Incredible growth can come when a congregation and its leadership break ground on a new building. But those same exciting times can also be times of great stress, sometimes even splitting a church if things do not go well.
Construction and its financing are complicated, and many well-seasoned church leaders find themselves in over their heads when things start to go wrong. Educating yourself on the entire process prior to beginning construction, or even finding financing, can be instrumental in avoiding problems.
This article describes the various steps of the process, pointing out specific areas that should be considered when planning any building project.
Step 1: Vision and planning
Before an architect draws the first line on the blueprints or the builder lays the first brick of your future building, it is essential for church leadership to carefully analyze the vision and planning process for the entire project. Because obtaining financing to build a new facility can be one of the most challenging decisions for a church, strong consideration should also be given to the other options available to acquire space. There are four ways to acquire new facility space:
An appropriate lease, with suitable terms and reviewed by legal counsel, can be a good way for a church to expand its footprint without having to spend the time and expense of obtaining financing and building a facility.
2. Purchase of an existing facility
Another option that should be given strong consideration is the availability of existing properties/facilities in your area for purchase. Purchasing an existing facility may be advantageous because, among other reasons, renovations generally will be less expensive than new construction, require a shorter amount of time to complete, and often entail less government involvement. In addition, while the cost of construction continues to increase, there has been an increasing availability of foreclosed or otherwise vacant commercial properties nationwide.
Key considerations with any existing facility available for purchase include:
Check if the building has existing tenants and, if so, see what the length of those tenants’ leases are, as well as the extent of the renovations your church would require. Existing tenants on a property could potentially result in your church assuming a landlord role and the liabilities and responsibilities involved with such a role. If those tenants fail to vacate the property at the conclusion of their lease, your church may also need to pursue eviction proceedings to obtain full control over the property.
Extent of renovations needed
If renovations of an existing property are extensive enough, your church may still need to obtain financing, zoning approvals, and/or an architect or a design-build team, which will raise some of the same legal and financing issues as new construction. All of these factors need to be weighed against the time and expense of new construction.
3. Expanding an existing building
Expansion of a current building may remove the cost of new real estate, but building and financing costs will remain. Also, when choosing to expand an existing building, your church may be surprised to learn that certain building codes or zoning regulations have changed. Many churches do determine that expansion is best, and often design their new buildings to plan for expansion in the future.
4. New construction
If the church’s leadership team has evaluated the time and expense associated with new construction and the leadership is determined to pursue financing for new church construction, you will want to make sure that you have engaged in the proper vision casting, strategic planning, and evaluation to ensure your congregation is fully behind you.
You may want to consider assembling a building planning team and a building finance team to evaluate your church’s congregation size and potential growth, ministries, current facilities, current financial condition, and possible ideas for new construction/facilities, including parking, preliminary construction funding/financing, and cost estimates.
Be realistic about the expansion project and the level of congregational commitment. Will a majority of the congregation commit to financially support the expansion if it hasn’t already? Will the church implement a stewardship or capital campaign? Keep in mind that there are firms that specialize in assisting churches in meeting their financial goals and objectives for new church construction.
Generally, building campaigns should be enacted 12 to 18 months before any anticipated new construction starts and frequently will not begin in earnest until after the initial architectural renderings and preliminary project costs have been determined.
When assessing your current situation and anticipated needs, as well as the possible required financing, be sure to anticipate and build in cost-overruns—whether resulting from “change orders” or otherwise.
“Change orders” are discussed throughout this article and are important to properly understand. In general legal terms, a “change order” is a modification of a previously ordered item or service. Change orders are important to anticipate because they are a leading cause of increased prices, unforeseen delays, and cost overruns. It is not uncommon for overruns to be 10 percent or more of the total cost of a building project.
These additional change orders must be carefully accounted for in the church’s construction legal agreements and throughout the entirety of the construction process. After the appropriate vision casting, strategic planning, and evaluation have been accomplished, you will be ready for the next step.
Step 2: Gaining approval and buy-in
The best way to obtain the congregation’s approval for the leadership’s new strategy is different for every church. But in a construction project, following governing documents to a “T” is absolutely vital.
It’s possible for church bylaws to have special voting procedures for construction, real estate purchases, or obtaining debt that do not apply to other large decisions, such as hiring a senior pastor. Do not assume you know what your church’s bylaws say without thoroughly reading them. And if there is any question as to what the bylaws say, contact an attorney. Your members and any possible lenders will want to be absolutely certain you followed the process your governing documents require.
Many words in your articles of incorporation and bylaws have a legal meaning that need to be understood. Even “Trustees” and “Directors” may have different legal duties and even different levels of personal liability. Take the time to figure out who is ultimately responsible for your church’s transactions.
If your church’s governing documents require the congregation’s vote to move forward with the transaction associated with construction (i.e., debt, real-estate purchases, hiring of a contractor), it is important to follow the process established by your bylaws or articles, and to document the process. Our legal firm has seen multiple churches that did not document any vote and say, “Well, our bylaws do not require documenting the vote.” Even if your bylaws do not require documenting a vote, state law or a lending bank likely do. Not documenting votes made in accordance with your governing documents is poor governance.
To ensure a proper congregational vote, pay attention to things in your bylaws such as:
- the requirement for a committee;
- required dates and times for a vote, and proper advance notice;
- required quorums;
- required approval percentages;
- process for taking a vote; and
- up-to-date voting member rolls.
If your church has never pruned its membership roll, and you have a thousand people on the roll who no longer attend, it may be difficult to achieve an affirmative vote if, for instance, your bylaws require 66 percent approval of “all voting members.”
It is also important to pay attention to the language the congregation or board is approving. Resolutions for approval should include:
- a brief and broad description of the project;
- a cap on the amount of loan approved, or total cost, if paying cash;
- approval for the board of directors or trustees to pursue methods of financing and construction;
- designating at least two individuals to execute documents on behalf of the church; and
- the designation of a representative to oversee the project.
Many churches that are governed by a board of directors, and do not require the approval of their members for a building project, still choose to have their congregation give an informal approval for construction projects.
While the informal approval may not be legally binding, this sort of procedure allows the board to determine whether the members have the desire to pursue a building project. If a larger percentage of the members would not support a construction project, or a building campaign, the board may want to consider other possibilities.
Step 3: Financing
Obtaining financing to purchase an already-completed structure is relatively straight-forward when compared to new-construction financing, which can be one of the most challenging decisions and processes a church will ever make. At times, it can feel as if the church is trying to hit a moving target. A possible scenario could look something like this:
A church’s finance committee decides on a $1 million budget. After the architect and builder draw up plans and collect bids, the cost increased to $1.5 million. By the time various change orders are made throughout the construction process, the overall cost for the church is $2 million.
Sound extreme? This can and does happen, which is why churches need to ensure an orderly preconstruction process. It’s impossible to have absolute certainty about the cost during the preconstruction phase, so churches should work with experienced church law and construction experts to protect the legal and financial interests of the church.
Until the design and other preconstruction issues are finalized, churches will not be able to engage in discussions and negotiations on the primary terms and conditions of any loan, because most construction loans are established as interest-only loans where the church will pay interest only on the draws that are made and not, initially at least, on the total amount of projected construction costs.
Caution. You should almost never agree to a personal guarantee of any kind. This is far too risky for any individual and eliminates the liability protection a corporate entity provides.
Steps churches can take to ensure construction projects are accomplished as smoothly as possible are:
Establish a well-defined plan for funding
This is particularly important, especially if a church plans to take out a loan. The best type of lender for this is often one who has experience working with churches and their unique needs. A local lender who is already familiar with your church can be helpful. A bank that is already familiar with your cash flow will be able to more quickly advise you on potential terms and conditions for your loan—including any lending limits and other constraints. However, be sure to get loan information from other banks and commercial lenders to ensure you are getting a competitive quote.
Caution. Some commercial lenders without church experience may want information on individual donors who are the largest contributors to the church. Don’t give names—you could subject yourself to an invasion of privacy lawsuit.
The qualification process to select a lender takes time; plan on starting this process at least three months before the anticipated construction start date. We recommend selecting a lender at least two months before the anticipated construction start date. The involvement of the senior pastor and other senior leaders is important at this early stage. Remember: the bank is trying to determine if it will enter into a long-term partnership with your church, which includes your pastors and leaders.
Also, be aware of the material distinction between a quoted rate, which may or may not be available when you actually need to take out a loan, and a locked rate, which is guaranteed in writing by a bank official and binds the bank to use that rate for a specified period of time. Generally, a locked rate will require the submission of a greater number of financial and other documents.
Establish preliminary documents
Prepare several preliminary documents to make the process as smooth and efficient as possible. The following preliminary loan documents should be sufficient to get a term sheet or preliminary expression of interest letter to allow you to select a lender:
Brief history of the church
Include facts such as: year the church was founded; denominational affiliation, if any; brief biographies of the senior pastor and business administrator; number of full-time and part-time staff; general description of the decision-making process to incur debt (congregational approval, board approval, etc.); current schedule of worship services; current and three-year history of attendance; and a brief description of location (such as urban, rural, residential neighborhood, business, or park).
Include the following items: three to five years of financial statements and balance sheets; an explanation of any significant year-to-year variances; a description of past, current, or contemplated pledge campaigns; and an interim balance sheet and an income and expense statement that is less than 60 days old.
The best information to include is audited financial statements but, in the event these are not available, some lenders will permit you to utilize detailed cash-flow or profit and loss statements, as well as a detailed balance sheet and income statements.
You may also be required to provide a breakdown of revenue including tithes, offerings, building fund/capital campaign figures, and missions giving; expenses such as salaries, operational costs, and benevolence; and an explanation of unusual increases or decreases in balances.
You will be required by law to provide a schedule of all assets and liabilities at some point, and it is good to over-disclose and over-communicate at this point to avoid potentially losing the loan or even subjecting individuals or the church to prosecution if information provided is contrary to the church’s reality. Other items you may have to provide include:
- bank statements;
- résumés of the senior pastor and other staff; approved construction drawings;
- insurance policies; and
- the church’s governing documents (including appropriate documentation for the approval for the project/loan and the church’s articles of incorporation and bylaws).
Caution. Ensure that you provide accurate financial information or you could risk being subjected to bank fraud charges and subject those signing loan documents to criminal prosecution and possible civil penalties.
Application and project description
Include an explanation of the purpose for which the loan is being sought, such as: refinancing existing property, acquiring new land or property, relocation, onsite expansion, or any combination of these. Also include an estimate of projected costs, a general description of current and future building phases, and a summary of proposed sources for project funding, if any, in addition to money provided by the lender.
In addition, the following are the three main financial ratios your bank or lending institution may require:
- Debt-service ratio. This is usually around 30 percent—based on the total of all annual debt payments divided by the total undesignated income.
- Fixed-expense ratio. This is usually around 85 percent—based on the total of all annual fixed expenses divided by undesignated income.
- Loan-to-value ratio. This is usually around 75 percent—based on the loan amount divided by the value of the property with the improvements.
Purchase a performance bond
A performance bond is an additional front-end expense, but it can greatly reduce the risk of additional costs due to errors in construction and/or construction defects. Performance bonds generally come into play when there are delays in performance or substandard performance.
Caution When considering issues related to performance, pay careful attention to the definition of “material default,” as this is often a triggering event for when an insurance company as the surety will come into the picture. If the definition of material default is unclear, it puts the insurance company in the middle of an ambiguous situation where the church could be alleging material defaults while the contractor is claiming interference by the insurance company. Such a situation is likely to increase costs and delay the project even further.
Purchase a comprehensive builder’s risk insurance policy
This is first-party insurance that covers loss or damage to the uncompleted building and materials stored at the site. Consider also purchasing Owner’s Professional Protective Indemnity Insurance, which insures specifically against design professional negligence.
Utilize financial instruments
The following financial instruments may be used to achieve your lending requirements:
- “Construction financing” is used to finance the construction phase of the project and generally allows that only accrued interest is paid monthly during the term of the loan. These terms are generally a year or less.
- “Permanent financing” is used to take out the construction loan or refinance existing debt. There are generally two kinds of permanent financing:bonds, which are financial instruments sold to public individual investors; andmortgage loans from a financial institution.
Obtain a commercial appraisal
Your church will be required to obtain a commercial appraisal.
Appraisal costs vary based on location and property size, but be prepared to spend anywhere between $800 and $5,000 for a limited or restricted appraisal, or up to $10,000 for a full commercial appraisal.
There are many reasons why some church appraisals are so expensive, including the large, single use nature of most church buildings coupled with the general lack of comparative data— depending on the location of the church.
Note. Appraisals are generally an out-of-pocket expense outside of closing costs for your church. Before ordering any appraisal, obtain your lender’s approval of the name and methods of the appraiser.
Navigate restrictive covenants
Prepare to navigate restrictive covenants that exist in many communities that may affect church construction.
A restrictive covenant is a provision in a deed which restricts the manner in which the property may be used. Because this issue is dependent on the situation in your church’s local community, it is imperative to engage legal counsel to determine the extent to which and how early in the process you will need to address this issue.
Generally, any restrictive covenants or other zoning issues must be resolved before securing financing and engaging in construction activity. The federal Religious Land Use and Institutionalized Persons Act (RLUIPA), which gives churches and other religious institutions a way to avoid burdensome government-imposed zoning restrictions on their property use, can sometimes be helpful to churches in resolving zoning disputes.
The RLUIPA also defines the term “religious exercise” to include “any exercise of religion, whether or not compelled by, or central to, a system of religious belief.” Experienced legal counsel can facilitate communications with governmental authorities regarding zoning issues and assist in resolving some before they potentially derail a project.
Anticipate possible environmental issues
Environmental issues such as lead, asbestos, and lead paint can also delay your construction project, especially when renovating an older building.
Banks and other commercial lenders typically require a “Phase I Environmental Study” to be completed on an expansion/construction site. This study is done by a professional engineer and assesses the environmental impact due to the construction, even if you have owned the property for a long time. A Phase I study, which is the most common, will involve soil borings, an analysis of the water table, and the exploration of other environmental concerns.
If your church’s property has previously been used as a gas station, gas storage, lumber treatment facility, or a dry cleaner, it is possible that the Environmental Protection Agency will require further testing to ensure its standards are met. These sorts of clean-up costs can sometimes exceed the cost/value of the property, although there are federal and state remediation programs a church can apply to for assistance with cleanup. The environmental issues can also invoke wetlands-related issues and require permitting from the US Army Corps of Engineers.
Consider other costs
Other costs and fees can include the following:
- Mortgage points, which one point equals one percent of whatever amount you are financing, can result in a lower interest rate if you buy down the rate by paying points on the front end of the loan.
- Administrative/loan origination fees may be required. These fees are generally standard costs and provide a way for the lender to pass on some of its overhead costs, though it is also true that these fees can often be waived by a senior bank official.
Tip. Use a competitive quote to negotiate the elimination or reduction of fees.
- Broker’s fees may also be included. Even though it is generally not a service that is required, a broker working through financial institutions directly can sometimes assist in obtaining the best possible rate.
- Find an experienced attorney to ensure that all of the legal relationships and contractual agreements the church enters protect the church’s interests. You can be assured that the other professionals and lenders, who will be working on your design and construction, will be represented by legal counsel and their interests will be protected. It is your job to ensure that experienced attorneys are looking after the interests of your church. An attorney will also need to draft an opinion letter for your lender. An opinion letter is a special legal letter that assures the lender that, in the opinion of a licensed attorney, the borrower has followed governing documents in approving the loan and is legally able to approve the loan.
In some cases, previous loan agreements may prohibit additional loans, or the church corporation may be out of good standing with the state and in a state of involuntary dissolution, which should be corrected prior to obtaining a loan. Obtaining a loan without a proper corporation could open the directors or trustees to personal liability if the loan ends up in default.
- Title insurance, also known as a lender’s policy, provides the level of assurance that a lender needs to have concerning whether the church has clear title to the property and that there are not outstanding superior liens or claims on the property. Legal counsel should review the proposed policy to ensure adequate coverage.
- The local government office for recording legal title documents sometimes requires recording fees and tax stamps. Your attorneys can also assist in ensuring that any available tax exemptions are utilized.
- Insurance costs are also required before loan proceeds will be released for your project. Generally these are addressed in construction documents as well.
Step 4: Church design and project delivery method
Once your church has decided to pursue new construction, and appropriately approved the project, it is time to consider the method by which your church will pursue that construction. This is the step where your church will involve professionals like bank loan officers, architects, and attorneys.
This step is also strongly influenced by and intertwined with the financing step (discussed earlier), as your plans and specifications for a new facility (or refurbishing/renovating an existing facility) will be dependent on how much can actually be spent. Within this step, you have a fundamental choice—namely, which method of construction will you utilize? Keep in mind you may have an architect or construction firm (or several already identified) who does not utilize all potential options.
Methods of construction
The three most common methods of construction are:
1. Design-bid-build method
This is the traditional construction method and involves the owner/church, the architect, and the general contractor. There are separate contracts between the church/architect and the church/general contractor.
Generally, there is a design, a bid, and a build phase. For the design phase, the church normally hires an architect to prepare detailed construction documents. A contractor is then selected and projects cost commitments through a competitive bid process. Finally, the church hires a contractor to build the project.
This is a widely used process with clear roles. It is important to note that a common pitfall of this method is the relative lack of coordination between the architect and contractor, which can result in delays, cost overruns, and change orders. To the extent a church can facilitate or encourage consistent communications between all parties, such as through regular status meetings, this risk can be minimized.
2. Design-build (turnkey) method
This is a two-step process with design and then construction, and allows the church to have a single contract with one firm who represents the architect and the construction services/general contractor. The single point of contact tends to reduce change orders and construction delays, but it is a relatively complicated delivery process. In this arrangement, the contractor is assuming responsibility for all professional design services as well as the construction work itself.
One potential issue with this method is the limited amount of direct communication between the church and the designer/architect or general contractor. This can potentially lead to problems such as the lack of clearly defined roles among the parties that can, if not properly addressed, result in cost overruns and/or compromises to the design or construction to meet contractual deadlines.
In addition, the construction aspect of the project is being contracted much earlier in the process with this method, and sometimes before the church even has the scope of the project finalized or secured financing. As a result, there can be tension between any potential future change orders as they can be viewed as “excessive” and negatively affecting project timelines. All of these issues need to be considered when signing off on any design-build contracts.
There are many other important and unique issues that may arise when using the design-build method. For example, in regard to the construction documents, ensure that the church does not give up the right to control whether the design-builder terminates a designer, or who the designer’s replacement might be, and that the designer/architect is identified in the construction documents.
Design-builders are generally responsible for the project and ensuring it is on time, on budget, and meets the church’s requirements. The church should select a designer/architect it is comfortable with. If the selection of the architect is important to your church, the construction documents should also reflect this. Additionally, be certain to specify what will be insured and by whom—there are definite differences in how various “standard forms” handle this issue.
Finally, as with any contract for construction-related services, special attention should be given to the warranty provisions of design-build contracts. It is not uncommon for designers to attempt to provide no warranties for their work, or warranties limited to “materials and workmanship.” Experienced counsel can address these issues and negotiate for appropriate warranty provisions in the contract to protect the church’s interests.
3. Owner-build method
The owner-build method utilizes an independent architect and either a construction manager or project manager who oversees the construction. This method is best for complex projects when the church does not have the time or expertise to oversee or manage the project.
This method involves the church/owner, construction manager, architect, and contractor. The addition of the construction manager tends to increase costs but allows the church to be relatively disengaged from the construction process, as the construction manager oversees the entirety of the project.
As with the prior two methods discussed, communication (or the lack thereof) is a common challenge. Like the design-build method, the owner-build method typically provides for a limited amount of direct communication between the church and the designer/architect/general contractor, which if not properly managed can result in an increased risk for cost overruns and deviations from the design or construction that the church desires.
With this method, the plans and specifications must be completed before construction begins; otherwise, you will face time-consuming and costly change orders. If church leaders do not actively engage with the architect or engineers, then the church may end up with a building that has a suitable design but poor function.
Regardless of which of the foregoing options is selected, church leaders should not start construction until they have a design they are comfortable with, can afford, and they know how they are going to pay for it.
Designate an “owner’s representative” for the construction project
For most substantial construction or renovation projects, the church must have an owner’s representative onsite periodically to check on the progress of the work and confirm that purchased materials are actually onsite. Usually this person is a construction professional or retired builder or contractor—someone who is knowledgeable about construction and functions as the trustworthy eyes and ears of the church. This person will document and report progress, watch for problems and potential changes that the church may need to address. If the church does not have this person onsite periodically, then it is solely relying on the contractor’s integrity and greatly increasing its risk.
It’s a good idea to factor in the owner’s representative as a paid position to the church’s total cost for the project. The general rule is that 1 to 3 percent of the total construction cost is paid to the owner’s representative, but this amount can vary depending on how much time onsite is required and the scope of authority the individual is given.
Our firm’s experience has shown that trying to cut costs in this area—by, for example, using an experienced volunteer member of the congregation who is not financially tied to the project—is a recipe for disaster and can cost the church far more in payment of attorney’s fees for litigation and lost time and materials. Hire an experienced professional, who understands the construction project and the industry, to routinely be onsite protecting the church’s interests and oversee construction or substantial renovation projects.
Draw schedules (or payment plans) and why they are important
Plans and specifications that are developed include documents detailing the timeline or critical path for the construction project. These documents are often posted in the contractor’s construction trailer, allowing the contractor to provide an estimate of the need for the project’s funding.
Payment is not made all at once in advance or upon completion of the project, but rather upon presentation of a draw request as the project progresses. Often, the first draw request is to pay the architect and engineer’s fees. Additional requests may be to pay for specific tasks such as site preparation, completing the foundation, and so on.
Churches should understand the draw schedule so that costs of construction and progress can be monitored. For example, you don’t want to pay out 80 percent of the cost of the building when only 30 percent has actually been completed.
Be sure to check that the construction documents reflect the understanding between the parties. Churches will be required to make timely payments as the building or construction progresses, or to timely file a contest to the payment per the terms of the specific contractual arrangement. Failure to pay on time, or to timely file an appropriate payment contest, can potentially result in substantial penalties. An owner’s representative is able to assist in monitoring the draw schedule and ensuring timely communication of any issues that arise throughout the project.
The draw schedule is also often where the issue of retention appears. Retention is a provision allowing the church to hold back a specific amount of funds (retainage) for a specified period of time to ensure the work is being, and will be, completed according to the terms of the contract. It is common to see at least 10 percent being withheld from each progress payment or draw until the construction or substantial renovation is completed.
If the work has failed to meet the contract specifications, then the retainage can be used to correct the problem (or can be used as leverage with the contractor to get the problem corrected—nothing speaks as loudly as money when trying to get the project completed). Most states have a statute that if an owner holds back 10 percent of the construction funds—until all the work is finished and verified—that it significantly reduces the owner’s liability to subcontractors by providing an affirmative defense to lawsuits from unpaid subcontractors.
Construction contracts should include a provision that expressly provides the final draw or “retention” will not be paid out until the punch list items and certificate of occupancy/occupancy permit is issued. Most lenders will require at least 10 percent retention.
What to know about construction contracts
Despite what may seem to be common sense, our law firm still faces situations where churches either have already begun construction or are seriously contemplating beginning construction without a written contract. More often, our firm sees churches proceeding with a bare-bones written agreement that has almost no legal effect and fails to protect the church and/or define the rights and responsibilities of each party to the contract.
Either scenario is inadequate, and leaves churches almost totally relying on the integrity of the contractor and subcontractors involved in the construction. Be sure your church has signed written agreements with the architect, engineers, and contractors. Each agreement should be drafted and reviewed by experienced legal counsel. At a minimum, the agreement should address the following areas and issues:
- general contract language identifying the parties;
- detailed description of the scope of work for the project, including detailed plans, specifications, materials, furnishings, and finishes to be used or installed; each description should include architectural specifications and detailed drawings that are either referenced or actually contained within the contract itself;
- start date and completion date;
- dispute resolution clause, including whether arbitration or litigation will be used to resolve disputes;
- price and payment schedule (including any draw schedule) to be followed, including how much the church is paying for the work that will be completed and how it will be paid (monthly, milestones, or on completion); contracts often have a provision that invoices will be submitted by the 25th of the month and reviewed and paid by the 10th of the following month, and another provision detailing the procedure for the church to contest requested draws and the deadline for the church to pay the requests before they incur penalties;
- detailed process of how to handle change orders, which is critically important to include, especially for churches that are unfamiliar with new construction or renovation; churches should anticipate that change orders will occur and determine how to handle them so they do not result in costly and time-consuming litigation;
- provisions clarifying roles and specifying who can contractually bind the church and contractor in decisions made throughout the construction process;
- provisions clarifying the role of the owner’s representative;
- provisions identifying who is responsible for obtaining permits, licenses, inspections, and certificates as well as who will be responsible for issuing an occupancy permit upon completion of the construction; the contract should require the contractor to remain on the job site until all punch list items and small tasks are completed and the Certificate of Occupancy or Occupancy Permit is issued;
- written warranty on the contractor-supplied work and materials in addition to the manufacturer’s warranties for a period of at least a year;
- description of how damage limitations will be handled—the limitation of liability clause is very important, especially in design-build method contracts that typically try to severely limit the architect’s liability;
- the issue of indemnification and insurance, as well as whether or not a performance bond will be utilized;
- if your state allows for the recovery of economic damages, such as loss of the use of the facility or damage to the church’s property, you will likely need to insure against that risk, and the scope of what is to be insured should be expressly described; this is particularly important with design-build method contracts where the contractor is assuming responsibility for the building design;
- clearly delineate the duties and responsibilities of all parties, provide the appropriate venue for any legal action for breach of the agreement, and whether to submit to arbitration and waive the right to a jury, etc.;
- if there are limited warranties, have an experienced lawyer review the contract to determine what is actually being warranted; most limited warranties are more about what is not being warranted than what actually is being warranted;
- the person responsible for selecting the designer (if it is a design-build contract);
- ownership of the design: an original design of a building created in any tangible medium of expression, including a constructed building or architectural plans, models, or drawings, is subject to copyright protection as an “architectural work” under section 102 of the Copyright Act; ensure your church can use the plans for any future repairs, remodels, etc., and if there is a dispute between the church and the contractor during the construction process, you will need to be able to transfer the plans and specifications to a replacement contractor;
Caution Churches often believe that because they paid an architect to design a building that they own the architectural plans. This is not true UNLESS you have agreed on this upfront in the contract documents.
- a provision covering “retainage,” which is closely tied to the completion clauses; as discussed on page 8, retainage is an amount withheld from the contractor or subcontractor to ensure performance is substantially complete and that the contractor and/or subcontractors will satisfy their obligations.
Additional tips and considerations are as follows:
- The use of shop drawings on construction projects is common in contracts. Thus, it is essential to understand what shop drawings are, how they are reviewed and approved, and the types of legal claims that arise from them. The term “shop drawings” refers to the drawings, diagrams, illustrations, and other data or information that are specifically prepared or assembled by or for a contractor and submitted by a contractor to illustrate some portion of the work on a project and to explain the fabrication or the installation of the items to the production or installation crews. The owner, contractor, and design professional all have certain responsibilities and liabilities with respect to shop drawings. While the owner of a project rarely assumes direct responsibility for shop drawings, the owner can be responsible for the acts of the architect or engineer acting as the agent for the owner. Also, shop drawings are not supposed to be a means for proposing deviations from the architectural plans. If changes are needed, a written change order should be executed. Your construction contract(s) should be carefully drafted to ensure the issue of shop drawings is handled appropriately.
- Be certain to carefully define completion clauses, benchmarks, and associated required payments in the contract. Pay particular attention to defining the substantial completion benchmark and to providing a definition for what constitutes “final completion,” as well as ensuring there is a financial incentive for the contractor to achieve final completion. Within the context of construction law, substantial completion is generally defined as the point at which the project is suitable for occupancy or use for its intended purpose.
- Pay close attention to the contract’s issue of delay clauses, which permit an extension of construction or other deadlines. A delay claim on a construction project relates to a period of time for which the project has been extended or work has not been performed due to circumstances that were not anticipated when the parties entered into the construction contract. The most common causes of delay on a project include: differing site conditions; changes in requirements or design; weather; unavailability of labor, material, or equipment; and defective plans or specifications. In order to receive an extension of time for project completion, or to recover additional costs, the contractor must meet a number of prerequisites. A delay must be excusable in order to be the basis for an extension of time or additional compensation. Experienced legal counsel can best ensure that this seemingly hypothetical concept is very well defined in the contract to best protect the interests of the church. Delays can and do happen and you do not want contractual ambiguity about what delays are acceptable, excusable, and not subject to a penalty.
- Do not begin any site work or accumulating supplies until all legal agreements are in place and signed by all parties, and after your lender gives the green light to proceed.
- Prior to entering into any agreements, it is advisable to perform background research on each of the parties to determine if they have any outstanding claims or litigation pending against them.
- Resist cutting corners and expenses by using a church member who may be an attorney but who is not skilled and experienced in reviewing church construction-related documents, using a member who may “know some things about construction,” or using a church employee to serve as the Construction Manager for the project. Doing so potentially shifts important responsibilities that the church is not prepared or equipped to handle.
- Develop a system with the church’s lender to verify work has been satisfactorily performed before payments are issued. Also, ensure the church plays an active role in the process and that this is reflected in the general construction contract.
It is common and generally preferred to use “standard industry contracts” from organizations such as the American Institute of Architects (AIA), the Associated General Contractors of America (AGC), the Engineers Joint Contract Document Council (EJCDC), and the Design-Build Institute of America (DBIA).
Be especially wary of contractors who are not utilizing standard industry contracts. If a nonstandard contract is used, it becomes even more important to involve experienced legal counsel. However, even though AIA and DBIA contracts are commonly used, churches still need to be aware that no contract is really “standard” in the sense of being one size fits all.
There are many different options within each so-called standard form, and experienced legal counsel can assure the church’s interests are being protected as much as possible. There are many opportunities to allocate risks and define roles and standards of performance. So, if you are presented with documents and communication such as, “Here’s our standard contracts,” or “It’s just boilerplate stuff,” or words to that effect, you might ask yourself what trade group drafted these contracts and for whose benefit were they drafted.
Step 5: Construction
If all of the other steps have been accomplished and sufficient attention has been paid to the details, construction should go well. The end goal is generally to obtain a Certificate of Occupancy (also known as an Occupancy Permit) from the local building inspector. As long as the building meets code requirements and other regulations, your church should be cleared for worship in your new facility.
You will have to ensure adequate maximum occupancy, mark all building exits, ensure adequate fire extinguisher protection, and other safety measures before the Certificate of Occupancy will be provided. However, before you get to the Certificate of Occupancy, you will need to manage the construction step well, ensure great communication, and be sure to follow the legal documents governing the construction.
A final checklist of items as you proceed through the construction process is:
- Make certain you have lender approval before any construction commences.
- Ensure your governing document’s approval process for approving the construction project and financing was followed precisely.
- Ensure your legal counsel is aware of your desire to proceed with a construction project and is experienced in handling construction and design agreements as well as preparing an opinion letter for your lender.
- Ensure close communication and cooperation with the contractor and architect.
- If your church is using any volunteer or employee workers, remember that Occupational Safety and Health Administration (OSHA) regulations apply to your church or ministry.
- Follow the draw schedule and obtain lien waivers as construction advances.
- Stay in communication with your lender.
- Keep the church congregation updated.
- Make arrangements for furnishings and equipment as the end date nears.
- Make a final inspection with the architect and appropriate government officials.
- Ensure you receive copies of all available warranties.
- Obtain “As Built” drawings from the architect for future reference as well as an “As Built” survey showing the location of all buildings, improvements, utilities, and easements.
- Enjoy your newly constructed or renovated building!