General Contractor or Architect: Risks in Financing a New Build

Anyone building a new home in Switzerland generally chooses between two models. With a general contractor (GC), the builder entrusts the entire project to a provider who is contractually obliged to complete the house turnkey at a fixed price. In the architect model, the builder, advised by an architectural office, awards the various trades directly to craftsmen. Both approaches are established, but they differ fundamentally in how financial risks are distributed. Banks therefore scrutinize certain contractual arrangements more closely and set different requirements for equity, disbursement schedules, and collateral depending on the model.

How financing is structured in both models

In both cases, financing runs in two phases. During the construction phase, the bank sets up a construction loan, which is paid out in tranches either quarterly or upon reaching defined construction stages. The interest rates are higher than those of a completed mortgage, as the bank's risk is greater during construction. After work is finished and construction is accepted, the construction loan is consolidated into the final mortgage. A minimum equity share of 20 percent of the investment costs is standard, of which at least 10 percent must come without early withdrawal from pension funds.

In the architect model, the bank usually settles based on the contracts with the individual craftsmen. Each invoice is approved by the architectural office and paid from the construction account once the building progress has been verified. In the GC model, payment is made in lump sums based on a previously defined stage of construction, such as after excavation, shell, interior fit-out, and readiness for occupancy. Before each tranche, the bank requires a payment plan and checks whether the value progress achieved is consistent with the money disbursed.

Why banks scrutinize the GC contract more closely

“General contractor” is not a protected job title in Switzerland. Rights, duties, and qualifications are not bindingly regulated. In recent years, banks have therefore increased the depth of their checks and are increasingly requiring the following documents: the current commercial register extract and debt collection register extract of the GC, references for comparable projects, proof of insurance as well as ideally a performance bond and a warranty bond from a Swiss bank or insurance company. Some institutions decline to finance lump-sum contracts under a certain price or reduce the loan-to-value ratio if the GC is not well-established.

Three major risk areas are at the forefront. First, the insolvency risk of the general contractor during the construction phase. In case of bankruptcy, advance payments already made fall into the bankruptcy estate, the house remains half-finished, and the builder must reorganize the remaining work. Second, the builder’s lien, which gives a subcontractor the right to file a lien on the property even if the builder has already paid the GC. Third, the non-transparent lump sum calculation, which makes it difficult to verify later additional costs or quality compromises.

Securities that reduce the risk

A performance bond in the amount of 5 to 10 percent of the construction sum is activated if the GC does not fulfill their obligation. The issuing bank or insurance company covers extra costs for alternative companies. The warranty bond of the same magnitude applies to liability for defects and typically runs for two to five years beyond acceptance of construction.

The SIA Standard 118 is the most important contractual basis and consolidates the warranty liability for subcontractor services with the GC. Those who rely on SIA Standard 118 have a single point of contact for defects and do not have to pursue each craftsman individually in the event of a dispute. Banks attach great importance to ensuring that contracts for work are based on SIA Standard 118.

To protect against the builder’s lien, a joint and several surety from the GC for their subcontractors or a guarantee agreement can help, in which the GC undertakes to pay all subcontractors on time and proves this with payment confirmations. Some builders additionally require that the bank pays invoices directly to the subcontractors, and only pays the margin portion to the GC.

Where the architect model has its strengths

In the architect model, the builder formally bears more responsibility, but also enjoys greater transparency. Each craftsman settles separately, extra costs are directly attributable, and a construction management mandate from the architect ensures coordination. Banks tend to rate this model as less risky, since problems with individual craftsmen do not affect the overall project. However, they require careful cost calculation, often based on SIA Standard 102 for architects’ fees and detailed cost estimates.

The disadvantage is that the builder bears the cost risk. Without a fixed price, they are exposed to the risk of additional work and rising material costs. In practice, cost overruns in architectural projects are, depending on complexity, between 5 and 15 percent of the original estimate. Anyone choosing the architect model should therefore plan for a reserve of at least 10 percent in their equity calculation.

Practical recommendations for builders

First, have the GC contract reviewed by an independent construction advisor or construction lawyer before signing. The cost of CHF 1,000 to CHF 2,500 usually pays off by identifying weaknesses early.

Second, check the GC’s creditworthiness before signing the contract, especially with smaller providers or newly established companies. Most mortgage brokers and some banks offer this service free of charge.

Third, link the payment schedule to the bank to specific and verifiable stages of construction progress, not to calendar dates. A tranche is paid only when the documented construction progress is achieved.

Fourth, ensure comprehensive insurance coverage. Builder’s liability insurance, construction insurance, and building insurance are the minimum protection. Separate construction performance insurance covers damages during the construction phase, such as those caused by weather or theft.

Fifth, plan a sufficient equity reserve. A cushion of 5 to 10 percent in addition to the bank’s minimum requirement absorbs extra costs or delays without emergency financing.

Conclusion for the financing decision

Both models have their merits. Those seeking planning certainty and a fixed price are well advised to use a general contractor, provided that creditworthiness, guarantees, and contractual foundations are sound. Those who value maximum transparency and individual solutions are better off with the architect model but must bear the cost risk. In both cases, the bank should be involved early in the planning, as it sets specific requirements for contracts, guarantees, and disbursement plans, which structure the project from the outset.

Sources: FinanceScout24, Bauszene on GC Risks, ZKB Guide Construction Process.