Construction Budgets Assembled Before 2024 Keep Coming Back Unfundable

A sponsor sent us a revised construction file last week. The cover page showed a hard-cost number from 2023. The contractor’s latest subcontractor bids were higher. The lender request was unchanged.

That is the file we are seeing most often. The project may still be worth building. The original capital stack may still be impossible to fund. We cannot solve a stale hard-cost budget by stretching the interest reserve or assuming a cheaper takeout.

The public cost backdrop is blunt. Nonresidential materials costs remain more than 55% above early-2020 levels, and some electrical-equipment backlogs exceed two years (CREFC). A 24-month electrical lead time can run through the entire schedule on a limited-service hotel. A cost overrun is one problem. A cost overrun plus a delayed opening is two.

The budget must be current

Start with the date on every number. A hard-cost total from 2023 is not a construction budget in August 2026. It is a placeholder until a general contractor tests it against current scopes, labor availability, freight, equipment lead times, and subcontractor bids.

We want the budget organized so the pressure points are visible. The summary should separate hard costs, general conditions, permits, design, owner’s costs, furniture fixtures and equipment, contingency, financing costs, and the interest reserve. If electrical, HVAC, elevators, or kitchen equipment have not been bid, label them as allowances. Do not hide an allowance inside a completed trade line.

Here is the screen we use before we discuss leverage:

The contractor’s number matters, but the contract matters more. A GMP that excludes design changes, tariff exposure, owner-directed changes, allowances, or delay damages can leave the lender holding a fixed-price label with variable economics. We read the exclusions before we use the word “guaranteed.”

Banks have remained selective on construction and transitional lending, according to midyear market reporting (Hall Structured Finance). That selectivity is rational. A senior lender cannot cure an $8 million scope gap with an extra three months of interest.

Contingency has two jobs

Contingency is not a round percentage applied after the deal is sized. It has two separate jobs: paying for an unknown item within the current scope and absorbing escalation or delay before the hotel opens. Combining them hides the first change order.

Take a $50 million hotel project with $38 million of hard costs. A 7% construction contingency is $2.66 million. If a long-lead electrical package arrives 20% above budget on a $3 million allowance, $600,000 is gone. If the delivery delay adds four months to the schedule and the project carries $260,000 per month of interest, taxes, insurance, and site overhead, another $1.04 million is gone. That uses $1.64 million before opening.

Separate hard-cost contingency from schedule protection. The percentage changes with scope maturity. Early design, concealed conditions, or unpriced long-lead packages need more than a fully bid repeat-product hotel.

The July 29 Federal Reserve decision did not change that conclusion. The FOMC held the federal funds target at 3.50%–3.75%, but the vote was 9–3, with three members favoring an increase (Federal Reserve). We therefore do not use assumed rate relief to make a thin reserve acceptable. Base rates may move in either direction during a two-year build. A completion budget cannot depend on guessing the direction correctly.

A workable structure puts the sponsor’s additional equity behind the uncertain scope, funds long-lead deposits early, and leaves enough reserve after a schedule stress. If the sponsor cannot meet that equity call, the construction loan is not fully capitalized at closing.

An interest reserve is not completion capital

An interest reserve pays scheduled debt service. Completion capital pays for labor, materials, scope changes, and the owner’s portion of a cost overrun. They are different uses, held for different risks.

The monthly draw schedule must show both uses at the same time. A project can remain within its hard-cost budget and still run short if a delayed delivery pushes the opening date past the reserve’s final month. The low point in the reserve, not the average balance, is the number we test. We compare it with the scheduled opening date.

Suppose the same project has a $6.2 million interest reserve based on a 24-month build and 12 months to stabilization. A six-month electrical delay can extend carry by $1.56 million at $260,000 per month. Reducing the interest reserve to preserve proceeds does not cure the delay. It merely moves the equity requirement into the middle of construction, when bargaining power is weakest.

We will finance ground-up and major-renovation hospitality where the scope is real, the GMP is readable, the procurement plan fits the schedule, and the sponsor can fund the residual risk. We will not finance a 2023 budget with a 2026 closing date just because the total development cost used to work.

The right response to an outdated budget is not optimism. It is a fresh bid, a revised sources-and-uses statement, and a sponsor equity check large enough to carry both the expected project and the project that is six months late.

The box this week

• Loan size: $5M floor, with a $20M–$100M sweet spot
• Asset focus: hotels, resorts, and mixed-use hospitality; construction and major renovation
• Leverage: sized to current cost, verified scope, and a durable completion budget
• Contingency: separately identified for scope risk and schedule risk
• Structure: interest reserve through stabilization; sponsor equity available for cost-to-complete risk

Send the current GMP, bid tab, procurement log, construction schedule, sources and uses, and reserve calculation. If the budget has aged, we will start with the refresh rather than the requested proceeds.