The project is over budget
The build is part way up, the contingency is gone, and the remaining draws will not cover what is left to do. Lenders call this a cost to complete shortfall. How it gets solved, and what it costs you, depends almost entirely on how early you put your hand up.
The short answer
A construction cost overrun in BC is usually closed with more sponsor equity, an increase from the existing lender, a mezzanine loan behind it, or a full refinance, and the earlier the shortfall is raised the more of those options remain.
| Route | Who has to agree | Relative cost | When it works |
|---|---|---|---|
| Sponsor equity | Sponsor and existing lender | Cheapest | The sponsor can fund the revised gap |
| Increase from the existing lender | Existing lender | Lower than junior debt | Loan to cost room and completed value support the increase |
| Mezzanine or second position loan | Existing lender and junior lender | Expensive | The existing lender consents and the exit supports both loans |
| Full refinance of the construction loan | Replacement lender and existing lender for discharge | Potentially highest total cost | A replacement lender can fund the revised budget |
What the lender is actually measuring
A construction lender is not tracking what you have spent. It is tracking what it will cost to finish. The quantity surveyor reports on work in place and on cost to complete, and advances are made against work in place.
If the remaining commitment will not finish the building, draws stop, regardless of how much has already gone in. The construction draws guide sets out how that process runs when it is working normally.
Why raising it early costs less
A shortfall identified at forty percent complete has options, including rescoping, value engineering and a modest equity top up. The same shortfall found at eighty five percent with trades unpaid and liens going on title has very few.
Lenders would far rather hear about it early, and their willingness to help drops sharply once they feel they were not told.
Where the money comes from
More sponsor equity. The cheapest route and the most common one.
An increase from the existing lender. Possible where there is room in the loan to cost and the completed value supports it. How that facility is structured is covered on the construction financing page.
A mezzanine or second position loan. Behind the construction facility, expensive, and usually needing the first lender's consent.
A full refinance. Replacing the construction loan with a lender who will fund the larger budget. One thing to be plain about: the statutory holdback is not available for any of this.
Compare the whole structure, not just the cash offered. Junior financing adds expensive debt. A refinance replaces the existing facility. In either case, check whether the revised budget and the exit work together before accepting more money.
What to bring to the lender
Bring a revised completion plan that lets the lender see the gap and how you propose to close it.
- The revised quantity surveyor report showing work in place and cost to complete.
- The revised budget with the original budget beside it.
- The reason the costs moved.
- The updated construction schedule.
- Signed contracts or quotes for the remaining work.
- A sources and uses table showing how the gap is closed.
- Current presale or lease up status where it applies.
Keep the documents consistent. The surveyor report should match the budget. Identify where the additional money comes from and distinguish signed commitments from contributions still being discussed.
A lender approves a plan, not a problem.
How the overrun affects your take out
The take out lender sizes the permanent loan on the completed value and the income the building will produce, not on what it cost to build. A higher build cost does not raise the take out amount. The difference has to come from equity or remain as more expensive debt.
Put the revised construction debt beside the expected permanent loan. More construction funding can finish the building without solving the repayment gap. Assess the funding decision and the exit together.
Liens and the holdback
In BC, the Builders Lien Act requires a statutory 10 percent holdback on the value of work. It is not contingency money. The construction draws guide explains why your cash flow must treat it as unavailable until release.
Liens can be filed for 45 days from the date on the certificate of substantial completion. The holdback is normally released at day 55 after a clear title search. Our construction financing page sets out that filing window and release check. Do not treat the passage of time alone as permission to spend the holdback.
Liens on title can stop further advances and narrow every funding route above. A lender assessing an increase, a junior loan or a refinance needs to understand the title problem as well as the budget problem. Once a lien is filed, speak with a construction lawyer about the claim and its effect on the financing. This is general financing information, not legal advice.
What makes it worse
Paying trades outside the draw schedule. Understating the remaining cost to the quantity surveyor. Letting liens be filed.
Each of those narrows the options that are left, and none of them buys any real time. If the project has already stopped, the stalled project page covers what happens next.
When more debt is the wrong answer
If the completed value no longer supports the total cost, borrowing more only moves the loss later. A loan that covers the next draw is not necessarily a loan the project can repay. Be honest about that distinction before adding another obligation to a budget that already does not work.
Weigh rescoping or value engineering, bringing in an equity partner or joint venture, and selling the project or part of it before completion. These are alternatives to assess, not promises of recovery.
Speak with a lawyer about the obligations attached to those choices. If trades are unpaid and arrears are building, also speak with a licensed insolvency trustee. The financing conversation should sit alongside that advice, not replace it.
Cost overrun questions we hear most.
Related situations
Bring it to us early.
Send the quantity surveyor report and the revised budget. We will tell you what closing the gap realistically looks like.