A newly discovered repair can exhaust contingency, create a completion funding gap and weaken the case for continuing. Reconcile the revised budget with available advances, then compare the incremental completion decision with a documented as-is alternative.
Hypothetical adaptive-reuse project. The original budget is $10 million, funded by $6.5 million of construction debt and $3.5 million of equity. After $7 million has been spent, an engineer identifies structural work outside the approved scope. Assume the necessary investigation and revised scope support the amounts below; no actual building condition or repair method is being represented.
The project has drawn $4 million of debt and used $3 million of equity. Remaining committed funding is $2.5 million of debt and $500,000 of owner equity. The original remaining budget is $3 million, including $400,000 of unspent contingency. The owner must decide whether and how the revised project can be completed.
Rebuild remaining cost without spending contingency twice
The original known work remaining is $2.6 million; the other $400,000 was contingency, not a separate signed work package. New structural repair costs $1.2 million, redesign costs $100,000, and additional delay carry costs $150,000. The revised plan also retains a fresh $250,000 contingency for unresolved risk.
| Revised remaining use | Amount |
|---|---|
| Original known work | $2,600,000 |
| Added structural repair | $1,200,000 |
| Redesign | $100,000 |
| Added delay carry | $150,000 |
| Remaining contingency after reforecast | $250,000 |
| Total remaining requirement | $4,300,000 |
| Remaining committed debt | ($2,500,000) |
| Remaining original equity commitment | ($500,000) |
| Additional commitment required | $1,300,000 |
The original $400,000 contingency is already absorbed by replacing the old $3 million remaining forecast with the new $4.3 million forecast. Deducting it again would understate the gap. Total revised budget becomes $11.3 million, including the new $250,000 contingency.
The OCC construction discussion identifies unforeseen conditions, delays and remaining completion funds as credit concerns. Its guidance does not allocate legal responsibility for this fictional repair. Engineering scope, contractor obligations, insurance and lender consents require their actual records.
Separate available cash from hoped-for recovery
The owner can currently commit another $650,000 beyond its remaining original $500,000. That still leaves $650,000 uncommitted against the revised requirement. It also asserts a possible $350,000 contractor recovery, but liability, payment and timing are disputed.
The recovery stays out of committed sources. If eventually collected and available, it can reduce the owner’s net cost; it cannot fund an invoice due before settlement. Counting both a contractor credit in the revised cost and the same recovery as cash would also double count the benefit.
Before another draw, the borrower should present the revised cost-to-complete and the source of every remaining dollar. A lender’s willingness to continue administering the loan does not establish that an underfunded completion budget has been cured.
Test whether a larger loan is actually supported
The owner proposes keeping the original 65% loan-to-cost percentage on the $11.3 million revised budget. That would imply $7.345 million total debt, or $845,000 above the original $6.5 million commitment.
Assume, however, that accepted completed value remains $10 million and the lender also imposes a 65% LTV ceiling. That ceiling remains $6.5 million. The higher cost does not produce more collateral value in this case, so the proposed loan increase fails the second constraint even before income, maturity and approval conditions are considered.
The owner must therefore fund the gap with other accepted capital or change the plan. A cost overrun is a use of funds; it is not itself evidence of appreciation. Removing repair work necessary for completion would not be a credible cost-saving alternative.
Compare continuing with an as-is exit on an incremental basis
Assume there is a documented hypothetical as-is sale alternative at $6 million with 2% selling costs and repayment of the $4 million presently funded loan. Ignore taxes, prepayment fees and other claims solely for this comparison. Net owner recovery would be $1.88 million.
If the owner instead completes under the revised plan, it must supply $4.3 million remaining cost less $2.5 million remaining debt, or $1.8 million of additional cash. This includes the $500,000 original future commitment plus the $1.3 million extra requirement. Assume the completed property then sells for $10 million with 2% costs and repays $6.5 million debt, returning $3.3 million to ownership.
| Decision from today’s position | Future owner cash required | Future net owner sale proceeds | Proceeds less new cash, undiscounted |
|---|---|---|---|
| Sell as-is | $0 | $1,880,000 | $1,880,000 |
| Finish and sell | $1,800,000 | $3,300,000 | $1,500,000 |
On these stipulated values and costs, continuation produces $380,000 less incremental net value, before time and execution risk. The $3 million already invested is common history and should not be used to justify spending more by itself. Actual sale ability, legal obligations, guaranties, construction termination costs and taxes could change the comparison materially and must be added before a real decision.
Make the next authorization conditional
The decision is not simply “raise the $650,000 still missing.” The committee must also decide whether the revised continuation economics justify the total additional commitment. It should require a validated scope, updated cost and timing, documented funding, lender consent and a realistic alternative-use or sale analysis.
If new evidence increases completed value or reduces supported remaining cost, rerun the same comparison. If a recovery becomes unconditional and timely, add it once in the proper period. Until then, the model shows both a financing gap and a reason to reassess the project itself. Completing the old business plan is not automatically the best response to a new structural condition.
Sources and evidence
- OCC — Commercial Real Estate Lending, version 2.0Construction Concerns, printed p.31; Monitoring and Disbursement, pp.45–48 · Checked 2026-10-21 · Bank supervisory context. March 2022 publication, with March 20, 2025 reputation-risk edits. All case amounts, thresholds and contractual conditions are invented teaching assumptions.
Source dates and applicability matter. Report an error or a changed source.