In construction lending, we often get nuanced questions from lenders who are working with borrowers taking a less traditional approach to project delivery. One common scenario:
“If we have a borrower who will manage their own project in lieu of a GC and they have their own construction company they will be using, would you recommend or require a Contractor Capability Evaluation (CCE) on their construction company? What documentation should we request when the owner is also the GC?”
Let’s break it down.
Is a Contractor Capability Evaluation Required in This Case?
Not required — but highly recommended.
Even when a borrower is using their own construction company as the general contractor, that GC entity will still have a contractual obligation to complete the work. From the lender’s perspective, that means risk still exists — and the quality, reliability, and financial stability of the contractor still matter.
So yes, we recommend performing a Contractor Capability Evaluation (CCE) on the borrower’s construction company, just as you would with any third-party GC.
What Does a CCE Provide in This Scenario?
A Contractor Capability Evaluation helps confirm:
- The company is properly licensed to build the type of project being financed.
- Their financial condition is stable enough to support the job.
- Their track record includes similar projects, and references (especially from trades or clients) validate their performance.
Even if the borrower and GC are legally affiliated or share ownership, these checks provide important insight into whether the project is likely to proceed smoothly — and finish successfully.
This is not about policing the borrower — it’s about understanding the true risk profile of the deal and helping all parties avoid avoidable pitfalls.
Should There Be a Formal Construction Contract?
Yes. Every time.
One of the most overlooked (but important) steps in related-party construction is executing a formal construction agreement between the borrower and their GC entity.
We understand that many borrowers push back on this — “It’s just us,” they say. “Why do we need to paper this?” But here’s why it matters:
A construction contract:
- Outlines the scope of work, based on the approved plans and specs.
- States the contract price and payment structure clearly.
- Addresses key terms like retainage, change order procedures, and payment application frequency.
- Helps avoid disputes later — even internal ones — by making expectations clear upfront.
In short, it protects both the lender and the borrower from assumptions or oversights that can derail a project.
What Type of Contract Format Works Best?
We recommend borrowers use a standard format such as an AIA construction agreement (e.g., AIA A102 with Exhibit A or similar).
That agreement should include exhibits that spell out:
- The full scope of work.
- Any exclusions or clarifications.
- Payment terms and schedules.
- Change order processes.
We encourage borrowers not to view this as a “box-checking exercise for the bank,” but as a real opportunity to create alignment and reduce friction down the road.
What Documentation Should Lenders Request?
At a minimum, we recommend collecting:
- Signed construction agreement (between the borrower and their GC company).
- Approved plans and specifications.
- Construction budget (itemized, matching the scope).
- Any typical due diligence materials you’d request from a third-party contractor (e.g., license verification, COI, references, etc.).
Remember: even if ownership is shared, the GC is still a separate legal entity managing real dollars, real risks, and real deadlines. Treat it accordingly.
Why This Review Matters
Related-party construction isn’t inherently bad — in fact, it can work well when the GC entity is experienced and accountable. But lenders should go in with eyes wide open.
A CCE and clear documentation help answer key questions:
- Can this GC actually build what’s proposed?
- Are they financially equipped to get it done?
- Do the plans, budget, and contract align?
- Is there a clear paper trail in place if issues arise?
In the end, it’s about transparency, risk mitigation, and setting up the project — and your borrower — for success.
Need help evaluating a borrower’s in-house GC?
We provide independent Contractor Capability Evaluations, Pre-Construction Reviews, and contract document assessments to support sound lending decisions. Contact us to learn more.
Visit the USA Construction Risk Solutions Blog for more insights on construction management and risk mitigation.
