Two surety bonds on a construction contract: one backs payment of subcontractors and suppliers, the other backs completion of the work.
A surety company issues both bonds for the contractor. The OCC handbook explains why a lender cares. A payment bond reduces the chance that unpaid subcontractors and material suppliers record liens ahead of the mortgage. A performance bond backs completion of the project if the contractor does not finish.
The handbook says a bank may require bonds on material projects where the borrower and the contractor are separate companies. A contractor related to the borrower generally cannot be bonded for that job.
Federal work is where bonds are mandatory. The statute once known as the Miller Act requires both bonds before award of a federal construction contract of more than $100,000, and the Federal Acquisition Regulation sets the working threshold at contracts exceeding $150,000. Under that regulation each bond normally equals 100 percent of the original contract price.
On private jobs the bond is a cost in the budget. Ask the lender early whether it is required.
How it shows up in the data here
Bonds are contract documents, and no public file shows which projects or loans carry them. Bank call reports show construction and land balances held, with no detail on contractors or sureties. Lenders with construction on their books are listed at construction lenders. Whether a given bank requires bonding, and at what project size, is set by its own policy and is not in the data here.
Go further
- Construction lenders by state: Lenders with construction balances, state by state.
- Deal summary builder: Turn the facts of a deal into a clean one-page summary you can copy or print. Nothing is saved or sent.
- Construction loan package checklist: A construction lender is lending against a building that does not exist yet. The package has to show what it will cost, who will build it, where every dollar comes from, and how the loan gets repaid when it is done.
Related terms
- Construction loan: A short-term loan that pays for building or renovating a property, advanced in stages as work is finished and repaid from a sale or a permanent loan.
- Retainage: The share of each construction payment that is held back until the job is finished and the liens are cleared.
- Completion guaranty: A guarantor's promise to the lender that a project will be finished and its bills paid, without a promise to repay the whole loan.
- Cost overrun: The amount by which a construction project costs more than its budget, which the borrower is normally expected to cover.
- Standby letter of credit: A bank's written promise to pay a third party if the bank's customer does not repay a debt or does not perform an obligation.
Sources
Plain definitions for orientation, not legal, tax or credit advice. A lender's own policy decides what it will do.