HB-1-3560

CHAPTER 9: PROJECT CONSTRUCTION 

9.1 INTRODUCTION 

Management of construction is the borrower’s responsibility. However, the Agency will 

monitor construction to ensure that it complies with the project plans and specifications and to 

protect the government’s security interest. Consequently, the Agency plays an active oversight

role in the construction process, from reviewing planning documents to inspecting construction 

work. This chapter describes the Agency’s procedures for carrying out these responsibilities. It 

summarizes the requirements established under RD Instruction 1924-A, and RD Instruction 

1924-C. 

The chapter is organized as follows: 

• Section 1 describes construction requirements, including construction standards, 

contracting methods, contractor requirements, and cost certification procedures. 

• Section 2 describes the contracting procedures from the invitation to bid through the 

preconstruction conference and the notice to proceed. 

• Section 3 describes the Agency’s responsibilities during construction, including 

inspections, concurrence in change orders and contractor payments, and the contract 

close-out process. 

9.2 OVERVIEW OF THE AGENCY’S ROLE IN THE CONSTRUCTION PROCESS 

The Agency’s involvement in the construction process begins with the submission of the 

initial application. The State Architect reviews all construction documents, beginning with the 

preliminary planning documents and concluding with the final plans, specifications and cost 

estimate. The State Architect will advise the loan approval official on acceptability of the project 

design, specifications, and cost estimates before the loan is closed or construction begins 

(whichever occurs first). The State Architect will also consult with the State Environmental 

Coordinator regarding any mitigation measures required by the environmental review, which 

may affect project plans and specifications. The State Architect acts in an advisory role to the 

processing and approval officials, unless specifically delegated responsibility for “approval” of 

design, contracts, etc. 

The Agency concurs in the borrower’s selection of a contractor and in the construction 

contract. The Agency requires that a preconstruction conference be held, as described in 

Paragraph 9.11. 

During construction, the Agency assumes an oversight role, performing inspections and 

concurring in change orders and contractor payments. The Agency also performs a final 

inspection before contract close-out. 

(Note: The Agency’s role in construction oversight does not diminish the role of the 

project architect hired by the borrower. The project architect is responsible to the borrower for 

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ensuring that the project is constructed according to the Agency-accepted plans and 

specifications. The project architect’s responsibilities include regular inspections, payment 

certifications, change order approvals, and other oversight of construction activities.) 

9.3 CONSTRUCTION FINANCING

There are two methods of financing construction: interim financing and multiple 

advances. 

• Interim financing. If the borrower obtains interim financing, an interim lender 

provides the funds for construction and the Agency does not close its loan until after 

construction. The Agency prefers to use interim financing whenever possible since it 

is, in essence, financing a finished product. 

• Multiple advances. If the borrower obtains multiple advances, the Agency advances 

funds to the borrower to pay for construction as the work progresses. If multiple 

advances are used, the borrower must document that interim financing is not available 

at suitable rates or terms. 

These methods are described in Chapters 4 and 5. Regardless of the method used, the 

Agency will assist in monitoring the construction process as described in this chapter. 

9.4 IDENTIFY-OF-INTEREST RELATIONSHIPS 

If any parties in the construction process have an identity-of-interest (IOI) relationship 

with the borrower, the following steps must be taken: 

• The borrower must disclose the IOI relationship to the Agency; 

• The construction costs must compare favorably with projects not involving an IOI; 

and 

• The contractor must certify all actual costs in accordance with cost certification 

procedures described in Paragraph 9.8. 

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SECTION 1: CONSTRUCTION REQUIREMENTS 

9.5 CONSTRUCTION STANDARDS 

Construction standards are prescribed in RD Instruction 1924-A. Projects must be 

designed to meet or exceed: 

• The development standard adopted by the Agency in the State where the project is 

located; 

• Agency thermal performance standards; and 

• Applicable state and local laws, ordinances, codes, and regulations. 

Land and site development must meet the standards and requirements in RD Instruction 

1924-C. These requirements are discussed in Chapter 3. The project architect must certify that 

the final plans and specifications comply with these standards prior to Agency approval of the 

loan. Form RD 1924-25, Plan Certification, must be used for this purpose. In addition, the 

project architect must also certify that the project has been designed in accordance with all 

applicable accessibility standards and guidelines. These standards may include, but not be 

limited to, the Uniform Federal Accessibility Standards (UFAS), the Fair Housing Act 

Accessibility Guidelines (FHA/AG), the Americans with Disabilities Act Accessibility 

Guidelines (ADA/AG), and any applicable State or local requirements. 

9.6 METHODS OF CONSTRUCTION 

There are three methods of constructing Multi-Family Housing projects: competitive bid 

contracts, negotiated bid contracts, and owner-builder. 

A. Competitive Bid 

All construction contracts must be awarded by competitive bid unless an exception is 

granted for a negotiated contract or the owner-builder method of construction, as 

described in Paragraphs 9.6 B and C. 

For competitive bidding, the borrower provides public notice inviting contractors to 

submit a bid within a specified time frame. Contracts are selected based on cost and 

awarded to the lowest responsible bidder. 

The contractor and the contract price must have Agency concurrence. The contractor 

must be licensed as required by the State and must not be on the list of debarred 

contractors. Unless waived by an interim lender, the contractor must provide a 

performance and payment bond or an acceptable alternative as described in RD 

Instruction 1924-A. 

The competitive bidding process is discussed further in Paragraph 9.9. 

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B. Negotiated Contract 

Borrowers may request an exception 

from competitive bidding if they prefer to 

use a specific contractor or if the 

competitive bidding process does not yield 

an acceptable bid. Negotiated contracts are 

often used by borrowers with a 

construction company having an IOI. The 

State Director may grant an exception only 

if the following conditions are met: 

Competitive Bids and 

Negotiated Contracts

At times of high-construction 

activity when construction prices tend to be 

higher, negotiated bids may provide lower 

costs. At times of low-construction 

activity, competitive bidding is more likely

to yield lower costs. 

• The cost under the negotiated contract compares favorably with similar and recent 

construction in the market area; 

• The proposed contractor is a reliable contractor and licensed to perform the 

construction work in accordance with local requirements where the project is located; 

and 

• The reasons for requesting the exception from competitive bidding are documented. 

The information required for a written request to grant an exception to the 

competitive bidding requirements must be in accordance with RD Instruction 1924-A. 

C. Owner-Builder [RD Instruction 1924.13(e)(2)] 

The Owner-builder method of construction is used when the construction company is 

identical to the borrower/owner entity. Owner-builders must be qualified to perform the 

construction work and show that they are licensed in accordance with local requirements 

where the project is located. There is NO written agreement or contract between the 

borrower and the construction company to build the project. However, there will be 

separate contracts with companies to perform portions of the work, such as plumbing and 

electrical systems. 

Before granting an exception to allow an owner-builder arrangement, the Loan 

Originator and the State Architect/Engineer will review the borrower’s written request, 

drawings, specifications, and cost estimates to determine whether the arrangement is in 

the best interest of all parties. All borrowers with owner-builder construction 

arrangements are required to certify the final construction costs as described in Paragraph 

9.8. 

The information to be included in the borrower’s written request must be in 

accordance with RD Instruction 1924-A. 

9.7 CONTRACTOR REQUIREMENTS 

The Agency must ensure that the contractor meets the requirements described below. 

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A. Debarment and Suspensions 

All contractors submitting a bid in excess of $25,000 must certify that they are not 

currently debarred or suspended from participating in Federally funded programs. The 

certification statement is included on Form AD 1048, Certification Regarding 

Debarment. Failure to submit the certification is grounds to reject the bid. It is the 

Agency’s responsibility to check the list of debarred and suspended contractors to make 

sure the contractor is not listed there (even if the contractor has submitted the 

certification). 

B. Insurance 

The contractor must have property and liability insurance for construction to protect 

the borrower and contractor from a variety of losses. The construction contract must not 

become valid until proof of insurance is received by the Agency. The amount of 

coverage and the other insurance provisions of the coverage must be in accordance with 

the project’s construction documents. 

C. Payment and Performance Bonds 

Payment and performance bonds covering the contractor’s work must be executed 

prior to the start of any construction. The bonds must each have a face value of 100 

percent of the construction contract. These surety bonds must only be obtained from a

corporate bonding company listed on the current U.S. Department of Treasury Circular 

570 (published annually in the Federal Register), as holding a certificate of authority, as 

an acceptable surety on Federal bonds, and as legally doing business in the State where 

the project is located. 

If interim financing is involved, the interim lender may waive the bonding 

requirement. The waiver must be in writing and attached to the contract documents. 

An alternative to the bonding requirement is a letter of credit. Requirements for 

letters of credit are discussed in Paragraph 9.7 D. 

D. Letters Of Credit 

In lieu of payment and performance bonds, the lender (or in the case of multiple 

advances, the Agency) may accept an unconditional and irrevocable letter of credit issued 

by another lending institution to secure the completion of construction. The letter of 

credit must equal the amount of the construction contract and must remain in effect until 

the date of final acceptance of work by the owner and the lender (or the Agency). In 

addition, the letter of credit must stipulate that the lending institution that issued the letter 

of credit, upon written notification by the owner or lender (or the Agency) of the 

contractor’s failure to perform under the terms of the contract, will provide payment up to 

the amount of the contract to satisfy all prior debts incurred by the contractor in 

performing the contract and all funds necessary to complete the work. 

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An irrevocable Letter of Credit issued by a bank or other approved financial 

institution must meet strict credit quality requirements (see Exhibit 9-1 for credit quality 

requirements) and be for 100 percent of the construction contract. Further requirements 

for letters of credit include: 

• The issuing institution must not be an affiliate of the lender, unless it has an

acceptable rating from an approved rating agency, which is not an affiliate of the 

lender; 

• Federal Home Loan District Bank-enhancement of a member bank letter of credit is 

an acceptable method for meeting Agency credit standards; 

• Rural Development, USDA, must be named as the sole beneficiary; 

• The term must be a minimum of 1 year; and 

• The form of the letter of credit and the sight draft must be reviewed and approved by 

the Agency.

Exhibit 9-1 

Credit Quality Requirements for Letters of Credit 

Rating Agency Type of Collateral Rating

Thomson’s Bankwatch N/A B or better 

S&P Long-term senior debt, if rated, 

or long-term bank deposit

A or better 

Moody’s Long-term senior debt, if rated, 

or long-term bank deposit

A or better 

E. Warranties 

At the time the project is determined ready for occupancy, the contractor must 

execute Form RD 1924-19, Builder’s Warranty, providing a 12-month warranty on work 

performed and materials supplied. 

F. Compliance with Civil Rights Requirements 

The applicant/borrower must comply with all applicable civil rights requirements. A 

partial list includes:

• Architectural Barriers Act (ABA); 

• Section 504 of the Rehabilitation Act of 1973 and UFAS; 

• Americans with Disabilities Act and ADA/AG; 

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• Fair Housing Act and FHA/AG; 

• Executive Order 11246; and 

• Any State or local requirements. 

9.8 COST CERTIFICATION 

In certain cases the borrower, contractor, subcontractors, and suppliers must each provide 

a certification of the actual costs of construction. Appropriate circumstances for cost 

certification include: 

• All situations where there is an IOI; and 

• Other cases deemed appropriate by the Agency. For example, the Agency may 

request cost certifications to assist in cost tracking and help determine whether bids 

on future projects are reasonable. 

• Cost Certification will be performed in accordance with § 1924.13 (e)(1)(v). 

The actual direct costs to the company with an IOI with the borrower must be reported on 

Form RD 1924-13, Estimate and Certificate of Actual Cost and audited by a licensed Certified 

Public Accountant (CPA) in accordance with Government audit standards (GAS). The audit 

may be contracted out by the Agency. 

Reviewing construction costs is an ongoing process for Agency staff, beginning with the 

preliminary cost estimate provided in the initial application through the final payment to the 

contractor. 

A short summary of the cost review process is provided in Exhibit 9-2. 

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Exhibit 9-2 

Overview of the Cost Review Process

The Loan Processing Staff will: 

y Compare the applicant’s preliminary cost estimate to historic costs and 

nationally recognized cost databases and discuss any concerns with the 

applicant. 

y Review the applicant’s cost estimate provided on Form RD 1924-13, 

and ensure any previous concerns were addressed satisfactorily. 

y Review payment requests and change orders to check arithmetic and 

verify that totals do not exceed contract limits. 

y Review the final payment request and the cost certification provided on

Form RD 1924-13. 

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SECTION 2: CONTRACTING PROCEDURES 

9.9 COMPETITIVE BIDDING PROCEDURES 

The borrower is responsible for following proper bidding procedures in accordance with 

RD Instruction 1924-A. Generally, the project architect oversees the bid invitation and selection 

process. The Agency serves only in an oversight role to ensure that proper bidding procedures 

are followed.

The purpose of competitive bidding is to obtain acceptable construction services for the 

lowest costs possible. To be successful, the process must maximize open and free competition. 

Conditions must not exist or be established that would give preference to a specific bidder or 

type of bidder. If no acceptable bids are received, the borrower may competitively rebid the 

contract or proceed to a negotiated bid, subject to Agency approval. 

A. Contents of the Bidding Package 

For competitive bids, the project architect prepares documents to be distributed in the 

bidding package. The bidding package must include the items listed in RD Instruction 

1924.13(e)(1)(ii). 

B. Distribution of the Bidding Packages 

The invitation to bid must be distributed to all interested parties. The borrower may 

send the invitation directly to specific contractors from whom bids are desired, but public 

notice must always be required so that other contractors have an opportunity to bid. 

Prospective bidders can be informed of requests for bids through publication in local 

newspapers, plans services and similar services. 

9.10 AGENCY CONCURRENCE IN THE CONTRACT 

Normally, the borrower, project architect, bidders, and interested persons attend a bid 

opening. An RD representative should attend each bid opening. The RD representative is an 

observer, not a referee, and as such cannot waive bidding requirements and should not address 

any questions concerning bid acceptability, responsiveness of bids, responsibility of bidders, etc. 

A. Review of the Bid 

The borrower must submit the following for Agency review: 

• A bid summary that shows the project architect’s estimate of costs and all bids 

submitted. 

• A revised final cost breakdown on Form RD 1924-13. 

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• The project architect’s recommendation. (If the project architect does not recommend 

that the bid be awarded to the lowest bidder, the recommendation must include a 

justification for an award to a higher bidder, or, to accept no bids.); and 

• Documentation of the borrower’s decision (copy of the bid selected). 

Loan Processing Staff should review the bid documentation to confirm the following 

items: 

• The selected bid is properly completed including the bid bond; 

• Based on the revised final Form RD 1924-13, there is enough money is to cover the 

construction costs; and 

• The project architect has provided sufficient justification for the borrower’s bid 

selection. 

After these items have been reviewed, the Agency should advise the borrower in 

writing of any problems or of its concurrence with the bid award. 

B. Contract Documents

The borrower may use the construction contract form published by the American 

Institute of Architects (AIA Document A-101) with the Agency-approved amendment 

(RD Instruction 1924-A, Guide 1, Attachment 6). RD Instruction 1924-A also references 

use of Agency forms for MFH and other more complex projects. Other contract 

documents, acceptable to the Loan Approval Official and containing the requirements of 

RD Instruction 1901-E may be used provided they are customarily used in the area and 

protect the interest of the borrower and the Government. In such cases, the OGC should 

be consulted. 

The construction contract must contain the nondiscrimination language required by 

Executive Order 11246 and regulations issued by the Department of Labor (DOL). That 

language may be found in the DOL regulations at 41 CFR 60 [§ 60-1.4(b)] and on pages 

2 through 4 of Form RD 1924-6, Construction Contract. 

A contract is signed and concurred in by the State Director (or his/her delegate) after 

it is signed by the borrower and contractor. The Agency is not a party to the contract and 

does not incur any liability under it, but still must ensure that the borrower and the 

contractor comply with all applicable regulatory requirements. 

Loan Processing Staff should maintain all construction-related documents in the 

borrower’s construction file. A complete list of contract documents is provided in 

Exhibit 9-3. See RD Instruction 1924-A for more guidance on contract documents 

(1924.13(e)(1)(ii) and Guide 1). 

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9.11 PRECONSTRUCTION CONFERENCE 

Once the contract is awarded and executed, all interested parties must attend a 

preconstruction conference. The conference serves to clarify arrangements and expectations in 

advance to avoid conflicts later in the construction process. Form RD 1924-16, Record of 

Preconstruction Conference, or an industry equivalent may be used as a guide for an agenda. 

The preconstruction conference should include the borrower, contractor, architect, lender 

representatives (if interim financing was obtained), and an Agency representative. The project 

architect should lead this meeting. It should cover, at a minimum, the following items: 

• Responsibilities of all parties, including the contractor, the Agency, and the borrower, 

including identifying the authorized representatives for each entity; 

• The work to be undertaken; 

• Applicable wage rates and The United States Equal Employment Opportunity 

Commission (EEOC) requirements; 

• The U.S. Department of Labor Occupational Safety and Health Administration 

(OSHA) requirements; 

• Contractor’s use of the site (parking, security, permits, dust control); 

• Protection of stored materials; 

• Mitigation measures required by the environmental review; 

• Procedures to be used for inspection, change orders, and payment requests; 

• Timeframes for starting and completing work; 

• Requests for extending contract times; 

• The contract agreement and any subcontracts; 

• Dispute resolution procedures; and 

• Close-out procedures. 

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Exhibit 9-3 

Contract Documents

• Advertisement for Bidders; 

• Instructions for Bidders; 

• Bid; 

• Bid Bond; 

• Form RD 400-6, Compliance Statement

• Notice of Award; 

• Form AD 1048, Certification Regarding Debarment and Suspension 

• RD Instruction 1940-Q, Exhibit A-1, Disclosure of Lobbying Activities 

• Agreement between Owner and Contractor 

• Certificate of Owner’s Attorney; 

• Contract Concurrence; 

• Payment Bond; 

• Performance Bond; 

• Notice to Proceed; 

• General Conditions of the Construction Contract ; 

• Form RD 3560-31, Identity of Interest Disclosure/Qualification Certificate; 

• Drawings and specifications; 

• Contract Change Order; 

• Payment request or certification; 

• Labor Standards Provisions, only for projects subject to Davis-Bacon 

• Wage determinations (Department of Labor); and 

• Form RD 1924-19 Builder’s Warranty, or equivalent.

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9.12 NOTICE TO PROCEED 

The Notice to Proceed establishes the contractor’s permission to proceed with 

construction. It gives the contractor permission to go to the borrower’s land and begin work, and 

it identifies the start date for the time period of the contract. It is issued by the borrower after the 

contract has been executed and the preconstruction conference has concluded. It is signed by the 

borrower and the contractor. The Notice to Proceed should not be issued until the Agency loan 

is closed (for multiple advances) or the interim lender has concurred (for interim financing). 

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Who Performs Inspections? 

Several parties have an interest in the 

satisfactory completion of project construction 

and, therefore, conduct inspections. 

y The project architect has the primary

responsibility for performing regular 

inspections. These inspections should take 

place at least monthly and serve to 

document partial payment requests. 

y An Agency representative with sufficient 

knowledge of MFH construction should also 

inspect the property on a monthly basis and 

as needed. It is good practice for the 

Agency architect to coordinate with the 

project architect to perform joint inspections 

and to time these inspections with partial 

payment requests. 

y The interim lender (if there is one) is also 

encouraged to make inspections of the 

SECTION 3: CONSTRUCTION OVERSIGHT 

9.13 PROGRESS INSPECTIONS 

The borrower maintains full responsibility for the quality of construction; however, the 

Agency must still take steps to protect the value of its investment. Consequently, the Agency 

must conduct periodic progress inspections to ensure that work is proceeding as planned. These 

inspections must be performed by persons with knowledge of MFH construction and experience 

in conducting Agency inspections. 

A. Timing of Inspections 

Inspections must take place prior 

to authorization of partial payments, 

normally at least monthly. In 

addition, the following three 

inspections must take place for each 

building:

• The initial inspection must be 

made just prior to or during the 

placement of concrete footings or 

monolithic footings and floor 

slabs. 

• Another inspection must be made 

when the building is enclosed; 

structural members are still 

exposed; roughing in for heating, 

plumbing, and electrical work is in 

place and visible; and wall 

insulation and vapor barriers are 

installed. Customarily, this is 

prior to installation of brick veneer or any interior finish materials. 

• The final inspection must be made when all development has been completed and the 

project is ready for occupancy for its intended use. 

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B. Inspection Procedures 

Actual construction work needs to be inspected to determine and verify that terms and 

conditions of the construction contract are met. The project plans and specifications 

signed by all parties are used to judge the acceptability of the work. Items that do not 

meet these or other contract documents must be either removed, corrected, or in some

cases accepted with an adjusted price. 

The Agency inspector must use Form RD 1924-12, Inspection Report. 

• The inspection report must provide a description of the conditions seen, especially 

those that differ from the plan and specifications. Discrepancies with the plans and 

specifications must be brought to the attention of the project architect and 

documented until the issue is resolved. 

• For inspections prior to making payment, the inspector must confirm the estimated 

values of work completed and properly stored materials and itemize the percent of 

work complete for each task. Payments must be adjusted if there are any

discrepancies. 

• If environmental mitigation measures are required and included in the construction 

contract, the inspector must document compliance with such measures on the report. 

Noncompliance with mitigation measures should be reported promptly to the Loan 

Originator. 

• A (pre-final) inspection must be made to determine if the project is ready for 

occupancy. If so, the project architect must issue a Certificate of Substantial 

Completion and submit a written report (punch list) of the work yet to be completed 

to the owner, the contractor, and the Agency. The project architect should notify the 

Agency in sufficient time for the Agency to participate in the inspection. The owner, 

project architect, Approval Official, and State Architect should jointly participate in 

the inspection. The Agency should receive a copy of all inspections from applicable 

regulatory authorities at this time. 

• The inspection report must be signed by the Agency inspector. 

• Copies of all inspection reports (by the Agency inspector, the project architect, and 

any other inspectors, e.g., local, State, fire marshal) should all be kept in the 

construction file by the Agency. 

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9.14 CHANGE ORDERS 

Change orders are used to address changes in: facility design; labor or material or their 

cost; or the time requirement of the project. They are used when an owner, the project architect, 

or local authorities require changes in the work or other unforeseen circumstances require a 

change in the contract’s scope of work. Any changes that occur after a contract is executed and 

affect project design, materials, costs, scope, or schedule must be documented as a contract 

change order. The owner, with the assistance of the project architect, will obtain Agency 

concurrence in writing for all change orders prior to the performance of the work. The change 

order becomes a part of the construction contract. Form RD 1924-7, Contract Change Order, or 

its equivalent must be used. Changes that are deemed minor and do not affect costs should be 

documented as field orders by the project architect.) 

• Generally, total changes to the work should not exceed 20 percent of the original 

contract cost. If changes exceed this threshold, an increase in performance and 

payment bonds will be necessary. 

• The change order must be supported by a cost breakdown, including any profit and 

overhead. No additional profit or overhead is allowed in IOI cases if either totals 

more than the amounts included in the final Agency-approved cost estimate on Form

RD 1924-13. 

• If the change orders result in an increase in project costs, there are several ways to 

pay for these costs:

◊ The borrower finds the funds elsewhere. 

◊ Costs are reduced from another part of the project, and a deductive change order 

is executed to document that change. Where funds are derived from reductions in 

other portions of the work it is critical to assure that these changes to not affect 

the overall value of the project. It may be necessary to refer such changes to the 

appraiser for this determination. 

◊ In rare cases, the Agency may make a subsequent loan. Subsequent loans may 

only be made to complete, improve, repair, or make modifications to a project. 

Subsequent loan funds may not be used to reimburse an owner for additional 

contributions that were made to complete a project. In addition, no commitment 

for additional funds will be made by the Agency unless, and until, additional 

funds have actually been obligated. Finally, if a subsequent loan is made, the 

borrower equity and initial operating capital contribution requirements apply, and 

the total amount of the combined loans may not exceed 95 percent of the 

appraised value, or total development cost, whichever is less. 

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◊ No increase in per-unit development cost will be approved, whether the 

circumstance causing the cost increase occurs before, during, or after the 

construction period, unless these conditions were unforeseen factors beyond the 

owner’s control; design changes that were required by the Agency or local 

government; or changes in financing that were approved by the Agency. Any 

increase in cost must be approved by Rural Development in writing before the 

expense is incurred. 

◊ Under no circumstances will a cost increase request be approved without 

concurrent agreement between Rural Development and the applicant/borrower as 

to how the cost increase will be funded. In most cases, this will mean that the 

owner will need to contribute additional funds. 

• If the change orders result in a decrease in project costs:

◊ Unused funds may be used to cover certain other eligible project costs only if they 

were unknown to the borrower at the time the loan was approved. 

◊ Otherwise, the amount of the loan will be decreased and the funds deobligated. 

• Change orders do not generally require preparation of Form RD 1940-22, 

Environmental Checklist for Categorical Exclusions or amendment of the original 

environmental assessment, provided that the action will not alter the purpose, 

operation, location, or design of the project as originally approved. 

9.15 PARTIAL PAYMENTS 

The borrower and the Agency must take proper precautions to ensure that all payments 

made to the contractor are properly applied against bills for materials and labor procured under 

the contract.

Form RD 1924-18, AIA Form G702, or other professionally recognized form that 

contains architect certification and approval, approval of the borrower, and conditional 

concurrence of Agency must be used. If the Agency form is not used, Agency concurrence 

language must be added to the form used. 

The following procedures must be used in approving construction payments: 

• Payment requests are submitted by the contractor to the owner. The request must 

include a statement showing total amount owed to date for material and labor 

procured under the contract. It may also include evidence showing that previous 

partial payments were applied properly. The payment requests should provide the 

same breakdown of construction costs as the final and approved cost estimate before 

construction began. 

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• The breakdown of cost items in the payment requests must be the same used in the 

final Agency-approved cost estimate on Form RD 1924-13. 

• The project architect and the borrower must review the request and confirm its 

accuracy, based on a site inspection, before signing and forwarding it to the Agency. 

• Payment requests may include costs associated with a change order only when the 

change order is approved by the Agency. Each approved change order should be 

entered as a separate cost line item on the request form. 

• The Agency will concur with the or require revision to the amount of partial payment 

based on a site inspection. 

• The borrower must retain a percentage of the amount due the contractor in 

accordance with RD Instruction 1924-A until all work has been completed and 

accepted. The surety company that issued the payment and performance bonds, if 

applicable, must provide a written consent for the retainage to be released. Retention 

percentages must be clearly articulated in the construction contract. When 

construction is determined to be substantially complete, but some work remains to be 

completed, an amount adequate to cover any remaining work items must be withheld 

from the contractor. See Paragraph 9.17 for a discussion of final payments at contract 

close-out. 

9.16 OBTAINING THE CHECK FOR MULTIPLE ADVANCES 

Once the Agency has approved the payment request, the Loan Servicer must order the 

check using AMAS. Note that the check request will take approximately 5 days from request to 

receipt. 

When the check is received it is deposited in the supervised bank account in accordance 

with RD Instruction 1902-A. As work is completed, the Agency can release these funds to the 

borrower. If all work for that payment request is completed at the time of check receipt, the 

entire amount of the check can be released immediately to the borrower. 

It is important to monitor the maximum debt limit (MDL) for the loan. The Loan 

Servicer should insure that that the disbursed amount plus accrued interest does not exceed the 

MDL. 

9.17 CONTRACT CLOSE-OUT 

When work is complete, the contract is closed out—all payments are made and all claims

are released. However, prior to close-out, the Agency and the borrower must ensure that all 

work was performed according to the contract and that it meets acceptable standards.

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A. Final Inspection 

The project architect should coordinate the final inspection with all parties, including 

the Agency and the interim lender's fee inspector (if applicable), so that all inspectors

may be present on the site at the same time. A final inspection must be conducted before 

the final payment to the contractor to ensure that all work is performed according to 

project plans and specifications and meets all applicable codes and quality standards. If 

the project is receiving interim financing, the Agency loan must not be closed until this 

inspection is performed. 

A final inspection is conducted when all construction work is completed, including 

any punch-list items, and the project is fully ready for its intended use. The owner shall 

acknowledge final acceptance by signing an Agency inspection report. The final 

inspection will be made at the earliest possible date after completion of the planned 

development. When several buildings are involved, inspections may be made upon 

completion of each building. No inspection will be recorded as a final inspection until all 

deficiencies or nonconforming conditions have been corrected. When codes and 

ordinances require inspections by local authorities, their final acceptance will be required 

prior to the Agency's final inspection and acceptance. 

B. Final Payment 

The final payment to the constructor will be based on the results of the final 

inspection. Before the final payment can be made, the final documents as listed below

must executed: 

• Form RD 1924-9, Certificate of Contractor’s Release, or other professionally 

recognized form. 

• Form RD 1924-10, Release by Claimants, or other professionally recognized form. 

• Form RD 1924-19, Builder’s Warranty or equivalent, and any related documents 

required by the contract. 

• Acceptance by responsible public authority. When local or state codes and ordinance 

require inspections, final acceptance by the local authority will be required prior to 

final inspection. A certificate of occupancy may be evidence of this inspection. 

• Final Certificate of Payment by the project architect. 

• Cost certification, if applicable. 

If work cannot be completed due to weather or other extenuating circumstances (e.g., 

landscaping work that cannot be done during the winter), the borrower will withhold 

funds to ensure completion of the work. Usually, the amount withheld is 1.5 to 2 times 

the dollar value of the work completed. (This serves as an incentive to the contractor to 

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HB-1-3560

return and complete the work.) 

Interim funds remaining because of early completion of construction will be returned. 

The leftover interest may be used for certain other eligible loan purposes critical to the 

completion of the project that were unknown to the applicant and contractor at the time 

the loan was approved. 

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(02-24-05) SPECIAL PN