What is the difference between a completion guarantee and a performance bond?

A performance bond is issued by a bank or insurer for the builder and pays up to a fixed sum if the builder defaults under its contract. A completion guarantee is given by the developer's owners or parent and promises the finished building, whatever the cause of the trouble. On a development loan the lender commonly has both: the bond recovers part of the cost of a builder's failure, and the guarantee covers what the bond does not.

Does a completion guarantee guarantee repayment of the loan?

Not by itself. It promises that the building will be finished and paid for, so that the lender holds a completed asset rather than a stalled site. If sales or the refinance then fall short of the debt, that loss sits outside the completion guarantee. Lenders that want the developer's backer to answer for repayment take a separate guarantee of the loan, often limited in amount.

When does a completion guarantee end?

When the event the document names has happened, which is usually practical completion as certified under the building contract. Many documents add conditions: the local building authority's certificate that the building may be occupied, the final account with the builder settled, and no unpaid claims by subcontractors. Until all of them are met the guarantor remains liable, so the release clause is one of the terms a guarantor's adviser reads most closely.

What is a completion guarantee in project finance?

It is the sponsors' support for a project loan during construction. Lenders to a power plant, a mine or an infrastructure project rely on the finished project's cash flow, so until the project is built and passes a completion test, the sponsors guarantee the debt or undertake to fund whatever completion needs. The tests are negotiated deal by deal and often include running at a stated level of output for a period, not only being built.

// WORKED EXAMPLEWHAT THE GUARANTEE PROMISES

Completion Guarantee: What It Promises a Lender

It promises a building, not a sum, and that is harder to value.

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-07

// THE SHORT ANSWER

A completion guarantee is the lender's answer to the question of what happens if a building stops halfway. The guarantor, usually whoever stands behind the developer, undertakes that the project will reach practical completion and that it will meet whatever that takes, whether the cause is a rise in cost, a builder's collapse or a delay that runs up interest. Where a cost overrun guarantee names a sum, this one names an outcome. That makes it stronger on paper and harder to value, because the lender has to estimate the cost of the worst way the build could go.

BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

// MAKE THE CALL

Issue 08 — Basalt Ridge Developments. A new-to-bank developer, a claimed 28% ROE and two other banks circling. Your bank has a growth target. Your call first, then the senior banker's.

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// 01 — WHY A LENDER WANTS THE BUILDING FINISHED

A half-built building is often worth less than the land and the money already spent on it. Few buyers want someone else's frame, with someone else's defects and a contract dispute attached. A development loan is repaid from a finished project, by sale or by refinance, so the lender's exit depends on completion more than on anything else in the file.

If the project stops, the lender's choices are poor: sell the site as it stands, or fund the rest itself and become a developer it did not set out to be. A completion guarantee moves that problem back to the people who chose the project, the builder and the budget. It is the developer's backer, not the bank, who must find a new builder, pay what it costs and carry the loan while that happens.

// 02 — WHAT THE GUARANTOR UNDERTAKES

The operative clause usually has three parts. The guarantor undertakes to procure completion, to the plans and specification the lender approved and often by a stated date. It undertakes to pay whatever that costs beyond the money still available in the facility and the equity. And it may undertake to meet interest and holding costs through any delay, either in the same document or in a separate interest or carry guarantee.

If the guarantor does not perform, the document commonly gives the lender more than one route. The quickest is a money claim: the lender's quantity surveyor prices what is left, the undrawn loan comes off, and the guarantor pays the gap, which lets the bank take the project out of the guarantor's hands. The slower routes are holding the guarantor to the building work, or appointing a builder itself and recovering the excess. Many are drafted as an indemnity as well as a guarantee, so the guarantor answers as a principal and not only for the borrower's own obligations. The guarantee usually ends at practical completion, sometimes only once the building authority's certificate has issued, such as New Zealand's code compliance certificate, and the final account with the builder is settled.

// 03 — THE EXAMPLE

A developer, constructed for this page like every figure in it, is building a four-storey medical and office building for US$22.0m: land US$4.5m, a building contract of US$13.0m, contingency US$0.6m, fees US$1.4m and finance US$2.5m. Its equity of US$8.0m went in first and the bank lends US$14.0m. The builder gives a performance bond for 10% of the contract, a level that belongs to the example. At month nine, with US$7.0m paid to it, the builder enters insolvency. A replacement builder will finish for US$8.3m, including making good what it inherits, and retendering stops the site for five months.

Cost to finish with the replacement builder 8.3

Interest through the five-month stop 0.6

Needed to reach practical completion 8.9

Left in the budget: contract 6.0 + contingency 0.4 − 6.4

Shortfall 2.5

Builder's bond, when and if it pays − 1.3

Left with the guarantor 1.2

The guarantor's cash need is US$2.5m, not US$1.2m, until the bond pays. An on-demand bond pays quickly; a conditional one can be disputed by the bond provider for months, and the site cannot wait. Had the developer's backer given only a cost overrun guarantee covering construction, capped at the example's US$1.0m, it would answer for the construction shortfall of US$1.9m only up to that cap, and for US$0.6m once the bond had paid; the five months of interest would fall outside it. Under the completion guarantee it must also run the retender and reach completion by the guarantee's date, which matters when a tenant's pre-let has a sunset date of its own.

// 04 — HOW IT DIFFERS FROM ITS NEIGHBOURS

The builder's performance bond is the nearest. It is given by a bank or insurer, not the developer's side, and answers for the builder's default up to a fixed amount; it says nothing about a cost rise the builder is entitled to pass on, or about the developer's interest. The completion guarantee sits behind the bond and picks up what the bond does not.

Nor is it a guarantee of repayment. Once the building is finished, a fall in sale prices or a failed refinance is outside it, and a lender that wants the developer's backer to answer for the debt takes a separate guarantee for that. In project finance the term has a wider sense: sponsors support the loan until the project passes a negotiated completion test, physical and often financial, after which the lenders rely on the project alone.

DEFINED IN ONE PARAGRAPH → · COST OVERRUN GUARANTEE → · PRACTICAL COMPLETION →

// 05 — WHERE IT DECIDES A FILE

The guarantee is valued in the conditions that would bring the call. A builder that fails usually fails because costs have risen across its market, and the same rise reaches the guarantor's other projects at the same time. So the credit paper reads the guarantor's liquid assets, the other guarantees it has given, and how much of its wealth is in property that would be hard to sell in the same downturn. Where that reading is thin, a lender may ask for part of the support in cash or a letter of credit.

The negotiation turns on scope: whether interest is included, whether there is any cap, whether the guarantor may pay instead of completing, and exactly which event releases it. For the developer the guarantee is cheaper than more equity on day one. For the lender it is worth the guarantor's means on the worst day of the build, and no more.

PRODUCT FILE: DEVELOPMENT LOAN → · DRAWING A DEVELOPMENT LOAN →

// QUESTIONS PEOPLE ASK

What is the difference between a completion guarantee and a performance bond?: A performance bond is issued by a bank or insurer for the builder and pays up to a fixed sum if the builder defaults under its contract. A completion guarantee is given by the developer's owners or parent and promises the finished building, whatever the cause of the trouble. On a development loan the lender commonly has both: the bond recovers part of the cost of a builder's failure, and the guarantee covers what the bond does not.
Does a completion guarantee guarantee repayment of the loan?: Not by itself. It promises that the building will be finished and paid for, so that the lender holds a completed asset rather than a stalled site. If sales or the refinance then fall short of the debt, that loss sits outside the completion guarantee. Lenders that want the developer's backer to answer for repayment take a separate guarantee of the loan, often limited in amount.
When does a completion guarantee end?: When the event the document names has happened, which is usually practical completion as certified under the building contract. Many documents add conditions: the local building authority's certificate that the building may be occupied, the final account with the builder settled, and no unpaid claims by subcontractors. Until all of them are met the guarantor remains liable, so the release clause is one of the terms a guarantor's adviser reads most closely.
What is a completion guarantee in project finance?: It is the sponsors' support for a project loan during construction. Lenders to a power plant, a mine or an infrastructure project rely on the finished project's cash flow, so until the project is built and passes a completion test, the sponsors guarantee the debt or undertake to fund whatever completion needs. The tests are negotiated deal by deal and often include running at a stated level of output for a period, not only being built.

THE IN-TRAY · ONE MINUTE

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THE NUMBER · THE ECONOMY · COLLATERAL MARKETS

A bank lent 65% of the value of a factory valued at US$10m. If it has to sell, it expects a forced-sale discount of 30%, and selling costs of 5% of the sale price.