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A Toll Road Sources and Uses Gap Surfaces From a Contingency Drawdown Error

Case Study • Intermediate • 4 min read

Audience
Lenders • Model Developers
Last Reviewed
July 2026
Updated
Version 1.0

Executive Summary

This is an illustrative, composite scenario, not a specific real transaction. It follows a toll road project company managing a moderate construction cost overrun, discovering that its financial model had never separately tracked construction contingency as its own funding line, having instead folded it into the base construction cost assumption at financial close, which meant the model had no mechanism to represent an actual contingency drawdown once one was genuinely needed. The core lesson: contingency must be modelled as its own distinct, triggered reserve, separate from base construction cost, or the model cannot represent the difference between the base case and a genuine cost overrun scenario.

Illustrative Scenario

This case study is a composite, educational scenario built from patterns commonly observed in financial model reviews. It does not describe a specific, identifiable client engagement, and any resemblance to a particular transaction is coincidental.

Background

A toll road project company had reached financial close on a mid-sized greenfield toll concession, with a financial model that had been reviewed and accepted by the lender syndicate ahead of close. The sources and uses statement balanced cleanly, with total sources matching total uses, and the model had been treated as a reliable basis for the funding plan throughout construction.

Partway through construction, the EPC contractor identified a genuine cost increase, driven by an unforeseen ground condition affecting one section of the alignment, requiring additional funding beyond the original construction budget.

The Problem

The project company's finance team turned to the financial model to determine how the cost increase should be funded, expecting a contingency reserve, established as a specific line item at financial close, to absorb some or all of the additional cost. Reviewing the model, the team found no separately identifiable contingency balance or drawdown mechanism at all.

Findings

Tracing the original model's construction budget, the team found that construction contingency had been included in the sources and uses statement only as an amount folded directly into the base construction cost line, rather than tracked as its own distinct reserve with an explicit drawdown trigger. The model had no formula representing the difference between "contingency unused" and "contingency drawn," because contingency had never existed in the model as a separately identifiable quantity in the first place — it was simply part of a single, blended construction cost figure. See Construction Period Modelling for the treatment this model should have implemented.

Root Cause

The original model had been built to demonstrate that the transaction's total funding requirement was covered by the proposed debt and equity quantum, and the contingency percentage had been applied as a single uplift to the base construction cost during the initial budget build, rather than carried forward as its own tracked line into the construction-phase funding schedule. Because the sources and uses statement reconciled cleanly in the base case, this collapsing of contingency into base cost was not flagged as a structural gap during the pre-financial-close review, which focused on confirming the statement balanced rather than on whether contingency was independently testable as a stress scenario.

Risk

Without a separately tracked contingency reserve, the project company had no existing model-based reference point for how the cost overrun should be funded, whether from an already-committed but unused contingency amount, a standby facility, or additional sponsor equity, since the model provided no visibility into what contingency capacity, if any, genuinely remained available. This left the funding decision to be worked out ad hoc under time pressure, rather than by exercising a mechanism the model was originally meant to have already established.

Resolution

The project company rebuilt the construction-phase funding schedule to separate base construction cost from a distinct contingency line, reconciled against the original percentage assumption applied at financial close, and confirmed with its lenders how much of that notional contingency capacity remained available in principle even though it had never been tracked as such. The specific cost overrun was ultimately funded through a combination of the reconstructed contingency allowance and a modest additional equity contribution, agreed with the lender syndicate once the corrected funding picture was established.

Lessons Learned

  • Construction contingency must be modelled as its own distinct, triggered reserve, separate from base construction cost, or the model has no mechanism to represent an actual cost overrun scenario when one occurs.
  • A sources and uses statement that reconciles in the base case does not confirm that the model can correctly represent a stress scenario; the two are different structural properties.
  • A pre-financial-close review should specifically test whether contingency is independently identifiable and drawable within the model, not only confirm that the base-case funding totals balance.
  • Collapsing a reserve or contingency amount into a single blended cost line during an early-stage budget build is a common shortcut that should be unwound before the model is relied upon as the transaction's ongoing funding reference.

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Frequently Asked Questions

Is this a real client engagement?

No. This is an illustrative, composite scenario built from patterns commonly observed in project finance model reviews. It does not describe a specific, identifiable transaction.

Why did folding contingency into base cost create a problem?

Because the model had no separately tracked contingency line with its own drawdown mechanic, there was no formula representing what should happen when an actual cost overrun occurred, only a single blended construction cost figure that had already assumed contingency was part of the base spend.

How should contingency have been modelled instead?

As a distinct reserve, separate from base construction cost, with its own explicit drawdown trigger, so the model could represent both the base case, in which contingency is unused, and a cost overrun scenario in which some or all of it is drawn.

What was the actual financial consequence?

When the genuine cost overrun occurred, the project company had to determine ad hoc, rather than through an existing model mechanism, how the overrun should be funded, since the sources and uses statement had never represented an unfunded contingency drawdown as a distinct scenario.

Could this have been caught before financial close?

Yes. A structural review specifically testing whether contingency was modelled as a separate, triggered reserve, rather than confirming only that the sources and uses statement reconciled in the base case, would have surfaced the gap before it mattered.

Related Articles

What Is a Project Finance Model Audit?

A project finance model audit is a financial model audit applied to the specific class of model used to finance infrastructure, energy, and long dated capital projects: debt sculpted, multi decade, cash flow driven structures with mechanics that do not appear in a typical corporate model. It is frequently a formal condition of financial close, not an optional check, and lender requirements for it exist almost entirely inside non public bank credit policy rather than any single consolidated public source. This page defines what makes project finance models structurally distinct, why lenders require independent verification of them specifically, and what the audit process looks like in this context.

Construction Period Modelling

The construction phase of a project finance model has no operating revenue and is governed entirely by funding mechanics, the construction cost curve, the drawdown profile, interest during construction, and contingency drawdown, culminating in a commercial operations date (COD) test that governs the transition to operations. This guide sets out how to build each of these mechanics and the common errors that misstate the total construction-phase funding requirement.

Construction Contingency

Construction contingency is an amount of funding reserved in a project finance sources and uses statement specifically to absorb cost overruns during the construction phase, distinct from and additional to the base construction budget. Because a project finance lender's exposure is fixed at financial close while the construction contract's final cost is not fully certain until completion, contingency sizing and its drawdown mechanics, including who bears responsibility for funding a shortfall once contingency is exhausted, is one of the most heavily negotiated points in project finance structuring.
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