Here’s a Proper Budgeting Approach For Construction Financing
One of the keys to not only securing construction financing in the first place, but getting your project completed on time without incurring additional financing costs and delay related costs, is developing a proper construction budget.
A construction budget plan should contain the following four parts.
First, you need to complete a detailed list of all the costs for the entire project. These costs should be backed up by written estimates from vendors and reviewed for completeness by someone other than the person putting everything together.
Its easy to get too close to the numbers and miss something or double count something else in the process. Having someone else review the costing details will give you more confidence in your estimates.
Second, develop a construction time line and assign the project costs to each construction element listed. The time line should indicate at what stage draws will be required and what amounts the draws will need to be for.
Third, maintain a construction financing variance report of the actual costs versus budget for each stage of the project. In this way, you’re going to be able to spot overruns or cost savings and factor them into the remaining costs that are still outstanding.
If you are running over budget at some point, you’re going to need to adjust your cash flow projections and draw requirements accordingly or cut back on the project in any discretionary areas to reduce costs. When more cash is required, you want as much lead time as possible to effectively deal with it so draws can be made on time and the construction project can stay on track.
Fourth, make sure you have a contingency allowance built into your overall project costs. Contingencies can vary significantly by project in terms of what’s reasonable, but in most cases an allowance of 10% will protect most projects from becoming underfunded.
The contingency allowance by itself doesn’t mean much if there is no source of capital to fund it if required. This should be established before the start of the project to avoid any disruptions in the event that overruns do occur.
A detailed budget will also give construction mortgage lenders greater confidence in your project and may even help you get higher leverage or better rates if a lender believes your project management plan of attack is sound.
If you’re seeking construction financing in Ontario, I recommend that you give me a call and I will provide a free assessment of your construction mortgage options.
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About the Author Joe Walsh
I'm a Toronto Mortgage Broker that arranges mortgage solutions on residential and commercial real estate property. With over 30 years of mortgage financing experience, I'm able to quickly assess your financing requirements and provide relevant solutions for your immediate consideration. Joe Walsh Google+ YouTube Channel