13.14.1 Construction Contract

• A. Lump Sum Contract. A lump sum construction contract is permitted when no identity of interest exists between the Borrower and General Contractor. The amount allowed in cost certification is the lesser of:

1. Actual cash paid or to be paid by the Borrower under the construction contract, or

2. Contract price as adjusted by HUD’s estimated cumulative effect of approved change orders paid, or to be paid, by the Borrower and the liquidated/actual damages provision to the contract, if applicable.

B. Cost-Plus Contract. A cost-plus construction contract is required when an identity of interest exists between the Borrower and General Contractor.

C. Allowable Costs. The amount allowed in cost certification when a cost-plus contract is used is the lesser of:

1. Actual cash paid, or to be paid, by the Borrower under the construction contract, or

2. Amount the cost analyst allowed for construction on form HUD-92331, Summary of Cost Certification Review–Cost Section, or

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3. Contract price as adjusted by HUD’s estimated cumulative effect of approved change orders paid, or to be paid, by the Borrower and, if applicable, either the incentive provision or the liquidated/actual damages provision of the contract.

   • Recognize approved change orders necessitated by errors or omissions by the Architect only to the extent there are savings in the mortgage. Do not recognize these change orders when processing a mortgage increase.

• Do not recognize approved betterment change orders in calculating the adjusted upset price in Section 13.14.1.A.2 and Section 13.14.1.A.3, above, unless they are determined by the cost staff to be necessary changes as defined in Chapter 12, Section 12.8.

• Recognize the increase in general requirements, if any, noted on approved time extension change orders. Do not recognize increases in soft costs associated with the change order. The soft costs will be recognized under the applicable line items.

• When BSPRA is not applicable, for profit motivated projects involving an identity of interest between the Borrower and General Contractor, the amount of builder’s profit as shown on form HUD-93305M is eligible whether or not it was paid in cash.

• For non-profit Borrowers, the allowable builder’s profit is the lesser of the amount actually paid or to be paid in cash to the General Contractor or the amount of builder’s profit shown in Section G of form HUD-92264, plus or minus any amount applicable due to HUD-approved change orders.

• D. Identity of Interest. An identity of interest is construed to exist when:

1. There is any financial interest of the Borrower in the General Contractor or any financial interest of the General Contractor in the Borrower.

2. Any officer, director, stockholder, or partner of the Borrower is also an officer, director, stockholder, or partner of the General Contractor.

3. Any officer, director, stockholder, or partner of the Borrower has any financial interest in the General Contractor; or any officer, director, stockholder, or partner of the General Contractor has any financial interest in the Borrower.

4. The General Contractor advances any funds to the Borrower.

5. The General Contractor supplies and pays, on behalf of the Borrower, the cost of any architectural services or engineering services other than those of a surveyor, general superintendent, or engineer employed by a General Contractor in connection with its obligations under the construction contract.

6. The General Contractor takes stock or any interest in the Borrower corporation as consideration of payment.

7. There are any side deals, agreements, contracts, or undertakings entered into or contemplated, thereby altering, amending, or canceling any of the required closing documents, except as approved by the Secretary.

8. Any relationship existing (e.g., family) which would give the Borrower or General Contractor control or influence over the price of the contract or the price paid to the subcontractor, material supplier, or lessor of equipment.

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E. Incentive Fee Payments to Contractors. The owner may request that the construction contract be modified before Initial Endorsement to provide for a General Contractor incentive fee for completed construction work and delivering a completed project before the date specified in the construction contract (or as amended by HUD-approved time extension(s)). Incentive fees must be specified in an Addendum to the construction contract that has been approved by HUD before initial endorsement or at the execution of a construction contract that has been approved by HUD for Insurance Upon Completion and Insurance of Advance projects. An Incentive Payment Addendum may not be added to the contract after Initial Endorsement.

1. Where there is an identity of interest between the Borrower and General Contractor:

   • General Contractor may benefit from savings in construction interest, taxes, property insurance, and mortgage insurance premiums to the extent there are construction cost overruns.

• Incentive payment is included in the adjusted upset price of the construction contract. If there is an identity of interest between the Borrower and the General Contractor, an incentive fee may only be paid if there are certified cost overruns that were not included in a HUD-approved change order, and the amount of the incentive fee may not exceed the amount of certified cost overruns that were incurred.

2. Where there is not an identity of interest between the Borrower and General Contractor:

   • Use Construction Contract Incentive Payment, form HUD-92443.

• Include the incentive payment under “Other” on form HUD-92331A. Incentive fees must be calculated in accordance with form HUD-92443. The incentive fee computed for Lump Sum construction contracts may not exceed 50% of the amount by which the estimated interest, taxes, property insurance and mortgage insurance premium, exceeds the certified costs for these same items through the actual date of completion. The incentive fee computed for Cost Plus construction contracts may be paid in an amount calculated in accordance with the Incentive Payment Computation on page two of form HUD-92443. Additionally, when the cost-plus contract is used the contractor may not receive total payments that exceed: (1) the actual costs of construction, (2) the cash fee provided in the construction contract, or (3) the incentive fee as determined by the computation. (The contractor shall not be paid an incentive fee that is greater than the amount of cost overruns; the contractor must only receive the amount of the incentive fee. Any excess of this amount must be refunded to the Borrower.)

F . Damages Clause. Apply the damages clause of the construction contract when the General Contractor does not complete the project on time. The clause holds the General Contractor financially responsible for the added soft costs resulting from the contractor’s delay.

1. Calculate the amount of actual damages and liquidated damages, using the lesser to determine the adjusted upset price.

2. To determine actual damages, compute the actual cost of interest, taxes, insurance, and MIP for the period from the scheduled completion date (as amended by HUD-approved change orders) through the substantial completion date.

3. To determine liquidated damages, multiply the daily liquidated damages rate from the construction contract by the number of days between the scheduled completion date specified in the construction contract, as amended by the HUD-approved time extensions, through the substantial completion date.

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4. Reduce the damages by the portion of the net operating income earned during the liquidated/actual damage period.

5. For those cases where an administrative completion date has been established, use this date for computing damages for cost certification purposes. However, the General Contractor is responsible for damages through the date of substantial completion.

G. General Contractor. A Borrower must be a single asset mortgagor entity and thus cannot act as its own General Contractor, though there may be an identity of interest between the two parties.

H. Incomplete Minor Items. The Borrower’s certification of the amount due under the terms of the construction contract may include the cost of minor items of on-site work that remain incomplete under the construction contract.