Who pays cost overruns on an SBA construction loan?
Short answer
You do. On 7(a) construction above $350,000, the lender must see evidence you can pay overruns before approving a contract change. Neither the lender nor SBA must increase the loan. Source: SOP 50 10 8.1, Sec. B, Ch. 6, Para. A.4.
Overruns fall on the borrower. SOP 50 10 8.1, Section B, Ch. 6, Para. A.4, says the lender and SBA need not increase the loan to cover them.
7(a) construction above $350,000
- Before approving any contract modification, the lender must obtain evidence you can pay overruns or added construction financing costs.
- Your construction contract must bar material changes to the plans without the written consent of the lender and the surety.
- If you are injecting funds, they must go in before the loan disburses.
The 504 contingency
A 504 project can include a contingency fund for overruns. SOP 50 10 8.1, Section C, Ch. 1, Para. C.8, caps it at 15% of project construction costs. 13 CFR § 120.882(b) still says 10%, and the prior SOP 50 10 8 also said 10%. We found no SBA notice reconciling them, so ask your Certified Development Company (CDC) which limit it applies.
Unused contingency is handled by size. At 2% of the debenture or less, it may be refunded as working capitalMoney for day-to-day costs such as payroll, rent and inventory. Full definition. Above 2%, the debenture must be reduced by the unused amount.
What the 7(a) rules do not set
We found no required contingency percentage for 7(a) construction. Lender practice varies.
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