Running Short Mid-Build: A Worked Example of a Funding Gap

An illustrative calculation of what happens when a build costs more than the facility covers, the three ways out, and what each one actually costs by the time the house is finished.

A build that overruns creates a specific problem: a part-built property is poor security, your contractor is on site and your facility is fully drawn. The arithmetic below shows how a moderate overrun becomes a large cash problem, and prices the three routes out. Every figure is an illustrative assumption used to show the method, and your own position depends on your contract, your facility and your lender’s policy at the time.

The situation

An owner is building a villa on a plot already owned. The cost plan totalled SAR 2,000,000, of which a construction facility covers SAR 1,400,000 released in tranches against certified progress, with SAR 600,000 of owner equity spent first. At roughly seventy per cent completion, the certifier’s reconciliation shows the forecast final cost has risen to SAR 2,300,000, driven by ground conditions in the substructure and a services variation. The facility cannot be increased without a new credit decision.

Assumptions (illustrative)

• Original cost plan: SAR 2,000,000.
• Construction facility: SAR 1,400,000, released against certified progress.
• Owner equity already spent: SAR 600,000.
• Revised forecast final cost: SAR 2,300,000.
• Work certified to date: SAR 1,610,000, being seventy per cent of the original plan.
• Owner cash remaining outside the project: SAR 120,000.

Step 1: Establish the size of the gap

Revised cost of SAR 2,300,000 less total funding of SAR 2,000,000 equals a gap of SAR 300,000.

A fifteen per cent overrun on the plan produces a gap of SAR 300,000 against remaining cash of SAR 120,000. The overrun is moderate; the liquidity problem is not.

Step 2: Work out what is left to build and what is left to draw

Remaining work at the revised cost is SAR 2,300,000 less SAR 1,610,000 certified, which is SAR 690,000. Facility remaining is SAR 1,400,000 less the SAR 1,010,000 drawn after equity, leaving SAR 390,000.

The owner needs SAR 690,000 and has SAR 390,000 of facility plus SAR 120,000 of cash, which is SAR 510,000. The shortfall of SAR 180,000 arrives before completion, not at it.

Step 3: Price route one, a facility increase

An increase of SAR 300,000 requires a new credit decision, a revaluation of a part-built property and fresh registration of the increased security, assumed here at SAR 22,000 of costs plus the carrying cost on the larger amount.

This is usually the cheapest route if the lender agrees, because it keeps everything inside one facility. The risk is that a revaluation of an unfinished house supports less than the owner expects.

Step 4: Price route two, an unsecured facility

SAR 300,000 raised as a separate obligation against income, at a materially higher margin than the construction facility, and repayable over a far shorter period, producing an instalment several times the proportionate cost of the construction tranche.

It is faster and usually available, and it loads a short, expensive obligation onto a household that is also about to start paying a long-term facility. It solves the build and strains the following three years.

Step 5: Price route three, reducing the scope

Deferring the external works, the landscaping and the upper-floor fit-out, assumed at SAR 210,000, brings the required cost to SAR 2,090,000 and the remaining need to SAR 480,000 against SAR 510,000 available.

This closes the gap without new borrowing and leaves a habitable house with work outstanding. It is the only route that does not depend on a third party saying yes.

Step 6: Compare the three at completion

Route one finishes the house and adds SAR 22,000 of cost plus carrying cost on SAR 300,000. Route two finishes it and adds a short expensive obligation. Route three finishes less house, adds nothing, and leaves SAR 210,000 of work to fund later from income.

The ranking depends on whether the owner needs the whole house now. If not, deferring scope is almost always the cheapest answer, which is why it should be priced before any lender is approached.

What changes the answer

• Whether the lender will revalue a part-built property at a level that supports an increase at all.
• How much of the remaining work is genuinely deferrable without leaving the house unusable.
• Whether the building contract allows scope to be reduced, and on what terms the contractor agrees.
• How long an increase takes to approve, since a contractor standing idle on site has a cost of its own.
• Whether the overrun is finished or still running, because a second gap after a top-up is far harder to fund.

What the numbers tell you

• A moderate percentage overrun becomes a severe cash problem because the facility is already fully committed.
• The deferrable scope should be identified in the cost plan at the start, so it is a lever rather than a scramble.
• A part-built property is weak security, which is exactly why a top-up is hardest when you most need it.
• Raise the forecast with the lender as soon as the certifier flags it, not when the money runs out.
• Contingency held centrally and defended against upgrades is what prevents this whole exercise.

Limits of this example

Every figure above is an illustrative assumption used to show the method, not a quote, valuation or market rate. Costs, rates, fees and regulations change and must be confirmed with the relevant authority, lender or supplier before you commit.

Domira works alongside the finance side of a property purchase or a build: the valuation evidence, the cost plan and the construction programme that a lender needs to see. The lending terms come from your bank or finance company, and Domira makes sure the property side of the file stands up.