Non Completion Risk in Construction Loans
Lenders who provide construction loans have many risk factors to consider, but one of the major factors is non-completion of the project. A construction project can fail to complete for a variety of reasons and it’s important for any company applying for a construction loan to consider these.
A construction project can fail due to inadequate funding. It’s important when preparing to apply for a construction loan to adequately budget for as many contingencies as possible. The plan should allow for things such as costs increasing during the project phases and cash flow issues relating to other projects. Failure to properly estimate costs for the entire project can cause the project to run out of funds prior to completion.
Another possible cause for non completion is subcontractor failure. A construction company should ascertain that their subcontractor base is solid and not subject to problems of being spread too thin, financial issues, or personnel problems. Once a project starts, it’s expensive to replace a subcontractor so it’s best to qualify them thoroughly prior to starting with them.
Vandalism is another possible cause for non completion. A construction company should make sure the project has adequate security to thwart any serious vandals. Other natural causes of non completion can’t always be avoided. These would include natural disasters such as hurricanes or tornadoes. But taking into consideration things that can be planned for will help the lender balance the risk factors in a construction loan.