In today’s market, there is a greater need than ever to minimize the financial risk of construction loans. To reduce risks, lenders have traditionally looked to payment and performance (P&P) bonds. Most public projects require payment and performance bonds, however, in the private construction and lending space, there are some limitations to using bonds for risk management. Some projects cannot be bonded (ex: multi-year jobs, inexperienced contractors, when an owner is also the GC, etc.). In addition, P&P bonds can only be triggered by a default, at which point massive problems have already incapacitated the project. The resulting time for filing liens, adjudication, and final fiduciary resolution can drag on for months, sometimes years. Meanwhile, essential sub-contractors can be lost due to lack of payment, while the materials and unfinished site deteriorate, possibly endangering the project altogether.
While bonds may have been considered the industry standard for many years, they are not necessarily the best solution for all business objectives in today’s market and are not the only safety net for lenders. One of the most comprehensive risk management approaches, called a Completion Commitment (CC), involves a series of proactive control measures implemented before and after closing to help to keep projects on budget and on schedule, and to minimize the risk of default. It includes four key risk management building blocks and an additional commitment of professional services to course-correct if needed.