Is a cost overrun guarantee the same as a personal guarantee?

No, though the same person may give both. A personal guarantee of the loan promises to repay the bank what the borrower owes. A cost overrun guarantee promises to pay the extra cost of finishing the project, usually into the project itself. The first lasts as long as the loan; the second usually ends once the building is complete and the costs are settled. Where an individual gives an overrun guarantee, it is a personal guarantee in form, and should be read as one.

Who pays for cost overruns on a construction project?

It depends on the contract. Under a fixed-price building contract, much of the construction risk sits with the builder, except for agreed variations and items left open. Anything outside that falls on the developer, first through the budget's contingency, then through its own extra equity. A development lender usually requires the developer to fund an overrun before the next drawdown, and the cost overrun guarantee makes the developer's owners or parent answer for it.

Are cost overrun guarantees capped?

Often, by negotiation, at a fixed amount or a share of the budget, though some are uncapped. The cap is only one of the terms that set the guarantor's exposure. What counts as cost, whether interest and enforcement costs sit outside the cap, and how long the guarantee runs can matter as much. A guarantor's adviser reads all of them together, and a lender weighs any cap against the contract type and the contingency.

What happens if the guarantor cannot pay a cost overrun?

The project stays out of balance, so the lender stops funding drawdowns, and the failure to pay is usually an event of default under the loan. The lender then chooses between enforcing its security over a part-built project, finding new equity, or funding the gap itself to protect its position and adding that to the debt. None of these is attractive, which is why the guarantor's means are read before the loan, not after the overrun.

// WORKED EXAMPLEHOW THE GUARANTEE WORKS

Cost Overrun Guarantee: How a Lender Reads One

The budget is a forecast. The guarantee says who pays if it is wrong.

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-07

// THE SHORT ANSWER

A development lender takes a cost overrun guarantee so that a project costing more than planned does not stop with the bank's money in a half-built frame. The loan and the developer's equity are sized to a budget. When the lender's quantity surveyor finds that the money left will not finish the job, drawdowns stop until someone fills the gap, and the borrowing company, usually formed for this one project, has nothing else to fill it with. The guarantee names who fills it and how far. What it is worth turns on the words that define an overrun and on the guarantor's cash when the call comes.

BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

// MAKE THE CALL

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// 01 — WHY A BUDGET NEEDS A GUARANTOR

A development loan is drawn against a budget, and at every drawdown the lender tests whether the undrawn loan plus any unspent equity still covers the cost to complete. The contingency absorbs the first surprises. Once it is gone, the project is out of balance, and the loan agreement usually requires the borrower to put in the difference before the next advance.

That promise is only as good as the borrower, and a development company formed for one site has nothing but the site. The guarantee moves the obligation to someone with other resources, typically the developer's parent or its owners. It keeps the building moving while the overrun is funded, and it keeps the cost of the developer's mistakes, or bad luck, with the developer rather than the bank.

// 02 — HOW THE GUARANTEE IS WRITTEN

Five drafting choices decide what it delivers. The first is what counts as cost: construction only, or also fees and finance costs, which rise whenever the programme slips. A separate guarantee of interest shortfalls can overlap with the same overrun, so a careful document says which instrument pays for what. The second is who measures: usually the lender's quantity surveyor, called a monitoring surveyor in much of the UK market, rather than the developer. The third is the trigger and timing, often a demand once the project is out of balance, payable within a short period, with failure to pay an event of default.

The fourth is the cap, a fixed sum or a share of the budget, and whether interest and enforcement costs sit outside it. The fifth is the form of payment: cash into the project, or a shareholder loan that must rank behind the bank and cannot be repaid before it. Because the general law of guarantees in all three markets can release a guarantor when the arrangement it guaranteed is changed without its consent, unless the change is insubstantial and cannot prejudice it, these documents usually say the guarantee survives budget changes, and lenders often take the guarantor's written consent anyway.

// 03 — THE EXAMPLE

A developer, constructed for this page like every figure in it, is building 36 apartments for US$30.0m: land US$7.0m, construction US$18.0m, contingency US$0.9m, fees US$1.6m and finance US$2.5m. Equity of US$9.0m went in first; the bank lends US$21.0m. The developer's holding company guarantees overruns up to US$1.8m, a cap that belongs to the example. At month ten the façade subcontractor fails. The quantity surveyor certifies US$2.2m of extra construction cost, and the three-month delay adds US$0.4m of interest. US$0.6m of contingency is left.

If finance costs count as cost:

Overrun, construction 2.2 + interest 0.4 2.6

Less contingency left − 0.6

Gap at the next drawdown 2.0

Paid under the guarantee, to its cap − 1.8

Still to find 0.2

If the guarantee covers construction only:

Construction overrun 2.2 − contingency 0.6 1.6 paid in full

Interest overrun, outside the guarantee 0.4 still to find

The same event leaves the bank twice as exposed under the narrower wording, and the difference sits in a definition few people read at signing. Then the guarantor. The holding company has US$4.0m of cash and listed investments, and has given overrun guarantees on two other projects, capped at US$1.2m and US$1.8m. If the same rise in façade prices reaches all three sites and each guarantee is called to its cap, the calls total US$4.8m against US$4.0m of means.

// 04 — HOW IT DIFFERS FROM THE GUARANTEES BESIDE IT

A completion guarantee promises an outcome, the finished building, rather than a sum, and so can reach a builder's collapse and the interest through a long stop. A repayment guarantee, such as a director's personal guarantee of the loan, pays the bank what the borrower owes, and lasts until the loan is repaid. An overrun guarantee pays into the project, to finish it, and usually falls away once the building is complete and the final costs are settled. It does nothing for a fall in sale prices.

Nor is it the builder's performance bond. A bond answers for the builder's default under its contract. Cost the builder can pass on under that contract, such as agreed variations or rises in provisional sums, is the developer's overrun, not the builder's failure, and the bond does not pay it.

DEFINED IN ONE PARAGRAPH → · PERSONAL GUARANTEES → · COMPLETION GUARANTEE →

// 05 — WHERE IT DECIDES A FILE

The cap is read against the building contract. A fixed-price contract leaves the builder carrying much of the construction risk, and the guarantee then answers mainly for variations and the developer's own costs. A contract let early, with much of the design still to finish, leaves more with the developer, and a cap that looked generous may cover little. The credit paper reads the guarantor's statement of position, how much of it is cash, and every other guarantee it has given, because overruns tend to come from the same market at the same time.

An industry code may give an individual guarantor some protection, but its reach is narrow. In Australia, the Banking Code of Practice, for the banks that subscribe to it, covers an individual guarantor only where the borrower is an individual or passes the Code's small business test, which includes a total-debt limit that many development borrowers exceed. Where no code reaches the guarantee, the protection is the document's own wording and the guarantor's independent advice.

DRAWING A DEVELOPMENT LOAN → · COST TO COMPLETE →

// SOURCES

The documents the statements on this page rest on. Each was opened and checked when cited.

Australian Banking Association, Banking Code of Practice (approved by ASIC, effective 28 February 2025) — paragraph 1 and the Small Business definition in the Code's definitions — The Code applies to individuals who guarantee an individual or Small Business customer, and the Small Business test includes turnover, staff and total-debt limits — section 05.

// QUESTIONS PEOPLE ASK

Is a cost overrun guarantee the same as a personal guarantee?: No, though the same person may give both. A personal guarantee of the loan promises to repay the bank what the borrower owes. A cost overrun guarantee promises to pay the extra cost of finishing the project, usually into the project itself. The first lasts as long as the loan; the second usually ends once the building is complete and the costs are settled. Where an individual gives an overrun guarantee, it is a personal guarantee in form, and should be read as one.
Who pays for cost overruns on a construction project?: It depends on the contract. Under a fixed-price building contract, much of the construction risk sits with the builder, except for agreed variations and items left open. Anything outside that falls on the developer, first through the budget's contingency, then through its own extra equity. A development lender usually requires the developer to fund an overrun before the next drawdown, and the cost overrun guarantee makes the developer's owners or parent answer for it.
Are cost overrun guarantees capped?: Often, by negotiation, at a fixed amount or a share of the budget, though some are uncapped. The cap is only one of the terms that set the guarantor's exposure. What counts as cost, whether interest and enforcement costs sit outside the cap, and how long the guarantee runs can matter as much. A guarantor's adviser reads all of them together, and a lender weighs any cap against the contract type and the contingency.
What happens if the guarantor cannot pay a cost overrun?: The project stays out of balance, so the lender stops funding drawdowns, and the failure to pay is usually an event of default under the loan. The lender then chooses between enforcing its security over a part-built project, finding new equity, or funding the gap itself to protect its position and adding that to the debt. None of these is attractive, which is why the guarantor's means are read before the loan, not after the overrun.

THE IN-TRAY · ONE MINUTE

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THE GLOSSARYIN ONE PARAGRAPHCost overrun guarantee What is a cost overrun guarantee on a development loan?