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Development Finance

How Construction Funding Works In Development

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Quick answer

Funds are usually released in

5 to 7

Main construction payment stages

  • Interest charged on Funds drawn
  • QS or lender sign off Usually required
  • Contingency allowance Commonly required
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Construction funding within development finance is the part of the facility used to pay for building works as they happen, rather than being advanced in one lump sum upfront.

In Australia, development lenders usually release money progressively against approved costs, builder claims and verified progress so the facility matches the actual build program.

That means construction funding is typically managed as a staged drawdown facility with lender oversight, quantity surveyor inspections, interest servicing and a contingency buffer for the unexpected.

Where construction funding fits in a development deal

In development finance, construction funding is the build component of the overall facility. It sits alongside the land debt, equity contribution, interest reserve and other project costs.

It is usually structured to cover approved hard construction costs plus selected soft costs that are directly connected to delivering the completed project.

This structure is commonly used across projects such as:

  • iconTownhouse developments
  • iconApartment developments
  • iconLand subdivisions
  • iconHouse and land projects
  • iconMixed-use developments
  • iconCommercial developments

How Construction Funding Works

Construction funding in a development loan is generally tied to the approved works contract, the project budget and the lender's quantity surveyor process.

Rather than advancing the full construction amount on day one, the lender progressively releases funds after each stage has been completed and verified.

Typical progress stages may include:

  • 01 Land settlement
  • →
  • 02 Slab stage
  • →
  • 03 Frame stage
  • →
  • 04 Lock-up stage
  • →
  • 05 Fit-out stage
  • →
  • 06 Completion

This staged process helps control risk, ensures the loan remains aligned to cost to complete, and limits interest being charged on money that has not yet been used.

What the construction facility usually covers

The construction component of a development facility is normally built around a detailed cost schedule and may include:

Included cost 01

Hard construction costs

Builder contract sums, trade costs, materials and other approved physical works needed to complete the project

Included cost 02

Associated project costs

Selected preliminaries, consultant fees, statutory charges, interest and contingency where the lender allows them in the total budget

Lender funding range 60–75%
  • Lender funds (60–75% of total development cost)
  • Developer contributes (25–40% via cash deposit or equity)

Most lenders fund approximately 60 percent to 75 percent of the total development cost. The developer contributes the remaining funds through cash deposit or equity.

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What lenders check before releasing construction funding

Construction money is only one part of the assessment. Lenders want to know the whole project can be delivered on time and within budget.

That means they usually review the feasibility, fixed price or sufficiently detailed build costs, approvals and the full delivery team.

Common items reviewed include:

  • iconApproved works contract or cost plan
  • iconBuilder credentials and insurances
  • iconQuantity surveyor review
  • iconContingency allowance
  • iconBuild program and milestones
  • iconInterest and holding cost assumptions
  • iconEnd value or take out strategy
  • iconBorrower equity contribution
1+
At minimum, most construction drawdowns involve more than one control layer, usually the lender's approval plus either quantity surveyor confirmation, progress evidence or both. The stronger the controls, the easier it is for lenders to manage risk.

Construction funding controls

Once the development loan is approved, lenders still manage risk during the build through a number of ongoing controls.

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Quantity surveyor reviews

The QS may assess progress claims, cost to complete and whether the remaining undrawn funds are still enough to finish the job.

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Retentions and conditions

Some lenders impose conditions around variations, contingency use, builder changes or updated valuation and QS reporting.

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Variation management

If the build contract changes or costs rise, the borrower may need to contribute more equity before the lender releases additional funds.

Common construction funding problems

Even after approval, development construction funding can become difficult if the build moves away from the original assumptions.

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Insufficient contingency

A thin contingency buffer can create pressure if variations, delays or material cost increases hit mid project

Possible solutions include:
  • icon Increase the contingency before settlement
  • icon Reduce specification or stage the works
  • icon Contribute extra equity if required
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Builder claims not matching progress

If claims arrive too early or work is incomplete, the lender may hold back the next drawdown until evidence is updated

Common fixes include:
  • icon Updated QS report
  • icon Clarified builder invoices
  • icon Revised progress schedule
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Construction cost overruns

If actual build costs exceed the approved budget, the lender may require the borrower to cover the shortfall rather than simply increasing the loan

Extra equity, variations control and early lender communication usually matter more than waiting until the budget is already blown.
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Delays extending interest costs

Longer build times can increase interest, holding costs and pressure on the debt expiry date

Ways to reduce this risk include:
  • icon Realistic build program and buffer
  • icon Strong project management
  • icon Clear extension strategy if needed
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How Construction Funding Usually Flows

Step

01

Approve the building contract, cost plan and project budget

Step

02

Settle the site or activate the development facility

Step

03

Begin works and submit the first eligible progress claim

Step

04

QS or lender verifies the completed stage and cost to complete

Step

05

Approved funds are drawn and paid against the claim

Step

06

Repeat each stage until completion, then exit by sale or refinance

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Speak with a Development Finance Specialist

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Construction funding within a development loan can vary significantly depending on the build contract, contingency, lender controls, project size and the quality of the supporting reports.

A specialist can review the proposed funding structure and explain how drawdowns, interest, contingencies and progress claims are likely to work on your deal.

Speak with a finance specialist about your construction funding needs.

Submit the short form below and a development finance specialist will review your project and discuss how the construction component may be structured.

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Additional Questions

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How development loans work

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Understanding development finance

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What it means to refinance a development loan

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