Construction Finance in Queensland: Progress Draws, Quantity Surveyors and Capitalised Interest

Construction is where a development project carries the most risk and needs the most capital. The site is settled, approvals are in place, and the builder is ready to start. From that point, money is spent long before any income is received, and the project has to be funded through to practical completion and beyond.

Construction finance is designed for that stage. This guide, prepared by Amar Alamar of Blended Ventures, explains how construction finance works for Queensland projects, how progress draws are released, why the quantity surveyor matters, and how capitalised interest affects the true cost of a facility.

What construction finance is

A construction facility funds the cost of building a project, such as townhouses, a small apartment building, a land subdivision with civil works, or a commercial or industrial building. It is usually secured by a first mortgage over the development site and supported by guarantees from the sponsors.

Construction finance differs from an ordinary property loan in a few important ways. Funds are not advanced in a single amount at settlement. They are released in stages as work is completed and verified. The facility usually includes allowances for interest, fees and contingency as well as building costs. And the loan is generally repaid from the sale of completed stock or a refinance once the project is finished, rather than from ongoing income.

For an overview of how construction finance fits alongside site acquisition, residual stock and bridging facilities, see How Private and Development Finance Works for Gold Coast and Queensland Projects.

How lenders size a construction facility

Construction lenders look at both the cost of the project and its expected end value. Two measures are commonly used.

Loan to cost compares the facility to the total project cost, including land, construction, professional fees, statutory charges, finance costs and contingency.

Loan to value compares the facility to the value of the completed project, often referred to as the gross realisation value, as assessed by an independent valuer.

The lower of the two outcomes usually sets the maximum facility. The gap between the facility and the total project cost is the developer's equity contribution, which is normally required to be fully committed before the lender's funds are drawn. Where equity is limited, some projects add a second ranking or mezzanine layer, priced to reflect the additional risk.

Progress draws

Once the facility is in place, construction funds are released through progress draws. The typical cycle is:

The builder submits a progress claim for work completed in the period, in line with the building contract.

The developer lodges a drawdown request with the lender, attaching the builder's claim and any supporting documents.

The lender's quantity surveyor inspects the site and reports on the value of work completed, any variations, and the remaining cost to complete.

The lender releases the verified amount, commonly paid directly to the builder, after confirming that the conditions for the draw are met.

Draws are usually monthly. Delays at any step, such as incomplete claims, unapproved variations or a gap between claimed and verified work, can hold up payment to the builder and put pressure on the program. Clear documentation and early communication with the quantity surveyor help keep draws on time.

The role of the quantity surveyor

The quantity surveyor is appointed by, and reports to, the lender. Their work starts before the facility is approved and continues until completion.

At the outset, the quantity surveyor typically reviews the construction budget, the building contract, plans and specifications, the construction program, and the builder's capacity. They prepare an initial report confirming whether the budget is realistic and whether the facility, together with the developer's equity, is sufficient to complete the project.

During construction, they verify each progress claim and track the cost to complete. If costs rise or variations are agreed, the quantity surveyor will identify any shortfall, and the lender will usually require it to be funded before further draws are released.

This is sometimes seen as a hurdle. In practice, independent verification protects the developer as well as the lender, because it identifies funding gaps early, while there is still time to address them.

Capitalised interest

Most development projects produce no income during construction. For that reason, construction facilities commonly capitalise interest, meaning interest is added to the loan balance instead of being paid monthly.

The lender will usually set aside an interest allowance within the facility, calculated on the expected drawdown profile and program. Because interest accrues on a growing balance, the total cost rises as the project progresses, and it continues to accrue until the loan is repaid.

Three points are worth keeping in mind.

The allowance is an estimate. If the program runs longer than planned, or settlements take longer than expected, the interest allowance can be exhausted before the loan is repaid.

Capitalised interest counts toward leverage. A facility that appears conservative at the start can sit closer to the lender's limits by the end of the project.

Fees often accrue in the same way. Line fees, establishment fees and other charges should be modelled across the realistic life of the facility, including a delay scenario.

Queensland considerations

Projects in Queensland operate within a specific regulatory framework that lenders and their advisers will review. Builders must hold the appropriate licence with the Queensland Building and Construction Commission, and lenders commonly check the licence class and the builder's track record. Depending on the contract, project trust account requirements under the Building Industry Fairness (Security of Payment) Act 2017 may apply, which affects how payments flow from the developer to the builder and subcontractors.

The building contract itself matters. Lenders generally prefer fixed price contracts with an experienced, appropriately licensed builder, and they will review provisions dealing with variations, delays, defects and the builder's security.

What lenders expect before the first draw

A construction lender will usually require the following before releasing funds:

Development approval and, where relevant, building approval.

An executed building contract and the builder's licence and insurance details.

The quantity surveyor's initial report and an acceptable cost to complete.

An independent valuation, including the as if complete value.

Evidence that the developer's equity has been contributed.

Presales or a sales strategy, where the lender requires them, together with the exit plan.

For projects without approval in place, a separate site or land facility is often used first, with construction finance arranged once the approval is issued. Where the developer needs to release equity from another property to meet the equity requirement, a second ranking facility may be considered. The guide Commercial Second Mortgages in Australia explains how those facilities work, and Bridging Finance on the Gold Coast covers short term facilities that can sit between stages.

The role of Blended Ventures

Blended Ventures is a finance brokering consultancy founded by Amar Alamar, working with property owners, investors, developers and business owners from the Gold Coast and Brisbane. It connects clients with private credit funds, non-bank lenders, banks and capital partners, and focuses on business, commercial and investment purpose finance.

Each engagement starts with the project, the budget, the program and the exit, so that a construction facility is structured to carry the project through to completion. More information is available at blendedventures.com.au.

Important information

This article is general information only. It is not financial, credit, legal or tax advice and does not take into account any person's objectives, financial situation or needs. Blended Ventures is a finance broker, not a lender. Any finance is subject to the relevant lender's assessment, credit criteria, security valuation and approval. Readers should obtain independent professional advice before acting.