How do lenders treat a fixed price building contract vs cost plus?

The lender is funding a building that does not exist yet, and its security is the finished product. A fixed price contract from a licensed builder with home warranty insurance tells the lender what the building will cost and that the builder carries the risk of most cost increases. The progress schedule is written into the contract, so the lender knows when and how much it will pay. This is the model residential construction lending is built around.

Cost plus is used for custom homes, renovations of old buildings and projects where the scope cannot be fully defined at signing. The borrower carries the cost risk. Lenders respond by funding a smaller share, requiring a contingency of ten to fifteen per cent, appointing a quantity surveyor to certify each claim against actual invoices, and sometimes capping the amount they will fund at an agreed estimate with everything above it from the borrower. Interest rates and fees are often higher, and the pool of lenders is small: some private lenders, a few non-banks and occasionally a bank for a high net worth client.

On any contract lenders review the builder's licence and insurance, the provisional sums and prime cost items, the progress payment schedule against state law, the liquidated damages clause, the start and completion dates, and whether the contract price includes site costs and services. Contracts with large provisional sums behave like partial cost plus and are treated with similar caution. Owner builder arrangements, where there is no head contract at all, sit in a category of their own with very few lenders.

Have the builder provide a detailed estimate with a guaranteed maximum price if possible. Fund the design and documentation fully before seeking finance so the scope is defined. Increase equity so the lender's exposure is lower. Accept a QS on every claim. Or convert to a fixed price contract once the design is complete, which is what most lenders will suggest.