorporate construction loan software into their operations to automate, expedite, and simplify these processes.

While there are many uses for the software that benefit all relevant parties in a construction project, loan software programs can significantly cut down on manual labor and eliminate human error and reduce risk. With these top five uses in mind, you can effectively and efficiently increase your portfolio of construction loans and maximize your ROI.