From Les Sparks:

First, let me say that there are no issues auditing both the mortgagor and the contractor. It happens all of the time.

The second question is covered below with material from the Chapter 13 of the Cost Certification Guide. Your statement is 50% correct. Contractors must certify when they are related party – but also when they are cost-plus contractors.

13.6 Entities That Must Cost Certify
A. The borrower must certify under all programs, except where HUD has determined at the time of issuance of the Firm Commitment that the insured mortgage under: a) Section 221(d)/220/231 new construction/substantial rehabilitation is 80% or less of replacement cost and the project is will benefit from LIHTC, Historic Tax Credits or New Market Tax Credits, or b) Section 207/223(f) refinance is 80% or less of value.

B. When the borrower is required to cost certify, the Contractor must also cost certify when:
1. The Contractor has an identity of interest with the mortgagor, whether such identity of interest existed or developed before or after the initial closing (for insured advances projects) or issuance of the Firm Commitment (for insurance upon completion projects); and/or
2. The Contractor used the Construction Contract-Cost Plus, Form HUD-92442M, whether or not any identity of interest with the borrower existed or developed.

C. When the Borrower is required to cost certify the subcontractors at any tier, equipment lessors, material suppliers and manufacturers of industrialized housing must cost certify where:
1. The total of all subcontracts, purchases, and leases are more than 0.5% of the mortgage, and
2. An identity of interest exists or comes into being between such subcontractor, equipment lessor, material supplier, or manufacturer of industrialized housing and either:
a. The borrower; or
b. The contractor, where the contractor must cost certify.

Let me know if there are more questions.

Les