My Contractor Walked Off the Job — What Happens to My Construction Loan?
Your contractor walked off the job mid-build. Your loan is running, interest is accruing, and the project is sitting still. Here is exactly what happens to your construction loan, what you are obligated to do, and the steps to take right now to protect your project and your financing.
Contractor Walked Off the Job — What This Means for Your Construction Loan
When a contractor walks off a construction project mid-build, the immediate instinct is to focus on the contractor — the breach, the legal exposure, the damage to the project. Those matters are important and they need to be addressed. But your construction loan does not pause while that happens. Interest continues to accrue on every dollar that has been disbursed. Your loan term is still counting down. And your lender needs to know what is happening.
The most important thing you can do in the first 24 hours after a contractor walkoff is call your lender and tell them what happened. Not because lenders have a contractual right to know — though most loan agreements do require you to notify the lender of material changes to the project — but because a lender who knows about a contractor issue early is a lender who can help you navigate it. A lender who discovers the issue six weeks later when draws have stopped and the project is visibly stalled is a lender who is already planning for a default scenario. Early, proactive communication is the single most important thing you can do to protect your financing when a project hits a significant problem.
Do These Things Within 24 Hours of the Contractor Walking
How a Contractor Walkoff Affects Your Construction Loan
Draws Are Paused Until a Replacement Is in Place
Your construction loan draws are tied to construction milestones. If work has stopped because the contractor has walked, there are no milestones being completed and therefore no draws to request. The holdback sits in reserve while the project is stalled. Interest continues to accrue on the amounts already disbursed, but no new funds are advanced until construction resumes with a qualified replacement contractor.
Your Loan Term Is Still Running
A contractor walkoff does not pause your loan term. If your loan matures in six months and the contractor replacement process takes two months, you now have four months remaining to complete a project that was already on a tight timeline. Address the replacement as fast as possible and communicate with your lender about a potential extension if the delay is material to your ability to complete within the original term.
Your Monthly Interest Payments Are Still Due
Construction loan interest payments are due on schedule regardless of what is happening on the project. A stalled project does not reduce your payment obligations. If the contractor walkoff creates a cash flow issue that affects your ability to make your monthly interest payment, call your lender immediately. Borrowers who communicate proactively are in a significantly better position to work through a temporary payment difficulty than those who miss payments without explanation.
Budget Modifications May Be Required
A replacement contractor rarely comes in at exactly the same price as the departed contractor, particularly when they are inheriting a partially completed project. Replacement bids typically run higher because the new contractor carries risk for the departed contractor’s work quality and must integrate with work that is already in place. If replacement costs create a budget overrun, discuss a loan modification with your lender early. The two conditions for a modification are that you are current on payments and that the modified total loan stays within LTV requirements.
What Mayflower Venture Partners Does When a Borrower Has a Contractor Problem
When one of our borrowers calls us with a contractor issue, our first response is not to review default provisions in the loan agreement. It is to understand the situation fully and help the borrower find the fastest path to a completed project. A completed project that sells is the outcome we are both working toward. A stalled project that goes into default serves no one.
We can often help borrowers identify replacement contractors through our network of developers and professionals active in the New England new construction market. We have seen contractor situations resolved quickly and we have seen them drag on for months — the difference is almost always how fast the borrower moves to replace the contractor and how proactively they communicate with us throughout the process.
If you are dealing with a contractor crisis on a project financed with another lender and want to discuss your options — including whether refinancing with Mayflower Venture Partners makes sense given your current situation — call us. We will give you an honest perspective on what we can and cannot do for you.
We finance new construction throughout Massachusetts, Connecticut, Rhode Island, New Hampshire, and Maine. Read more about what happens if a construction loan runs out of money for related guidance on managing mid-project financial challenges.
Contractor Problem? Call Us First.
Direct private lender across New England. We have navigated contractor situations with borrowers before. Call us and let’s figure out the path forward.