Cost overruns are normal
Let's start with a reality check: cost overruns happen on the majority of UK development projects. Industry data suggests 60–80% of projects exceed their original budget to some degree. The question isn't whether costs will overrun — it's how much and what you do about it.
Common causes include ground condition surprises, material price increases, contractor delays, planning condition changes, Building Regulations compliance costs, and scope creep. A 5–10% overrun is normal. A 20%+ overrun usually indicates a fundamental problem with the original cost estimate.
What happens to your finance
When costs exceed the agreed facility, the development finance lender won't automatically release additional funds. Here's the typical sequence:
- The monitoring surveyor flags the issue at the next drawdown inspection. They note that remaining costs exceed the remaining facility.
- The lender freezes further drawdowns until the funding shortfall is resolved. This doesn't mean they're pulling the loan — they need assurance that the project can be completed.
- You need to present a solution: Additional equity, cost savings, specification reduction, or a formal facility increase request.
- Once the solution is agreed, drawdowns resume. If you can't find a solution, the project risks stalling — which is the worst outcome for everyone.
Your options when costs overrun
1. Inject additional equity
The simplest solution: put more personal money in. If you have reserves, this is the fastest way to get drawdowns moving again.
2. Request a facility increase
If the deal still works at higher costs (LTGDV and LTC within parameters), ask the lender to increase the facility. They'll reassess the deal and may require an updated valuation. This takes 2–4 weeks.
3. Bring in mezzanine finance
A mezzanine lender can provide a top-up facility to bridge the gap. This is quicker than renegotiating the senior facility but adds another layer of debt and cost.
4. Value engineer
Reduce specification or scope to bring costs back in line. Cheaper kitchen units, standard rather than premium bathrooms, simplified external landscaping. This reduces your GDV too, so model the trade-off carefully.
5. Negotiate with the contractor
If the overrun is due to contractor pricing, negotiate. Fixed-price contracts should protect you; cost-plus contracts need active management. Consider whether a different contractor or subcontractor can deliver outstanding work more efficiently.
How to protect yourself before it happens
- Include contingency: 5–10% of build costs as standard. 10–15% for complex schemes or refurbishments.
- Use fixed-price contracts: Transfer cost risk to the contractor where possible.
- Monitor costs monthly: Don't wait for the monitoring surveyor to tell you there's a problem. Track actual vs budgeted costs in real time.
- Stress-test before you start: Assesr's credit papers include sensitivity analysis showing what happens at 10% and 20% cost overruns. If the deal doesn't survive a 10% overrun, the margins are too thin.
Communicate early
The single most important piece of advice: tell your lender early. Lenders would much rather work with a borrower who flags a cost issue at 10% overrun than discover a 25% overrun at the next monitoring visit. Early communication preserves trust and gives everyone more time to find solutions.