How a construction facility is controlled: QS, reserves and ratchets
A construction facility is the only kind of property lending where the asset securing the loan does not exist yet when the money starts moving. Everything between drawdown and completion is a control problem, and three mechanisms do most of the work.
1. Certification against physical progress
The core discipline is simple and it is the one most often misunderstood by borrowers: a quantity surveyor certifies against verified physical completion on site — not against what has already been paid to the builder.
On one facility with a varied contract of about $1.498m, the QS would not fully certify a claim because windows and rough-in had not reached the claimed stage, even though the borrower had already paid the builder and had an agreed variation. Neither fact was relevant.
What that discipline buys the lender:
- The certified amount can be less than the claimed amount. One claim of $165,000 was certified and paid at $150,000. Another line item covering works that had not visibly started was reduced to $0.00.
- The statutory declaration is the trigger. The builder’s payment declaration is what causes the inspection to happen at all — no declaration, no inspection, no funds.
- The report has to clear the firm’s own quality assurance. A job sitting at “in progress” after inspection is usually awaiting internal compliance sign-off, not a platform delay.
One nuance worth knowing: a financier’s QS reports to and for the financier. It is not a party to the building contract and cannot certify variations, extensions of time or payment schedules under it. Borrowers who expect the QS to adjudicate builder disputes are looking at the wrong instrument.
Reconciling three cost figures
A construction file carries the builder’s contract sum, the valuer’s check-cost assessment, and the independent QS’s assessed cost. The QS figure is generally the one used — but where the QS figure comes in lower than the valuer’s check cost, that specific direction of difference is treated as needing discussion rather than automatic pass-through.
2. The interest reserve
On a capitalised-interest facility, the reserve is what keeps the loan current while the asset produces no income.
The structural point that matters: the reserve is usually a fixed dollar amount, not an open-ended provision. Interest accruing beyond it becomes an immediate out-of-pocket obligation of the borrower, and non-payment is a default event rather than an overdraft.
That makes reserve exhaustion an early signal rather than a late one. A well-run facility monitors it and gets ahead of a shortfall notice; a poorly-run one discovers it when the debit fails.
Related: the full term’s interest is commonly reserved and deducted upfront from the facility limit. On one $550,000 facility over 13 months, roughly $99,251 was reserved, leaving about $430,000 in hand. The borrower pays interest on the limit while holding substantially less.
3. Contingency floors and variation control
Two related controls sit around the construction budget:
- A minimum cost-to-complete retained within contingency at all times — commonly around 3%, and commonly non-negotiable. A disputed short payment has to show contingency comfortably above that floor after the disputed amount is released.
- Variations exceeding remaining contingency need separate credit approval to draw from the main construction budget. The certified base claim is paid immediately; the variation shortfall waits.
Together these stop a facility being drawn down to the point where finishing the building costs more than the money left.
4. Presale conditions
Presale requirements are the fourth control, and they are more flexible than they look.
Presale coverage materially affects a lender’s risk assessment, and a shortfall below roughly 20–25% presale debt cover is commonly treated as a pricing lever rather than an automatic decline. Presale conditions are usually about de-risking the exit, not mandating a sale — which is why a proposal to retain a completed asset and refinance it to a mainstream lender post-completion is often acceptable where rental yield supports it.
Presale requirements also trade against equity. Reducing the number of presales directly increases the equity the developer must contribute, because presales reduce required leverage. On one file, dropping from three presales to one at settlement plus one pre-construction lifted the equity target by roughly $450,000. Those two asks should be negotiated together, not separately.
One diligence point: cross-check presale assumptions against the developer’s actual, current sales register. One development valuation had marked two units as presold that were still unsold per the developer’s live figures, and had mispriced a third. Where presales sit with several solicitors, expect the lender’s solicitor to require them reconciled into one lot, solicitor and price schedule before advancing.
What good control looks like from the outside
If you are assessing a manager’s construction exposure, these are the observable markers:
- Independent QS certification, not self-certified claims.
- A stated contingency floor, maintained.
- A monitored interest reserve with a defined response when it approaches exhaustion.
- Presale coverage tracked against a stated threshold, with a documented consequence when it slips.
- Reconciliation of the QS figure against the valuer’s check cost, with a defined process when they diverge.
Where no-presale lending is written, expect the oversight cost to be visible in the structure — one observed no-presale facility carried a $5,000 due diligence fee and a $4,000 per month fee for a lender-appointed superintendent overseeing the build. That is the control being paid for explicitly rather than assumed.
General information only, prepared for wholesale investors. It is not financial product advice, does not take account of your objectives, financial situation or needs, and is not an offer of, or invitation to acquire, any financial product. Figures are de-identified observations over 2024–2026.