Best Practices
Letters of Credit in Construction: When They Stand In for Bonds
A letter of credit is a bank's commitment to pay a beneficiary on demand if specific conditions are met. In construction, LOCs sometimes substitute for performance bonds, retention, warranty reserves, or contract deposits. They cost less to obtain than bonds for strong contractors but tie up bank credit capacity, and they're demand instruments — the beneficiary can draw on them without the contractor's agreement.
Sarah Blake6 min read