Credit Risk Assessment

Document Type: Procedure
Version: 1.0
Last Updated: February 2026
Distribute To: CFO, Controller, BD Team, Project Managers

Purpose

Establish procedures for assessing credit risk of project owners and other parties to minimize exposure to payment problems.

Why Credit Risk Assessment Matters

Construction Payment Reality:

You extend credit by performing work before payment
Owner bankruptcy can mean total loss
Private owners have varying credit quality
Lien rights help but don't guarantee payment
One bad project can eliminate year's profit

Assessment Objectives:

Identify high-risk projects/owners
Inform go/no-go decisions
Structure deals to manage risk
Protect through lien rights
Avoid payment disasters

Risk Categories

Owner Types and Risk:

Owner Type	Typical Risk	Key Factors
Government	Low	Funding appropriated
Institutional	Low-Medium	Financial strength
Corporate	Medium	Company health
Developer	Medium-High	Project financing
Individual	Variable	Personal finances
Startup	High	Unproven entity

Owner Credit Assessment

Assessment Template:

================================================================
         OWNER CREDIT ASSESSMENT
================================================================

Project: _______________________
Owner: _______________________
Contract value: $_________________
Assessment date: _______________________
Assessed by: _______________________

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SECTION 1: OWNER INFORMATION

Type: ☐ Government  ☐ Institutional  ☐ Corporate  
      ☐ Developer  ☐ Individual  ☐ Other

Years in business: _____
Principals: _______________________
Address: _______________________

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SECTION 2: FINANCIAL STRENGTH

For Corporate/Developer Owners:

Financial statements available: ☐ Yes  ☐ No
If yes, source: ☐ Audited  ☐ Reviewed  ☐ Compiled  ☐ Internal

Key financials (if available):
  Revenue: $_________________
  Net worth: $_________________
  Current ratio: _____
  Debt/equity: _____

Credit report obtained: ☐ Yes  ☐ No
  D&B rating: _______
  Payment trends: _______
  Public filings: _______

Financial strength score: _____/10

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SECTION 3: PROJECT FINANCING

How is project funded?
☐ Cash (owner's funds)
☐ Conventional loan
☐ Construction loan
☐ Bond financing
☐ Investment partners
☐ Unknown

If financed:
  Lender: _______________________
  Loan amount: $_________________
  Loan-to-cost: _____%
  Interest reserve: ☐ Yes  ☐ No

Financing verification:
☐ Commitment letter reviewed
☐ Lender contact confirmed
☐ Equity verification

Financing risk score: _____/10

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SECTION 4: PROJECT ECONOMICS

Project type: _______________________
Projected value (complete): $_________________
Expected revenue/income: $_________________
Projected return: _____%

Does project make economic sense? ☐ Yes  ☐ Questionable  ☐ No

Pre-sales/pre-leasing: _____%
Comparable market performance: _______________________

Project economics score: _____/10

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SECTION 5: PAYMENT HISTORY

Have we worked with this owner before?
☐ Yes - Payment experience: ☐ Excellent  ☐ Good  ☐ Fair  ☐ Poor
☐ No

References from other contractors:
| Contractor | Project | Experience |
|------------|---------|------------|
|            |         |            |

Any known payment problems in market?
☐ No
☐ Yes: _______________________

Payment history score: _____/10

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SECTION 6: LIEN RIGHTS ANALYSIS

State: _______________________
Project type: ☐ Public (bond)  ☐ Private

Lien rights available: ☐ Yes  ☐ Limited  ☐ No

Notice requirements:
  Preliminary notice: ☐ Required  ☐ Not required
  Deadline: _______
  
Lien deadline: _______

Bond (if public):
  Payment bond: ☐ Yes  Amount: $_______

Lien protection score: _____/10

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OVERALL ASSESSMENT:

| Factor | Score | Weight | Weighted |
|--------|-------|--------|----------|
| Financial strength | /10 | 25% | |
| Project financing | /10 | 25% | |
| Project economics | /10 | 20% | |
| Payment history | /10 | 20% | |
| Lien protection | /10 | 10% | |
| TOTAL | | 100% | /10 |

RISK RATING:

8-10: Low risk - Standard terms
6-7.9: Moderate risk - Enhanced monitoring
4-5.9: Elevated risk - Risk mitigation required
Below 4: High risk - Do not proceed without mitigation

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RECOMMENDATION:

☐ Proceed with standard terms
☐ Proceed with risk mitigation measures
☐ Proceed only with prepayment/payment security
☐ Do not proceed

Mitigation measures (if applicable):
☐ Personal guarantee
☐ Letter of credit
☐ Escrow account
☐ Progress payment security
☐ Retainage reduction
☐ Shorter payment terms
☐ JV with bond
☐ Other: _______________________

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Risk Mitigation Strategies

By Risk Level:

Low Risk (Score 8-10):

Standard contract terms
Standard lien notice procedures
Normal billing and collection

Moderate Risk (Score 6-7.9):

Ensure lien rights perfected
Monthly credit monitoring
Prompt billing and follow-up
Consider retainage escrow

Elevated Risk (Score 4-5.9):

Require payment security
Personal guarantees
Progress payment verification
More frequent billing
Tighter collection efforts
Consider reducing contract size

High Risk (Below 4):

Prepayment or letter of credit
Cash on delivery for materials
Very short payment terms
Tight draw schedules
Consider declining work

Ongoing Monitoring

Credit Watch List:

================================================================
         CREDIT WATCH LIST
================================================================

Date: _______________________

HIGH-RISK ACCOUNTS:

| Owner | Project | Exposure | Risk Factors | Status |
|-------|---------|----------|--------------|--------|
|       |         | $        |              |        |
|       |         | $        |              |        |

Total high-risk exposure: $_________________

----------------------------------------------------------------

WATCH LIST (Moderate/Elevated Risk):

| Owner | Project | Exposure | Concern | Action |
|-------|---------|----------|---------|--------|
|       |         | $        |         |        |
|       |         | $        |         |        |

Total watch list exposure: $_________________

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CHANGES THIS PERIOD:

Added to watch: _______________________
Removed from watch: _______________________
Elevated risk: _______________________
Reduced risk: _______________________

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Warning Signs to Monitor:

Warning Sign	Action
Slow payment	Immediate follow-up
Excuses for non-payment	Escalate concern
Staff turnover at owner	Investigate
Rumors in market	Verify and monitor
Reduced project activity	Review exposure
Financing issues	Assess security
Disputes increasing	Document carefully

Payment Security Options

Types of Security:

Security Type	Protection Level	Cost/Effort
Personal guarantee	Medium	Low
Letter of credit	High	Medium
Escrow account	High	Medium
Payment bond	High	High
Construction lien	Medium	Low
UCC filing	Medium	Low

When to Require:

================================================================
         PAYMENT SECURITY DECISION
================================================================

Project: _______________________
Owner risk rating: _____
Contract value: $_________________

SECURITY REQUIREMENT:

Based on risk rating and contract value:

| Risk Rating | Under $500K | $500K-$2M | Over $2M |
|-------------|-------------|-----------|----------|
| High (1-4) | PG + Lien | LC or Escrow | LC + PG |
| Elevated (4-6) | PG | PG | PG + Escrow |
| Moderate (6-8) | Lien only | PG | PG |
| Low (8-10) | Standard | Standard | Standard |

Required security: _______________________

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Collection Escalation

When Payment Problems Occur:

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         COLLECTION ESCALATION PROTOCOL
================================================================

| Days Past Due | Action | Responsible |
|---------------|--------|-------------|
| 1-7 | Reminder call | AR/PM |
| 8-15 | Written reminder | AR |
| 16-30 | Demand letter | Controller |
| 31-45 | Escalate to management | CFO |
| 46-60 | Attorney demand | Legal |
| 61+ | File lien/bond claim | Legal |

CRITICAL: Do not miss lien deadlines!

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Credit Management Procedures
Lien Rights Guide
Go/No-Go Decision Process
Accounts Receivable Procedures

Template provided by support.construction. The time to worry about getting paid is before you do the work.

Purpose​

Why Credit Risk Assessment Matters​

Construction Payment Reality:​

Assessment Objectives:​

Risk Categories​

Owner Types and Risk:​

Owner Credit Assessment​

Assessment Template:​

Risk Mitigation Strategies​

By Risk Level:​

Ongoing Monitoring​

Credit Watch List:​

Warning Signs to Monitor:​

Payment Security Options​

Types of Security:​

When to Require:​

Collection Escalation​

When Payment Problems Occur:​

Related Documents​