Interest During Construction (IDC)

Glossary Term • Intermediate • 3 min read

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

Executive Summary

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.

Key Takeaways

✓ IDC is the interest accrued on drawn debt during construction, before the project generates revenue to pay it in cash.
✓ IDC is typically capitalized, added to the total funding requirement, rather than paid in cash during construction.
✓ IDC is calculated on the cumulative drawn balance, which itself depends on total uses, including IDC itself, creating a circular reference.
✓ A model that estimates IDC as a static assumption rather than calculating it from the actual construction drawdown profile risks materially understating or overstating the total funding requirement.
✓ The correct convention, consistent with debt sculpting practice elsewhere in project finance models, is to calculate interest on the opening drawn balance each period, not an average balance, to avoid a second layer of circularity.

Definition¶

Interest during construction (IDC) is the interest that accrues on project finance debt drawn during the construction phase, before the project reaches commercial operations and begins generating revenue. Because no operating cash flow exists during construction to fund a cash interest payment, IDC is typically capitalized: added to the total funding requirement on the sources and uses statement and financed as part of the debt facility, to be repaid from operating cash flow once the project is generating revenue.

Why It Matters¶

IDC is frequently one of the largest single line items on the uses side of a project finance sources and uses statement, particularly for long-construction-period assets such as large infrastructure, power generation, or process plant projects. Because IDC is calculated on the drawn debt balance, and the drawn debt balance itself depends on the total funding requirement, which includes IDC, a model that does not handle this circularity correctly can materially misstate the total funding requirement and therefore the required debt and equity quantum.

Technical Background¶

The IDC Circularity¶

Total Uses = Construction Cost + IDC + Fees + Contingency + Reserve Funding
Total Sources = Debt + Equity
Debt Drawn (cumulative) → drives → IDC
IDC → increases → Total Uses → increases → Debt Drawn

This is structurally the same circularity pattern addressed in Circularity in Debt Models for operating-phase interest, applied to the construction phase. The resolution is the same: enable a controlled iterative calculation with the circularity explicitly documented in the model's assumptions log, or derive a closed-form algebraic solution where the construction-phase cash flow profile permits one.

Calculation Convention¶

IDC in a given construction period is calculated as the interest rate applied to the drawn debt balance for that period. Consistent with the convention established in debt sculpting, interest should be calculated on the opening drawn balance for the period, not an average balance, to avoid introducing a second, unnecessary layer of circularity within the already-circular IDC calculation.

IDC(period) = Opening Drawn Balance(period) × Interest Rate × Period Fraction
Closing Drawn Balance(period) = Opening Drawn Balance(period) + Drawdown(period) + IDC(period)

Relationship to the Drawdown Schedule¶

IDC cannot be calculated independently of the drawdown schedule, since the drawn balance in any period depends on the timing and amount of prior drawdowns, which themselves depend on the construction cost profile and, circularly, on IDC accrued in prior periods.

Common Errors¶

Error	Description	Risk
IDC estimated as a static lump sum	IDC entered as a fixed assumption rather than calculated from the drawdown profile	Total funding requirement does not respond correctly to changes in construction schedule or interest rate
Average balance used instead of opening balance	Interest calculated on the average of opening and closing balance	Introduces an unnecessary second layer of circularity, increasing the risk of calculation instability
IDC omitted from the debt sizing loop	IDC calculated but not fed back into the total funding requirement that sizes the debt facility	Sources and uses does not reconcile; debt facility may be undersized
Construction period misaligned with drawdown timing	IDC period range does not match the actual drawdown schedule dates	IDC over- or understated relative to the actual construction programme

Best Practices¶

Calculate IDC on the opening drawn balance each period, feed it explicitly back into the total uses figure that sizes the debt facility, and resolve the resulting circularity through a controlled, documented iterative calculation. Present the cumulative IDC figure as a visible line in both the sources and uses statement and the construction-phase debt schedule, so a reviewer can trace exactly how much of the total funding requirement is attributable to capitalized interest rather than direct construction cost.

Continue Reading¶

Prerequisites¶

What Is a Project Finance Model Audit? — the parent pillar

Financial Model Audit Engine (FMAE) — deterministic structural auditing referenced throughout this guide

How OXXON tests thisRun a free structural check with FMAE

Frequently Asked Questions

What is interest during construction (IDC)?

The interest that accrues on project finance debt drawn during the construction phase, before the project reaches commercial operations and begins generating revenue.

Why is IDC capitalized rather than paid in cash?

Because there is no operating revenue during construction to fund a cash interest payment. Capitalizing IDC means it is added to the total funding requirement and financed as part of the debt facility, to be repaid from operating cash flow once the project is operational.

How is IDC calculated?

As interest on the cumulative drawn debt balance in each construction period, typically calculated on the opening balance to avoid a second layer of circularity, consistent with the convention used in debt sculpting. See Debt Sculpting Mechanics for the equivalent operating-phase treatment.

Why does IDC create a circular reference?

Because IDC is itself a use of funds that increases the total funding requirement, which increases the debt drawn, which increases the interest accrued, which increases IDC. This is resolved the same way as other project finance circularities, through a controlled iterative calculation or an algebraic closed-form solution.

What happens if a model estimates IDC as a fixed assumption instead of calculating it?

The sources and uses statement will not correctly respond to changes in the construction schedule, drawdown profile, or interest rate assumption, and the total funding requirement may be materially misstated, particularly if the construction period is extended.

Does IDC affect the project's tax position?

In many jurisdictions capitalized interest during construction receives specific tax treatment, distinct from interest expense during operations. See Tax and Depreciation in Project Finance Models for the construction-phase tax treatment.

Is IDC the same as capitalized interest?

IDC is the project finance term for the specific case of capitalized interest that accrues during a construction or development phase before an asset generates revenue. Capitalized interest is the broader accounting concept.

Sources and Uses (of Funds)

A sources and uses statement is the schedule in a project finance model that lists every source of funding for a transaction, senior debt, subordinated debt, sponsor equity, grants, and any other funding instrument, against every use of that funding, construction costs, capitalized interest during construction, reserve account funding, financing fees, and contingency. The two sides must reconcile to the same total with no unexplained balancing figure. It is typically the first schedule built in a project finance model and the one lenders review first, because it is the clearest single statement of how a transaction is actually funded and what that funding is spent on.

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.

Circular Reference

A circular reference occurs when a formula in a financial model depends, directly or through a chain of intermediate cells, on its own value. Excel flags circular references by default and returns zero in the affected cells unless iterative calculation is enabled. In financial models, circular references arise most often in interest-on-debt calculations, cash sweep mechanics, and tax shield computations — some are structural errors, others reflect genuine simultaneous financial relationships. The distinction between the two, and how each is handled, is addressed in full on the dedicated technical guide linked below.

Debt Service

Debt service is the total periodic payment obligation on a loan facility, comprising interest payable in the period and scheduled principal repayment due in the period. In project finance, debt service is the denominator of the debt service coverage ratio (DSCR). The DSCR measures the ratio of cash available for debt service (CADS) to total debt service, and must exceed the minimum threshold specified in the loan agreement throughout the loan life. Debt service is applied at a defined step in the cash waterfall, after operating costs and before reserve contributions and equity distributions.