The amount by which a construction project costs more than its budget, which the borrower is normally expected to cover.
A lender sizes a construction loan to a budget. If the job costs more, the loan does not grow on its own, and the gap has to be filled before the building can be finished.
The OCC handbook says a budget typically includes a contingency account for unexpected overruns, and that these allowances usually range between 5 and 10 percent of the overall budget. It separates true surprises from poor estimating: overruns that come from poor projections would ordinarily be covered by the borrower, not by drawing down the contingency line in the loan.
Example: on a $4,000,000 budget, a contingency in that range is $200,000 to $400,000.
Lenders look for the things that limit the exposure: a fixed-price construction contract, a contractor with a record on similar jobs, borrower cash equity that goes in first, and a guarantor with verified liquidity. Renovation jobs get extra attention because hidden conditions show up only after work starts.
How it shows up in the data here
Overruns happen inside individual projects, and no public file tracks them. Bank call reports show the construction and land balance a bank held on the report date, nothing about budgets. Lenders with construction on their books are at construction lenders. To test how a higher cost changes your loan-to-cost, use the LTV and LTC calculator. No lender's contingency rule is in the data here.
Go further
- Loan-to-value and loan-to-cost calculator: See what a higher project cost does to loan-to-cost.
- LTV and LTC calculator: Loan to value and loan to cost, the equity a lender will ask for, and the federal supervisory limit for the property type.
- Deal summary builder: Turn the facts of a deal into a clean one-page summary you can copy or print. Nothing is saved or sent.
- Construction loan package checklist: A construction lender is lending against a building that does not exist yet. The package has to show what it will cost, who will build it, where every dollar comes from, and how the loan gets repaid when it is done.
- How bankers evaluate a commercial loan deal: A credit officer asks one question five ways: how will this loan be repaid, and what happens if it is not? Knowing the five tests lets you size a request before you send it.
Related terms
- Construction loan: A short-term loan that pays for building or renovating a property, advanced in stages as work is finished and repaid from a sale or a permanent loan.
- Construction draw: One advance of construction loan money, released after the lender confirms that the work it pays for is in place.
- Retainage: The share of each construction payment that is held back until the job is finished and the liens are cleared.
- Completion guaranty: A guarantor's promise to the lender that a project will be finished and its bills paid, without a promise to repay the whole loan.
- Loan-to-cost ratio (LTC): The loan amount divided by the total cost of a project: the property plus all construction costs. It shows how much of the budget the lender funds.
- Interest reserve: An account set up by the lender that pays the loan's interest during construction and lease-up, usually funded as a line in the loan budget.
Sources
Plain definitions for orientation, not legal, tax or credit advice. A lender's own policy decides what it will do.