Construction Finance Costs & Feasibility | DeMarque
Construction finance is priced differently from any other commercial loan, because it funds something that doesn’t exist yet. The facility carries cost components a standard loan never sees — interest that compounds inside the loan, fees on the whole limit, a procession of professional sign-offs — and the lender’s decision rests less on the borrower’s balance sheet than on a single document: the feasibility. Understanding both sides — what the facility costs, and how the feasibility absorbs those costs — is what separates projects that stack up from projects that only looked like they did.
The Cost Components a Normal Loan Doesn’t Have
Capitalised interest. Interest is charged on the drawn balance, which grows with the build — and on most development facilities it isn’t paid monthly from your pocket but capitalised: added to the loan and funded by the facility itself. That’s borrower-friendly for cash flow, but it means interest accrues on previously capitalised interest, and the total interest bill depends heavily on how long the build runs. Time is a direct cost input in a way it isn’t on an ordinary loan.
Fees on the limit, not the balance. Construction facilities commonly carry a line or facility fee calculated on the approved limit for the life of the facility — payable whether funds are drawn or not — alongside establishment fees scaled to the facility size.
Professional costs the facility requires. The lender’s quantity surveyor (initial report plus each progress certification), valuations — typically both “as is” and “on completion” — and legal and documentation costs on the security package. On development-scale projects these are thousands of dollars of genuine project cost, and they belong in the budget from the first draft. How the QS and drawdown machinery works is covered in construction loan drawdowns and progress payments.
Exit costs. A construction facility is designed to end — refinanced into a term loan, repaid from sales, or rolled to an investment facility — and the exit has its own costs: discharge fees, new-facility establishment, and on sold stock, agent and settlement costs that the feasibility must absorb.
DMF Insight: The line item that sinks more feasibilities than any other is time. Every month of delay adds capitalised interest, line fees and holding costs simultaneously — three meters running on the same clock. Building a genuine time contingency into the feasibility, not just a cost contingency, is what experienced developers do differently.
Feasibility: The Document the Lender Actually Assesses
A construction lender is underwriting a project, and the feasibility is the project in numbers:
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Total development cost (TDC) — land, construction contract, professional fees, authority contributions, finance costs (including that capitalised interest), marketing and selling costs, and contingency.
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Gross realisation value (GRV) — what the completed project sells or values at, supported by evidence: comparable sales, presales, or lease covenants on commercial stock.
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The margin between them — the development profit, expressed against cost. Lenders want the project to clear a healthy margin not out of curiosity about your profit, but as their buffer: a project with a thin margin has no room to absorb a cost overrun or a soft market at completion.
Around that core sit the qualification tests — how much of TDC the lender will fund, how much of GRV, and what presale coverage is required. Those gates decide whether the facility is available at all, and they’re a subject of their own: see presales and LVR requirements in development finance.
Stress-Testing: What the Lender Does to Your Numbers
Expect the credit team to rework the feasibility, not just read it. Common adjustments: construction cost checked against the QS’s independent estimate rather than the builder’s quote; realisation values trimmed toward conservative comparable evidence; the program extended; interest recalculated on the longer timeline; and contingency tested for adequacy against the project’s complexity. A feasibility that survives those adjustments with margin intact is fundable. One that only works on the developer’s own assumptions isn’t — and it’s better to discover that in a broker’s pre-review than in a credit decline that goes on the record.
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Keeping the Costs Down
The levers that genuinely move construction finance costs are structural, not negotiated basis points: a shorter, more credible program (time is the biggest cost input); a fixed-price building contract with a builder the lender can verify; realistic staging so the facility limit — and the fees on it — aren’t oversized; presales or leasing precommitments that de-risk the exit and unlock sharper pricing tiers; and clean, complete information, because lenders price uncertainty as surely as they price risk.
Final Thoughts
Construction finance costs more than term debt because it carries risks term debt doesn’t — and the costs are manageable when the feasibility treats them as first-class line items: capitalised interest on a realistic program, fees on the limit, the QS and valuation procession, and the exit. Build the feasibility the way a lender will rebuild it, and the funding conversation becomes a comparison of offers rather than a fight for approval. The broader picture sits on our construction and development finance page.
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This information is general in nature and does not constitute financial advice. Costs and structures vary by lender and project, and lending is subject to individual circumstances and lender criteria.
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