What does out of balance mean on a construction loan?

Out of balance means the money still available is less than the cost of finishing the project. The usual consequence is that the lender stops advancing until the borrower adds cash or otherwise closes the gap. The trigger, what counts as available money, and the remedies are set out in the facility agreement, and they vary. The phrase describes a funding position, not a judgment on the builder's work.

Who calculates cost to complete?

On a development loan the figure used for the test is normally assessed by the lender's independent quantity surveyor or monitoring surveyor, working from the contract, the certified amounts, variations and the programme. The developer and builder will have their own figures, which are useful inputs. The lender advances against the independent estimate because the other parties have a direct interest in the answer.

Does cost to complete include interest?

On a development loan it should, where interest is being funded through the facility. The interest still to accrue until repayment is a real call on the remaining money, and it rises if the programme slips. Leaving it out makes the project appear better funded than it is. Agreements differ on whether the test covers interest explicitly, so the definition has to be read for the deal at hand.

What happens if a developer cannot fill a cost-to-complete gap?

The lender can refuse further advances and, if the facility agreement treats the shortfall as an event of default, may have enforcement rights. In practice, it will look at whether completing the project is the least bad outcome. Options include calling on guarantors, bringing in new equity or a junior lender, reducing the scope, advancing more against a revised plan, or enforcing and appointing someone to finish or sell the site.

// WORKED EXAMPLETHE ARITHMETIC A DECISION RESTS ON

Cost to Complete: a Worked Example

Not what has been spent. What it will take to finish.

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-09 · 6 MIN READ

// THE SHORT ANSWER

The question a development lender asks before every advance is whether a half-finished building can still be finished with the money that is left. Cost to complete is the number that answers it. It is built forward from today, by the lender's surveyor, and it includes what is easy to leave out: retentions already earned, unpriced variations, and the interest on the months remaining. Set against the undrawn loan and any equity still unspent, it either shows the project in balance or puts a figure on the cash the developer has to find before the next payment.

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

Issue 08 — Basalt Ridge Developments. A new-to-bank developer, a claimed 28% ROE and two other banks circling. Your bank has a growth target. Your call first, then the senior banker's.

Read the file →

PART OF Property Development Finance

// 01 — WHY THE LENDER LOOKS FORWARD, NOT BACK

A budget that is on track to date can still be short. A variation not yet agreed, a price that has moved, a programme that has slipped: none of these appears in money spent so far. A lender who advanced simply because each claim was valid could reach the last dollar of the facility with a building still unfinished, and an unfinished building is worth much less than a finished one and is harder to sell.

So the lender tests the future at each drawdown. A project is in balance when the money available covers everything still to be paid. The principle is common across markets: the US bank supervisor's handbook, for example, describes banks confirming that the budget remains in balance with sufficient funds to complete. The facility agreement sets the exact test, which differs deal by deal, and some agreements test each budget line as well as the total.

// 02 — WHAT GOES INTO THE FIGURE

Cost to complete = contract sum − certified to date

+ retentions held and still to be paid

+ variations approved, pending or expected

+ fees and other project costs still to come

+ contingency still needed

+ interest and finance costs to repayment

Money available = undrawn loan + equity not yet spent

In balance when: money available ≥ cost to complete

Each line has a trap. Retentions are the easiest to overlook, because the cash has not gone out but the debt to the builder exists. Variations need a judgment, since the surveyor has to allow for those that are probable and not only those already signed. Contingency is included because a building that is half done still has risk in it, and a test that treats the contingency as free money shows a false surplus. Interest belongs here because the loan is paying its own interest, so a delay increases the cost without anyone buying anything.

The money side needs equal care. Undrawn loan counts only if the lender is still obliged to advance it. Equity counts only if it is really available, ideally already in the project, rather than promised.

// 03 — THE EXAMPLE

A developer is converting an office building into apartments under a US$13.0m contract with a 5% retention. The case is constructed for this page like every figure in it. Eight months into a sixteen-month programme, the surveyor has certified US$6.5m. The developer's equity went in first and is fully spent, so the only money left is the undrawn loan of US$8.405m.

Month 8 (US$000) Before After the discovery

Contract less certified 6,500 6,500

Asbestos variation – 520

Site costs for the delay – 60

Retentions held 325 325

Fees still to come 180 180

Contingency still needed 450 100

Interest to repayment 800 1,040

Cost to complete 8,255 8,725

Undrawn loan 8,405 8,405

Surplus / (gap) 150 (320)

Before the strip-out reached the upper floors, the project was US$150,000 in surplus. Then the contractor found asbestos behind the wall linings. Removal is priced at US$520,000, with US$60,000 of extra site costs and two months' delay. The contingency takes most of the blow, but the surveyor says US$100,000 of it has to stay for the work still to come. The two extra months add US$240,000 of interest at a balance that is near its highest. A gap of US$320,000 appears on a project whose builder has done nothing wrong.

It is worth doing the sum the other way, to check it. Costs have risen by US$580,000 and the interest by US$240,000, while the contingency released is US$350,000. The net increase is US$470,000, and US$470,000 less the US$150,000 surplus is US$320,000. Under the test, there is no further advance until the developer funds the difference, a guarantor pays under a cost overrun guarantee, or the scope is cut and the surveyor agrees the saving is real. The retained contingency and other amounts are the example's and not a market norm.

DEFINED IN ONE PARAGRAPH → · THE LENDER'S QUANTITY SURVEYOR → · COST OVERRUN GUARANTEE →

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

A cost overrun is a change against the original budget, while cost to complete is a position measured today. A project can have no overrun and still be out of balance, if the budget was thin to begin with or a funding source fell away. Loan to cost measures gearing and can stay acceptable while the money runs out, because it says how the funding was shared and not whether there is enough left.

Accountants use the phrase too. Under the percentage-of-completion method a contractor estimates cost to complete in order to work out how much revenue and profit to recognise on a contract. It is the same idea applied to a different purpose: there it decides reported earnings, and on a development loan it decides whether the next payment is released. A contractor's figure is the contractor's own, and a lender relying on it should bear that in mind.

// 05 — WHERE IT DECIDES A FILE

The test bites early or it bites badly. At approval, a lender reads the contingency and the source of any extra money, and it is the reason a completion guarantee or equity held back in reserve may be asked for. During the build, it reads the trend. A surplus shrinking month by month tells the lender about the project even while the test still passes.

When a gap appears, the developer's choices are limited and the lender's are uncomfortable. Stopping funding protects the bank from advancing into a shortfall, but a stopped site loses value, loses its builder and uses up more interest. Lenders therefore sometimes advance further against a revised plan, and that decision needs the same care as the original credit, with a fresh look at the value, the programme and the presales. Topping up without that reading is how a gap of US$320,000 becomes a much larger one.

DRAWING A DEVELOPMENT LOAN → · COMPLETION GUARANTEE → · ISSUE 08 · BASALT RIDGE →

// SOURCES

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

Office of the Comptroller of the Currency (United States), Comptroller's Handbook: Commercial Real Estate Lending, version 2.0, March 2022 — page 45 and the disbursement-control sections — A bank supervisor's description, not specific to the three markets this site covers, of banks confirming that the budget stays in balance with sufficient funds available to complete — section 01.

// QUESTIONS PEOPLE ASK

What does out of balance mean on a construction loan?: Out of balance means the money still available is less than the cost of finishing the project. The usual consequence is that the lender stops advancing until the borrower adds cash or otherwise closes the gap. The trigger, what counts as available money, and the remedies are set out in the facility agreement, and they vary. The phrase describes a funding position, not a judgment on the builder's work.
Who calculates cost to complete?: On a development loan the figure used for the test is normally assessed by the lender's independent quantity surveyor or monitoring surveyor, working from the contract, the certified amounts, variations and the programme. The developer and builder will have their own figures, which are useful inputs. The lender advances against the independent estimate because the other parties have a direct interest in the answer.
Does cost to complete include interest?: On a development loan it should, where interest is being funded through the facility. The interest still to accrue until repayment is a real call on the remaining money, and it rises if the programme slips. Leaving it out makes the project appear better funded than it is. Agreements differ on whether the test covers interest explicitly, so the definition has to be read for the deal at hand.
What happens if a developer cannot fill a cost-to-complete gap?: The lender can refuse further advances and, if the facility agreement treats the shortfall as an event of default, may have enforcement rights. In practice, it will look at whether completing the project is the least bad outcome. Options include calling on guarantors, bringing in new equity or a junior lender, reducing the scope, advancing more against a revised plan, or enforcing and appointing someone to finish or sell the site.

// NEXT TO IT

// ON WHOSE DESK

The seats that read this term in an ordinary week. Each page says what the seat is for, who arrives in it, and the shape of the round it runs.

Credit analystReads a borrower and writes the recommendation a decision-maker will act on.
Credit sanctionerHolds delegated authority and signs — or declines — the lending the front line brings.
Workout and recoveries managerTakes the files that have gone wrong and works out how much the bank gets back, and how.

THE IN-TRAY · ONE MINUTE

Make the call on one file.

A short file on the ground this page covers. Every option opens with how far it sits from a senior banker’s read.

SIGNAL OR NOISE · THE ECONOMY · COLLATERAL MARKETS

A loan is secured on a specialised cold-store warehouse. Similar warehouses in the region have taken two years to sell.

Signal or noise?

3 MORE ON THE ECONOMY · COLLATERAL MARKETS →WHERE DO YOU READ FROM? THE PLACEMENT →

THE READING ROOMIN ONE PARAGRAPHCost to complete What is cost to complete on a development loan?