Does SBA construction require a payment and performance bond?
Short answer
On a 7(a) loan, construction above $350,000 needs a 100% bond unless a construction manager provides funds control. At $350,000 or less, SBA waives it if the lender uses its usual construction policies. Source: 13 CFR § 120.200.
It depends on the size of the construction component. 13 CFR § 120.200 requires a 100% payment and performance bond and builder's risk insurance on 7(a) construction, unless SBA waives it. SOP 50 10 8.1, Section B, Ch. 6, Para. A.4, explains the waivers.
Construction of $350,000 or less
SBA has a blanket waiver of the bonds and of proof of builder's risk and workers' compensation coverage. The lender must apply the same risk policies it uses on similar non-SBA construction loans.
Construction above $350,000
Before construction starts, the lender must obtain evidence of a 100% performance bond and a labor and materials payment bond from the licensed contractor. The contractor must also carry builder's risk and workers' compensation insurance.
Only a corporate surety approved by the Treasury Department may issue these bonds, using an American Institute of Architects form or comparable coverage. Only the borrower may be named as obligee.
The waiver above $350,000
The blanket waiver also applies when the lender retains a third-party construction management firm. It applies too when the lender has an internal department that routinely manages similar loans. The monitoring must include funds control for all disbursements.
Lien risk stays
The lender must document completion to plans and obtain lien waivers and releases. A mechanics' lien that takes priority can lead to a repair or denial of the guaranty.
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