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Cost overrun

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.

Halftone illustration of a plumb bob beside a partly built wall.

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.

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.

FAQ

Cost overrun questions we hear most.

Sometimes. It depends on whether there is room under their loan to cost limit, whether the finished value still supports the larger loan, and how much confidence they have left in the budget. An increase is easier to get when the numbers are presented early with a revised quantity surveyor report behind them.

No. Under the Builders Lien Act the ten percent holdback on construction costs is held for the benefit of lien claimants, not as project contingency. Treating it as spare money creates a legal problem on top of a financing one.

It is the gap between what remains available to draw and what the quantity surveyor says it will cost to finish the building. Lenders manage construction risk against that number, so when it goes negative the file stops until the gap is closed.

Only with the first lender's consent. Most construction loan documents prohibit further encumbrance, and registering a second charge without permission is usually an event of default on the loan you already have.

Trades stop, and once trades stop the position deteriorates quickly. Liens get filed, the schedule slips, carrying costs continue, and the eventual solution costs more than it would have a few months earlier.
Keep reading

Related situations

Mezzanine financingFilling the gap above senior debt, and what it costs.The build stopped part wayCompletion financing when the project has already halted.Construction financingHow build facilities are structured, sized and advanced.How construction draws workWork in place, cost to complete and the holdback.Have a broker read your dealSend the property and the numbers and get a straight answer. No fee, no credit check.

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.

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