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The Mongolian financial sector consists of 14 commercial banks.The overall amount of loans provided by those commercial banks reached to MNT 11.6 trillion year-ending 2015.Out of this,MNT 822.3 million is considered as bad loans which show that the credit risk of the commercial banks has increased.Credits provided for the construction sector takes significant accounts from the overall amount of loans provided and it solely constitutes 13 percent of the total credit package.The overdue and bad loans of the Construction sector have experienced a noticeable increase in 2015 compared to the previous years with overdue loans amount of MNT 144.7 million and MNT 69.6 amount of bad loans.The economic state of Mongolia has been unstable since 2014 which is affecting considerably the Construction sector including the shortage in investment,delay in building commissioning and consumers’ purchasing power resulting to overdue and bad loans.In this research,I examine the factors influencing bad loans in the construction sector by developing recommendations for further risk reduction and improvement.Credit for the Construction sector is allowed at 2 stages in Mongolia.The first stage is to provide credit upon considering the borrower’s situation and studying the particular project.The second is the credit re-issuing stage upon the evaluation of objective and subjective criteria.Even though,after the second stage,the borrowers still face unexpected risks due to budget overspending,failure to meet the deadline,poor quality,and risk related to sales.These risks should be detected beforehand,minimized and maintained at the lowest level throughout the entire credit term.The Construction sector legal environment and weak coordination of activities between companies result in the ineffective implementation of joint credit contracts in Mongolia.