Construction Delay Exposes an Unbudgeted Interest During Construction Shortfall
Executive Summary
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 sponsor and its lender syndicate had reached financial close on a mid-sized transport infrastructure project, with a financial model built to size the debt facility and establish the construction-phase funding plan. The model's sources and uses statement included interest during construction as one line among the total funding requirement, alongside base construction cost, fees, and contingency.
Six months into construction, the EPC contractor notified the sponsor of a schedule delay driven by a permitting issue unrelated to the contractor's own performance, extending the expected construction completion date by approximately six months.
The Problem¶
As part of assessing the delay's financial effect, the sponsor's finance team updated the model's construction schedule assumption to reflect the new completion date. The total funding requirement on the sources and uses statement, however, increased only modestly, by an amount the team recognized did not plausibly reflect six additional months of interest accruing on a debt balance that, by that point in construction, was already substantially drawn.
Findings¶
Investigating the funding requirement calculation, the team found that interest during construction had been built into the original model as a static lump-sum assumption, a single fixed figure entered based on an early-stage estimate of total construction financing cost, rather than calculated period by period from the actual drawn debt balance and the construction cost curve. See Interest During Construction for the calculation this model should have implemented.
Because the static assumption was not a function of the drawdown schedule or the construction period length, updating the construction schedule assumption elsewhere in the model had no effect on the IDC line at all — the total funding requirement changed only marginally, reflecting a small adjustment the team had made manually, rather than the genuine additional interest cost the six-month delay actually created.
Root Cause¶
The original model had been built under time pressure ahead of an earlier target financial close date, and the IDC line had been entered as a placeholder estimate intended to be replaced with a full calculation before the model was finalized. That replacement was never completed, and the placeholder was not identified as a structural gap during the model's pre-financial-close review, since the sources and uses statement still reconciled, with total sources matching total uses, even with the static IDC figure in place. See Construction Period Modelling for the correct treatment.
Risk¶
Had the delay's actual IDC effect not been separately investigated and recalculated, the sponsor would have understated the project's true funding requirement by the difference between the static estimate and the actual, drawdown-driven IDC cost, a gap that widened directly in proportion to the length of the delay. Left uncorrected, this would have created a genuine funding shortfall discovered only as construction-phase cash requirements were actually drawn down, at a point considerably harder to remedy than during initial structuring.
Resolution¶
The sponsor's finance team rebuilt the IDC calculation to derive interest from the cumulative drawn debt balance each period, consistent with the opening-balance convention used elsewhere in the model's debt mechanics, and reconciled the corrected total funding requirement against the sources and uses statement. The additional funding requirement created by both the delay itself and the correction of the original static estimate was addressed through a combination of additional sponsor equity and a modest increase in the standby facility drawn, resolved with the lender syndicate ahead of the revised completion date.
Lessons Learned¶
- Interest during construction must be calculated from the actual drawn debt balance and construction period, not entered as a static estimate, since a static figure cannot respond to a change in the construction programme.
- A sources and uses statement that reconciles does not, by itself, confirm that every underlying calculation is genuinely formula-driven; a placeholder assumption can sit undetected inside an otherwise-balancing statement.
- Placeholder assumptions entered under time pressure ahead of an original target close date are a specific, recurring risk that a pre-financial-close structural review should specifically test for, not assume has already been resolved.
- A construction delay's full financial effect should be assessed by recalculating dependent figures (IDC, total funding requirement) directly, not by checking whether a summary schedule still appears to reconcile.
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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 does a static IDC estimate fail when construction is delayed?
Because a static lump-sum estimate is not a function of the actual drawn debt balance or the actual construction period length, so it cannot respond when the construction programme extends beyond its original schedule, unlike a formula-driven IDC calculation tied to the drawdown schedule.
How should interest during construction be calculated instead?
On the cumulative drawn debt balance each period, using the opening-balance convention, so the calculation automatically reflects any change in the drawdown timing or construction period length.
What is the financial consequence of an understated IDC estimate?
The total funding requirement on the sources and uses statement is understated, which can leave a genuine funding gap once the actual, correctly calculated IDC is known, particularly if a delay extends the period over which interest accrues.
Could this have been caught before financial close?
Yes. An independent structural review confirming that IDC is calculated from the drawdown schedule rather than entered as a static assumption would have surfaced the issue before the funding plan was finalized, rather than only once an actual delay occurred.
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.
Interest During Construction (IDC)
Interest during construction (IDC), also called capitalized interest, is the interest that accrues on project finance debt drawn during the construction phase, before the project reaches commercial operations and begins generating revenue to service that debt. Because there is no operating cash flow available to pay this interest as it accrues, IDC is typically capitalized, added to the total funding requirement and financed as part of the debt facility, rather than paid in cash during construction. IDC is calculated on the cumulative drawn balance, which itself depends on the total funding requirement, creating a circular reference that is one of the most common structural features of a project finance construction-phase model.