Construction cost overruns rarely happen overnight. More often, they develop gradually as schedules shift, change orders accumulate, contingency is depleted, and project costs begin to move away from the original budget.
For lenders, identifying these warning signs early is critical. The earlier a potential issue is identified, the more opportunity there is to understand what is happening and address concerns before they become larger problems.
Pre-construction due diligence and ongoing monitoring can help lenders gain greater visibility into potential cost and construction risks. Here are seven warning signs lenders should watch throughout the life of a construction project.
1. Change Orders Are Beginning to Accumulate
Change orders are a normal part of construction. However, their frequency, size, and cause can provide important insight into the financial health of a project.
A growing number of change orders may point to unforeseen site conditions, design revisions, scope changes, material substitutions, coordination issues, or costs that were not adequately accounted for in the original budget.
Individually, these changes may appear manageable. Collectively, they can place significant pressure on the remaining construction budget.
Lenders should pay attention not only to approved change orders but also to pending and anticipated changes that could affect the project’s future costs
2. Contingency Is Being Used Too Early
Construction contingency provides a financial cushion for unexpected costs. Using contingency is not necessarily a problem; the concern is how quickly it is being consumed relative to construction progress.
For example, a project that has used 70% of its contingency while only 30% complete may have limited flexibility to absorb additional unexpected costs during the remainder of construction.
Contingency should therefore be considered alongside the project’s remaining scope, schedule, budget, and anticipated costs.
3. Construction Progress Is Falling Behind Schedule
Schedule delays can quickly become financial issues.
When a construction project takes longer than anticipated, additional expenses can begin to accumulate. These may include extended general conditions, equipment rentals, labor costs, financing expenses, and other costs associated with a longer construction period.
The reason for the delay matters as well. A temporary weather delay may present a different level of risk than persistent delays caused by contractor performance, permitting issues, design changes, material shortages, or unresolved project problems.
Monitoring both the project’s reported schedule and actual construction progress can help lenders identify potential delays before they create larger financial concerns.
4. Percent Funded Is Outpacing Percent Complete
One of the most important relationships to monitor during construction is the amount of the construction budget that has been funded compared with the amount of work that has actually been completed.
If a project is becoming substantially more funded than physically complete, lenders should understand why.
There may be legitimate reasons for a difference, including deposits, approved stored materials, or certain front-loaded costs. However, a growing gap between funding and physical progress may indicate that project funds are being consumed faster than construction is advancing.
Ongoing Draw Inspections can provide lenders with independent observations of physical construction progress as part of the draw process.
5. Stored Materials Are Increasing
Stored materials are common in construction, particularly when projects require long-lead equipment or materials to be purchased before installation.
However, significant or increasing stored-material requests deserve careful attention.
Lenders should consider whether the materials are present, properly documented, securely stored, insured, and reasonable for the project’s current stage of construction.
Large amounts of project funds tied up in materials that have not yet been incorporated into the work can affect the relationship between dollars funded and physical construction progress.
6. Contractor or Subcontractor Payment Issues Appear
Payment problems can be an early indicator of broader project stress.
Delayed subcontractor payments, lien activity, disputes, or inconsistent payment documentation may indicate that project funds are under pressure or that other issues are developing behind the scenes.
Payment problems can also create additional construction risk. Subcontractors may reduce or stop work, disputes can contribute to delays, and unresolved liens can create additional complications for the project.
These issues become especially important when they appear alongside other warning signs, such as schedule delays, contingency depletion, or increasing change orders.
7. The Remaining Budget May Not Match the Remaining Work
Construction budgets naturally evolve as projects progress. Costs may shift reallocate between categories, savings may occur in one area, and additional expenses may emerge elsewhere.
The important question is whether the remaining funds appear sufficient for the remaining scope of work.
Repeated budget reallocations or increasing costs across multiple categories may indicate that portions of the project were underestimated or that the original budget assumptions are no longer holding.
As construction progresses, lenders should continue considering the relationship between work completed, funds disbursed, remaining funds, and remaining work. When those pieces begin moving out of alignment, it may be an early indication of potential cost-to-complete concerns.
How Budget Reviews, Project Reviews, and Draw Inspections Can Help
Cost overruns cannot always be prevented, but early due diligence and ongoing monitoring can help lenders identify potential risks sooner.
For residential construction, a Budget Review evaluates the proposed construction budget to help identify potential cost concerns before construction begins. For commercial projects, a Project Review provides a more comprehensive review of the project, including the budget and key construction documents.
Once construction is underway, Draw Inspections provide independent observations of construction progress and help lenders monitor the project throughout the draw process.
Together, these services help lenders identify potential concerns earlier and maintain greater visibility into construction risk from pre-closing through project completion.
Stay Ahead of Construction Risk
Cost overruns may not always be avoidable, but they rarely occur without warning. Change orders, contingency usage, schedule delays, funding discrepancies, stored materials, payment issues, and cost-to-complete concerns can all provide important signals.
Identifying these warning signs early gives lenders more time to understand potential issues and make informed decisions before they become larger problems.
NWM Risk Management provides residential Budget Reviews, commercial Project Reviews, and Draw Inspections to help lenders gain greater visibility into construction risk from pre-closing through project completion.
Contact NWM Risk Management to learn how we can support your next construction project.
