HB-1-3565 

5.1 INTRODUCTION 

A primary goal of the GRRHP is to encourage the construction of affordable yet safe and 

sanitary housing units in rural areas. To achieve this goal, the Agency will review the quality of 

construction of all housing developed under the program. However, the Agency will take a more 

active role during the construction phase when it is guaranteeing construction advances. This 

chapter details the basic construction requirements that must be met whenever the Agency is 

providing a loan guarantee, as well as the additional requirements that apply when the Agency 

guarantees construction advances. 

SECTION 1: PRE-CONSTRUCTION CONFERENCE 

5.2 CONFERENCE REQUIREMENTS 

After a contract is awarded and all documents are completed and signed and prior to any 

actual construction work, a pre-construction conference must be held between the borrower, 

contractor, architect, and lender representatives, including the lender's fee inspector. The 

Agency must be notified of the conference, and Agency representatives may attend. If a 

representative from the Agency is not able to attend, pre-conference meeting notes should be 

forwarded to the Agency to maintain in the Agency’s files. The conference is held to reach 

mutual understandings on all terms and conditions of the contract documents. The adequacy of 

the plans and specifications, as well as the cost estimates, must be reviewed. 

The Agency's environmental review must be examined, and any required mitigation 

measures discussed at this time. The construction schedule must be reviewed to ensure that the 

work can be completed in a timely manner. If any changes in the plans and specifications are 

proposed, they must be approved as described in Paragraph 5.18. The Agency has developed a 

suggested format to record the minutes of the pre-construction conference (Form RD 1924-16, 

“Record of Pre-Construction Conference)” which is available upon request. 

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Revised (07-30-15) PN 478 

CHAPTER 5: CONSTRUCTION REQUIREMENTS 

Key Topics in this Chapter 

 Section 1: Pre-Construction Conference 

 Section 2: Basic Construction Requirements 

 Section 3: Guarantees of Construction Advances 

 Section 4: Application Processing for Guarantees on Construction Advances 

 Section 5: Claims Processing for Guarantees on Construction Advances 
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SECTION 2: basic CONSTRUCTION requirements 

5.3 OVERVIEW 

The lender must ensure that the construction meets all local codes and that the product 

will comply with the Agency construction and environmental guidelines. Even when the 

construction loan is not guaranteed, the construction must meet local, state and Agency 

standards. Project construction plans and specifications will be discussed in full detail with the 

Agency during the planning meeting. The planning meeting must be scheduled after the lender 

has received the Notice to Proceed letter. 

Prior, during and after project construction, the Agency must be able to assess its quality 

and suitability for the GRRHP. When the Agency is not guaranteeing the construction, the State 

Director, in consultation with the State Architect, may waive some of the requirements for 

architectural services when they determine those services are not necessary to complete the 

project’s construction in accordance to Agency requirements. 

The lender must ensure that all of the construction requirements described in this section 

will be met when the Agency is providing either an Option Two or an Option Three guarantee. 

5.4 CONSTRUCTION CONTRACTOR EXPERIENCE AND CAPACITY 

The lender must ensure that the 

contractor has demonstrated overall financial 

stability and is experienced in building 

multifamily housing of a size, design, scope, 

and complexity that is similar to the proposed 

project. 

5.5 DEBARMENT AND SUSPENSION 

The lender must ensure that the general 

contractor and all subcontractors and suppliers 

sign certification statements indicating that they 

are not currently debarred or suspended from participating in federally funded programs. The 

certification statement is included on Form AD-1048 . The signed form must be submitted with 

each proposal to the borrower, including the proposal from the general contractor and each 

subcontractor. Failure to provide the signed certificate is sufficient grounds to reject the 

company's bid or proposal. 

5-2 

Construction Requirements 

The construction requirements cover the 

following topics: 

 Contractor experience and capacity; 

 Debarment and suspension; 

 Architectural Services and Capital Needs 

Assessments; 

 Plans, specifications, and cost estimates; 

 Environmental requirements; 

 Construction; 

 Inspections; and 

 Warranty 
HB-1-3565 

Information on debarred or suspended contractors is available on the Internet at 

http://www.epls.gov or https://www.sam.gov/portal/SAM/#1 . 

The Agency will verify that the general contractor does not appear on the debarment/ 

suspension list. Under any of the three guarantee options, Form AD-1048 must be reviewed by 

the lender as part of the application for loan guarantee (see Chapter 4, Section 3). 

5.6 ARCHITECTURAL SERVICES AND CAPITAL NEEDS ASSESSMENTS 

Capital Needs Assessments (CNAs) are required for every property to be rehabilitated regardless 

of the scope of work. A CNA provides a repair schedule for the property, indicating the 

necessary repairs and replacements to a property over the coming 20 years. It is not an estimate 

of existing rehabilitation needs or an estimate of rehabilitation costs. If a rehabilitation of a 

multifamily housing development is planned, the rehabilitation repair list or scope of work 

should be developed outside the CNA. A copy of the rehabilitation repair list should be provided 

to the CNA Provider. This rehabilitation repair list may be developed by the owner, a project 

architect, or an outside party (such as the CNA Provider hired by the owner). The CNA Provider 

should prepare an “as is” CNA, based on existing conditions at the property. Then, if requested 

by the owner and approved by the Agency, the CNA Provider would prepare a “post 

rehabilitation” CNA, indicating what repairs are planned for the property in the coming 20 years 

based on conditions after the rehabilitation is completed. Items to be replaced during 

rehabilitation, such as appliances, that will need to be replaced again during the 20 years will be 

included in the “post rehabilitation” CNA. Items, such as a new roof, that will not need 

replacement during the coming 20 years will not appear in the CNA. Because requirements for 

CNAs may change from time to time, the Agency may issue specific guidance on CNAs for the 

538 program through Unnumbered Letters. 

The services of a professional architect or engineer must be obtained to perform 

architectural services related to the construction of the project. This person or organization must 

be duly licensed and qualified in accordance with State law. 

Architectural services include: 

 Schematic designs and preliminary cost estimates; 

 Preparation of bid documents; 

 Design development exhibits; 

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HB-1-3565 

 Working drawings and specifications for the construction of the entire project in 

accordance with applicable regulations and codes and review of the final construction 

budget; 

 Assistance in the selection of the contractor and the preparation of the construction 

contract; 

 Attendance at the pre-construction conference to discuss work and schedules; 

 Administration of the construction contract including periodic inspections of all 

phases of construction; 

 Review/approval of pay requests; 

 Preparation of change orders/directives; 

 Preparation of “punchlist” items needing completion and documentation for, and 

participation in, the final inspection; 

 Advice and consultation regarding the warranty items; and 

 Development of final “as built” drawings. 

5.7 PLANS, SPECIFICATIONS, AND COST ESTIMATES 

The borrower must use the services of a professional architect or engineer duly licensed 

and qualified in accordance with State law to provide architectural services, including the 

development of plans, specifications, and cost estimates. The lender must provide a copy of 

preliminary plans, specifications, and cost estimates as part of the application package for 

Agency review. 

Plans, specifications, and cost estimates must fully describe all of the work to be completed, 

including all landscaping, construction, repairs, and site development work. The plans must be 

clear and accurate, with adequate dimensions and sufficient scale for estimating purposes. 

Technical data, tests, or engineering evaluations needed to support the design of the development 

must be included. 

Occasionally, the owner requests of the architect, a Life Cycle Cost Analysis (LCCA) 

report generated to establish “best value” for product selection for the project. The Life Cycle 

Cost Analysis is the sum of all recurring and one-time (non-recurring) costs over the full life 

span 

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HB-1-3565 

or a specified period of a good, service, structure, or system. The analysis includes purchase 

price, installation cost, operating costs, maintenance and upgrade costs, and remaining (residual 

or salvage) value at the end of ownership or its useful life. If available, the LCCA report should 

become a part of the Rural Development files to assist with development of a CNA for this 

property. 

The level of housing amenities provided in the plan must be competitive within that 

market. For example, washers, dryers, and air conditioners may be necessary for the units to be 

competitive within the local market. Amenities must not, however, include such luxury items 

such as swimming pools and health clubs unless specifically approved by the Agency. 

The State Architect will review the preliminary documents. This review will take into 

account the amenities being provided, the quality of materials being used, development costs, 

and other items pertinent to the quality and cost of construction and the operation of the 

property. The project architect must make appropriate changes to the plans, specifications, and 

cost estimates to respond to Agency concerns prior to submitting a final set of plans, 

specifications, and cost estimates to the lender. When these items are submitted to the lender, 

the project architect must also provide Form RD 1924-25, which is available from the Agency. 

The lender must provide a copy of the final plans, specifications, and cost estimates, 

together with the Plan Certification, to the Agency for written concurrence by the State 

Architect. All of these items will be retained as a part of the Agency file. Agency staff should 

include a statement “that there is evidence of the extent and quality of the work/product and RD 

is comfortable that the expected value is there” as part of resolution. Construction documents 

that must be submitted to the Agency are listed in Attachment 5-A. 

5.8 ENVIRONMENTAL REQUIREMENTS 

The Agency is required by law to complete an environmental review under the National 

Environmental Policy Act (NEPA) prior to issuing a conditional commitment of a guarantee to 

the lender. This environmental review may require redesign or relocation of structures, as well 

as mitigation measures to be taken during and after construction to protect any important 

resources. 

The lender must comply with all applicable Federal, State, and local laws regarding 

environmental protection and pollution abatement, in addition to applicable permitting and 

zoning ordinances. It is the responsibility of the lender to ensure that the borrower/developer, 

architect, and contractor are fully aware of and comply with the mitigation measures contained 

in the Agency's environmental review and all other applicable Federal, State, and local laws and 

regulations. 

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HB-1-3565 

5.9 CONSTRUCTION 

The contractual arrangements for the construction of a rural rental housing project must 

be contained in a written contract between the borrower and the construction company (general 

contractor). 

The construction contract form published by the American Institute of Architects (AIA) in 

AIA Document A-101 is acceptable provided that it is modified to meet the Agency’s 

requirements. Agency requirements for construction contracts are described in RD Instruction 

1924-A at §1924.13(e)(1)(ii) and RD Instruction 1924-A, Guide 1, Attachment 6. Other AIA 

documents used and supplemented in RD Instruction 1924-A, Guides 1 and 4, are: Instructions 

to Bidders; Architect’s Agreement; and General Conditions to the Construction Contract. The 

AIA construction contract form is available from the AIA. 

Construction of the housing and related facilities must be in conformance with the 

approved plans and specifications, applicable laws, ordinances, codes and regulations, and good 

construction practices. To avoid future maintenance problems, quality materials must be used. 

As a minimum, the materials must be consistent with those described in the Marshall & Swift 

Company's basic description of “average quality multifamily residences." Compare materials 

and systems and determine which are most economical, considering the sum of all costs (initial, 

operation, and maintenance). 

 

5.10 INSPECTIONS 

Actual construction work must be inspected by the lender to verify that the terms and 

conditions of the construction contract are met. This includes verifying that work is being 

performed in accordance with the approved plans and specifications without deviation. The 

contract documents and all referenced codes, standards, and other ordinances are the instruments 

used to judge the acceptability of the work. Items that do not meet the requirements and 

specifications of these documents must be removed, corrected, or accepted as change orders by 

the lender with an appropriate price adjustment. 

The lender may use its own staff or the services of a qualified independent fee inspector to 

periodically inspect the construction work to determine that the construction and land 

development conform to the drawings and specifications. In any case, the lender must ensure 

that the inspector has experience inspecting work similar in size, design, scope, and complexity 

to the project. Fees paid to the inspector must be reasonable and customary in the local area for 

similar work. The lender's inspections must be made as frequently as necessary. If 

environmental mitigation measures are required, the inspector must follow-up on the 

implementation of such measures and document compliance in his or her inspection report. 

Non-compliance with environmental mitigation measures must be promptly reported to the 

Agency. 

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At a minimum, inspections must be made at the three stages of development described 

below, as well as prior to each payment: 

 Stage 1. An initial inspection immediately prior to or during the placement 

of concrete footings or monolithic footings and floor slabs. 

 Stage 2. An inspection when the building is enclosed, structural members are still 

exposed, rough in for heating, plumbing, and electrical work is in place and visible, 

and wall insulation and vapor barriers are installed. Customarily, this is prior to 

installation of brick veneer or any interior finish which could include lath, wallboard, 

and finish flooring. 

 Stage 3. A final inspection when all on-site and off-site development has been 

completed and the structure is ready for occupancy for its intended use. 

Note that inspections at each of these stages must be made of each building. In a project 

with multiple buildings, inspection of one building will not be deemed sufficient to meet these 

requirements. 

The lender must notify the Agency when each of these three major inspections is 

scheduled so an Agency inspector can accompany the lender’s inspector. An Agency inspector 

must inspect the building to ensure compliance with Agency construction requirements. (See 

Attachment 5-A for Agency requirements to attend inspections.) In addition to these three major 

inspections, inspections must be made by the lender or its inspector prior to each payment to the 

contractor to confirm the estimated values of work completed and stored materials. Payments 

must be adjusted if there are any discrepancies in the reported values. 

Any work or material deficiencies noted or alleged as a result of any inspections by the 

lender's inspector must be reported to the borrower or borrower's architect or other party with the 

authority to demand that the contractor make necessary corrections. 

Documentation must be provided for deviations from the approved plans and 

specifications. For cases where the Agency guarantee is only on the permanent loan, “as built” 

plans must be provided. For cases where the Agency is guaranteeing the construction advance as 

well as the permanent loan, contract change orders must be submitted as discussed in Paragraph 

5.18. 

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5.11 WARRANTY 

The lender must ensure that the contractor or contractors provide a legally enforceable, 

one-year warranty to the owner indicating that the work done and materials supplied conform to 

those specified in the contract documents and applicable regulations. The warranty must provide 

that the contractor agrees to repair defective workmanship and repair or replace any defective 

materials at the contractor’s expense for the period of the warranty. The lender will do its first 

annual inspection of the property as defined in Chapter 7, Paragraph 7.14 A.2. before the 

expiration of the warranty period. The first annual inspection must include 100 percent of the 

units. 

5.12 CONSTRUCTION REQUIREMENTS CERTIFICATION 

To ensure that each of the basic construction requirements described in Section 2 of this

chapter have been met, the lender must provide a signed certification to the Agency prior to the 

issuance of the loan guarantee.

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SECTION 3: Guarantees of CONSTRUCTION ADVANCEs 

5.13 OVERVIEW 

The Agency will guarantee 

construction advances, secured by an 

acceptable credit enhancement, as part of an 

Option Two or an Option Three loan 

guarantee. Under Option Two, the Agency 

may provide a guarantee that covers up to 90 

percent of the amounts actually advanced by 

the lender. As more construction work is 

accomplished and more funds are advanced by 

the lender, the amount of the advanced funds covered by the guarantee increases. In no case will 

the guarantee during the construction period exceed 90 percent of the original principal amount 

of the loan. 

Option Three is a single continuous guarantee for construction and permanent loans for 

which there are no conversion requirements to the permanent loan. Similar to Option Two, the 

lender underwrites the loan, and the Agency provides a guarantee that covers up to 90 percent of 

the amounts actually advanced by the lender. The guarantee will go into effect with the first 

draw of the construction loan. As more construction work is accomplished and more funds are 

advanced by the lender, the advanced funds covered by the guarantee increases. In no case will 

the guarantee during the construction period exceed 90 percent of the original principal amount 

of the loan. 

Under both Options Two and Three, the Agency will only guarantee construction 

advances which have acceptable credit enhancements. Acceptable credit enhancements include 

any one of the following: 

 Surety bonding or performance and payment bonding acceptable to the Agency; 

 An irrevocable letter of credit acceptable to the Agency. 

 A pledge to the lender of additional collateral that is acceptable to the Agency. 

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Example of a Guarantee of 

Construction Advances

Total development cost = $1,000,000 

Lender underwritten loan = $900,000 

First loan advance = $70,000 

Guarantee ($70,000 x 90%) = $63,000 

First plus second loan advances = $150,000 

Guarantee ($150,000 x 90%) = $135,000 
HB-1-3565 

5.14 INSURANCE 

The lender must ensure that property and liability insurance are in place during the course 

of construction to protect the borrower, the lender, and the contractor from a variety of losses. 

The construction contract must not become valid until proof of insurance is obtained. The 

contractor is usually responsible for obtaining and carrying the insurance policies. The amount 

of coverage, the deductible, and the beneficiary of the policy must be in accordance with 

commonly accepted lending practices or State or local law. 

5.15 SURETIES 

Payment and performance bonds covering the contractor’s work must be 

executed prior to the start of any work. The bonds must each have a face value of 100 

percent of the construction contract. These surety bonds must be obtained from a 

corporate bonding company listed on the current Department of Treasury Circular 570

(published annually in the Federal Register) as holding a certificate of authority as an acceptable 

surety on Federal bonds and legally doing business in the state where the project is located. The 

bonds must remain in effect until the date of final acceptance of work by the owner and the 

lender and evidence of lien free completion. 

5.16 LETTERS OF CREDIT 

In lieu of payment and performance bonds, the lender may accept an unconditional and 

irrevocable letter of credit issued by another lending institution to secure the completion of 

construction. The letter of credit must equal not less than 25 percent of the construction contract 

and must remain in effect until the date of final acceptance of work by the owner and the lender, 

and all certificates of occupancy from the local jurisdiction are issued. In addition, the letter of 

credit must stipulate that the lending institution that issued the letter of credit, upon written 

notification by the owner or lender of the contractor’s failure to perform under the terms of the 

contract, will provide payment for an amount not less than 25 percent of the amount of the 

contract to satisfy all prior debts incurred by the contractor in performing the contract and all 

funds necessary to complete the work.

An irrevocable letter of credit issued by a bank or other approved financial institution 

must meet strict credit quality requirements (see Exhibit 5-1 for credit quality requirements) and 

be valid and collectable. 

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Exhibit 5-1 

Credit Quality Requirements for Letters of Credit 

Thomson's Bankwatch N/A "B" or better 

 

 S&P Long term debt, if rated, "A" or better 

 or long term bank deposit 

 

 Moody's Long term debt, if rated, "A" or better 

 or long term bank deposit 

Criteria for letters of credit are as follows: 

 The issuing institution must not be an affiliate of the lender. 

 Federal Home Loan District Bank enhancement of a member bank letter of credit is 

an acceptable method for meeting Agency credit standards. 

 The lender must be named as the sole beneficiary. 

 The term must be a minimum of one year and remain in effect until the requirements 

for release of the letter of credit are met. 

 The form of the letter of credit and the sight draft (demand for payment) must be 

reviewed by the Agency. However, the guaranteed lender is solely responsible for 

ensuring that the letter of credit is acceptable and enforceable. 

 For GRRHP loans that are backing Ginnie Mae guaranteed securities, the lender will 

follow Ginnie Mae procedures for letters of credit. 

5.17 PAYMENT PROCEDURES 

Payments to the general contractor should usually be made on a monthly basis. 

The format of the payment request must be consistent with AIA Document 702, 

Application and Certificate for Payment. The payment requests must provide the same 

breakdown of construction costs as the final and approved cost estimate before construction 

began. They must be signed by the contractor and the architect. The Agency staff will not sign 

the payment request forms. 

The amounts of the partial payments are based on the amount of work completed, the 

amount of materials stored on site, and the amount of retainage. The determination of the 

amount of work completed and the amount of stored materials must be made by the lender after 

consultation with the borrower, the borrower's architect, and on-site observations. The amount 

of retainage will be set by the lender. The retainage amount must be withheld until 100 percent 

of the construction contract is complete, including punch list items. 

. 

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 Payment requests may include charges for change orders only after the change orders 

have been signed by the lender and the Agency representative. Partial payments for overhead 

and profit may be made to contractors provided the percentages paid on each item are no higher 

than the percentage of total construction completed. 

When construction is determined to be substantially complete, an amount determined to 

be adequate to cover any remaining work items must be withheld from the contractor. This 

amount is normally included in the retainage. If the amount of remaining work is higher than the 

budgeted retainage, then the retainage must be adjusted upward accordingly. 

5.18 CONTRACT CHANGE ORDERS 

 Any construction changes that occur after a contract is executed, which affect design, 

costs, time, or the provision of financial assistance in connection with the change order, must be 

documented as a contract change order. Changes that do not affect design, cost, or time are 

deemed minor and must be documented as field orders by the architect. These minor changes do 

not require the preparation of a change order. All proposed change orders must be in writing and 

signed by the borrower, borrower's architect, contractor, lender, and Agency representative 

before the work involved in the change is started or the costs are included in a payment request. 

Provision of additional financial assistance in connection with a contract change order does not 

require preparation of an environmental review by the Agency, provided that the action will not 

alter the purpose, operation, location, or design of the project as originally approved. 

Agency approval of contract change orders must be obtained to ensure that changes in 

design or quality of materials/construction do not adversely impact the appraised value of the 

completed project, holding other appraisal factors (income approach and comparable sales) 

constant. 

5.19 MODIFICATION OF MAXIMUM AMOUNT GUARANTEED UNDER A 

CONSTRUCTION/PERMANENT LOAN OR A PERMANENT ONLY LOAN OR FOR A 

CONTINUOUS GUARANTEE LOAN 

There are two situations, which may result in a modification of the maximum loan 

amount that will be guaranteed during the construction period. 

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 If following full underwriting by the lender and the issuance by the Agency of a 

conditional commitment to guarantee part of the loan, but prior to the start of 

construction, there are changes in the proposed construction or development work 

that will reduce the loan amount, the lender must notify the Agency. While the 

amount covered by the guarantee will be reduced, the percentage of the loan amount 

guaranteed will remain the same. 

 If the construction is not in accordance with approved plans and specifications, the 

Agency may not issue the guarantee. At the Agency’s discretion it may issue the 

guarantee at a reduced the guarantee amount. For example, if the materials used are 

below the standards described in the approved specifications, the Agency may 

disapprove or reduce the guarantee percentage. 

5.20 REPORTING DURING CONSTRUCTION PERIOD 

The lender is responsible for ensuring that the Agency is provided 

a copy of approved payment estimates and the related inspection reports 

prepared by the lender's fee inspector and by the project architect. This 

documentation must be provided in a timely fashion to the Agency 

following each draw. 

Once a new draw is issued, the lender is responsible for ensuring that the Agency has the 

information needed to adjust the guarantee amount. In addition, the lender must submit Form 

RD 1980-41, “Guaranteed Loan Status Report”, on a monthly basis to the USDA Finance 

Office. 

Exhibit 5-2 shows the notifications to the Agency required during the construction 

guarantee period. 

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Exhibit 5-2 

Notifications Required During the Construction Guarantee Period 

Notification When to Notify Reference 

Major inspections As soon as a major inspection is 

scheduled 

Paragraph 5.10 

Project changes requiring 

an environmental review 

As soon as the project change is 

proposed that alters purpose, 

operation, location, or design 

Paragraph 5.18 

Project changes reducing 

the loan amount 

After Agency issues guarantee but 

prior to construction start 

Paragraph 5.19 
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5.21 Final payment 

The lender must ensure the following items have been completed before final payment is 

provided to the contractor. 

 Final inspection. The lender should coordinate the final inspection with all parties, 

including the borrower's architect, the lender's fee inspector, the local government, and 

the Agency, so that the inspections may be done at the same time. In all cases, the 

Agency will conduct a final inspection. 

 Completion of construction. All construction must have been completed in a manner 

acceptable to the Agency. The borrower, the borrower's architect, and any local 

jurisdiction must state their final acceptance, in writing, before the lender issues its 

acceptance, as defined in Paragraph 5.16. 

 Final cost certification. The lender is responsible for certifying to the Agency that the 

borrower's cost certification accurately represents the actual cost of the work 

performed in connection with the construction. If an identity of interest between the 

developer and the contractor exists, the cost certification must also be audited. 

However, if a cost certification is prepared for any other funding source (e.g., an 

agency providing Low-Income Housing Tax Credits), then a copy of that cost 

certification may be accepted. If the cost certification indicates any "to be paid" 

costs, those amounts must be included in the amount of retainage being withheld.

 Warranties. A builder's warranty of at least one year and other required 

product/material warranties and information must be provided to the borrower before 

final payment is made. The warranties should become effective on the date of 

substantial completion. 

 Final payment documents. All final payment documents required by the lender, such 

as release of liens, must have been executed and must be available at the time of final 

payment. 

5.22 CERTIFICATION THAT ADDITIONAL REQUIREMENTS HAVE BEEN MET 

To ensure that the lender has addressed each of the additional construction requirements 

described in Section 3 of this chapter, the lender must include a signed form certifying that each 

requirement has been met prior to the Agency issuance of a permanent loan guarantee. The 

lender must not issue final payment until the requirements in Paragraph 5.21 have been fulfilled. 

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SECTION 4: APPLICATION PROCESSING FOR 

GUARANTEES ON CONSTRUCTION ADVANCES 

5.23 OVERVIEW OF PROCESS 

Once construction begins, the guarantee will be adjusted based on the amount of money 

advanced. Adjustment of the guarantee will be automatic as long as the lender complies with the 

reporting requirements of this chapter. 

SECTION 5: CLAIMS PROCESSING FOR GUARANTEES 

ON CONSTRUCTION ADVANCES 

5.24 OVERVIEW OF PROCESS 

The maximum guarantee of construction advances related to a construction and 

permanent loan will not at any time exceed the lesser of 90 percent [or the percent established by 

the Agency and announced through a Notice in the Federal Register] of the amount of principal 

and accrued interest up to default for amounts which exceed the original advance if for eligible 

uses of loan proceeds or 90 percent of the original principal amount and accrued interest up to 

default of the loan. The Agency’s guarantee will cover losses to the extent aforementioned once 

all sureties/insurances and/or performance and payment bonds have fully performed their 

contractual obligations. 

For loans on construction advances where a default occurs prior to the issuance of the 

permanent guarantee, liquidation, disposition, and claims processing should be performed in 

accordance with Chapter 10. 

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Attachment 5-A 

CONSTRUCTION DOCUMENTS THAT MUST BE SUBMITTED FOR ANY LOAN GUARANTEE

(GUIDANCE FOR RURAL DEVELOPMENT STAFF)

Issue Option One Guarantee Options Two and Three 

Guarantees 

Paragraph

Pre-construction Conference Agency will attend, if 

available 7

Agency will attend, if available 7 5.2 

Preliminary plans, specs, and cost 

estimates 

Review, provide 

comments, and file 1

Review, provide comments, and file 

1

5.7 

Design Development Documents Review, provide 

comments, and file 2

Review, provide comments, and file 

2

5.7 

Final (WD) plans, specs, cost 

estimate, and Form RD 1924-25 

Review, concur, and file3 Review, concur, and file 3 5.7 

Construction Contract -------------------------- Review, concur, and file 4 5.9 

Debarment and Suspension Review website list 5 Review website list 5 5.5 

Surety Bonds and Letters of 

Credit

-------------------------- Review, approve, and file 6 5.15 and 

5.16

Inspections: 

Footing 

Framing 

Final

 

Conduct, if available 

Conduct, if available 

Conduct, document, and 

file 8

 

Conduct, document, and file. 

Conduct, document, and file. 

Conduct, document, and file. 

5.10 

Payments to contractor ------------------------- File only 9 5.17 

Change Orders Review and file Review, approve, and file 10 5.18 

Final Cost Certification Review, accept, and file 11 Review, accept, and file 11 5.21 

As-built plans and specs Review Review 5.10 

Certification that additional 

construction requirements were 

met 

-------------------------- -------------------------- 5.22 

Form RD 1980-41 -------------------------- Monitor 5.20 

Lender –approved payment 

estimates and related inspection 

reports 

Review inspection reports 

and file 

Review and file 5.17 and 

5.20 

NOTES 

1. These are submitted after the preplanning meeting and with the application. They may include life cycle cost analysis 

for roofing, paving, exterior wall, and mechanical systems, etc. 

2. These are in response to the preliminary design review. These documents may be skipped and go directly to the final 

(WD) documents. 

3. The WD Documents include the plan certification and bidding and contract documents due prior to the start of 

construction. 

4. A written agreement is NOT required to be on an AIA form. 

5. State Office reviews the GSA website list for the general contractor. Lender reviews Form AD-1048. 

6. Letter of Credit may be substituted for payment and performance bonds. 

7. Conference must be held. Agency attendance is highly recommended. 

8. Agency must be notified of all inspections. Agency participation is required only in the final inspection. 

9. Payments are processed and approved by the lender upon receipt of all documentation and signatures cited in 5.17. 

10. Agency uses same criteria employed in reviewing final plans and specs. 

11. Cost certification from IOI contractors must be audited. 

(02-23-12) PN 455 

Revised (07-30-15) PN 478