Sources and Uses (of Funds)

Glossary Term • Beginner • 4 min read

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

Executive Summary

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.

Key Takeaways

✓ A sources and uses statement lists every funding source against every funding use, and the two sides must balance to the same total exactly.
✓ It is typically the first schedule built in a project finance model and the first schedule a lender reviews.
✓ Common sources include senior debt, subordinated or mezzanine debt, sponsor equity, and grants or subsidies; common uses include construction costs, interest during construction, financing fees, contingency, and initial reserve account funding.
✓ A sources and uses statement that does not balance without a hardcoded plug figure indicates a structural error elsewhere in the model, not a rounding difference to be ignored.
✓ Gearing (the debt-to-total-funding ratio) is read directly off the sources and uses statement.

Definition¶

A sources and uses statement is a schedule that lists every source of funding for a project finance transaction against every use of that funding, structured so the two sides reconcile to exactly the same total. It is typically the first schedule built in a project finance model and the first schedule a lender or lender's technical adviser reviews, because it is the single clearest statement of how a transaction is funded and what that funding pays for.

Sources                          Uses
------------------------------   ------------------------------
Senior debt                      Construction / EPC cost
Subordinated / mezzanine debt    Interest during construction (IDC)
Sponsor equity                   Financing and advisory fees
Grants / subsidies (if any)      Contingency
                                  Initial reserve account funding
------------------------------   ------------------------------
Total Sources                =   Total Uses

Why It Matters¶

A sources and uses statement that does not balance to the total without an unexplained hardcoded plug figure is not a rounding artifact — it is evidence of a structural error elsewhere in the model, most commonly a circularity or timing mismatch in the interest during construction calculation, an incomplete fee schedule, or a reserve account funding requirement that was added to uses without a corresponding funding source. Because lenders review this schedule first, an unbalanced sources and uses statement is one of the fastest ways a model loses credibility in an initial review.

Technical Background¶

Sources¶

Senior debt — the primary secured facility, typically the largest single source, sized against the project's debt sculpting and covenant capacity.

Subordinated / mezzanine debt — a secondary debt layer, ranking behind senior debt in the cash waterfall, used to increase total leverage beyond what senior debt alone would support.

Sponsor equity — the balance of funding not covered by debt or other sources, sized as a residual once debt capacity and other sources are determined, though in practice equity is frequently committed as a fixed amount or percentage early in a transaction's structuring.

Grants, subsidies, and concessional funding — relevant in some infrastructure, PPP, and renewables transactions, particularly those involving multilateral development banks or government co-funding.

Uses¶

Construction / EPC cost — the base construction contract price, the largest single use in most project finance transactions.

Interest during construction (IDC) — interest accrued on drawn debt during the construction phase, before the project generates operating revenue. See Interest During Construction for the full calculation treatment.

Financing and advisory fees — arrangement fees, legal fees, technical and financial adviser fees, and other transaction costs incurred in structuring the financing itself.

Contingency — a reserved amount for cost overruns during construction. See Construction Contingency.

Initial reserve account funding — the amount required to fund reserve accounts, such as the debt service reserve account, to their required initial balance at financial close, rather than relying on operating cash flow to build the balance over time.

Reconciliation¶

The sources and uses statement should reconcile automatically as a formula check, not as a manually entered balancing figure. In a correctly built model, total uses is the sum of independently calculated cost line items (construction cost, IDC, fees, contingency, reserve funding), and total sources is the sum of debt sizing (itself frequently dependent on the total uses figure, creating a circular reference resolved the same way as other project finance circularities — see Circularity in Debt Models) plus equity, sized as the residual once debt capacity is determined.

Common Errors¶

Error	Description	Risk
Hardcoded balancing plug	A hardcoded adjustment is entered on either side to force the statement to balance	Masks a real structural error; the model will not correctly respond to changes in any input assumption
Incomplete uses list	A cost category (fees, contingency, reserve funding) is omitted from uses	Total funding requirement is understated, risking a funding shortfall discovered only during construction
IDC calculated outside the circular loop	IDC is estimated as a static assumption rather than calculated from the actual drawdown profile	Understates or overstates total uses depending on whether the estimate was conservative
Equity sized before debt capacity is finalized	Equity is fixed as a hardcoded amount before the debt sculpting calculation converges	Sources and uses does not reconcile once debt sizing is finalized, requiring a manual re-plug

Best Practices¶

Build the sources and uses statement as a live, formula-driven summary that pulls from the underlying construction budget, financing fee schedule, contingency assumption, and reserve funding requirement, with debt and equity sized through the model's actual sizing logic rather than entered as fixed assumptions. Present it as a standalone summary schedule, visible without navigating into the underlying calculation detail, since it is the schedule most frequently reviewed first by a lender or auditor.

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 a sources and uses statement?

A schedule that lists every source of funding for a project finance transaction against every use of that funding, structured so the two sides reconcile to the same total.

What are typical sources of funds in a project finance transaction?

Senior debt, subordinated or mezzanine debt, sponsor equity, and in some transactions grants, subsidies, or development finance institution concessional funding. See Project Finance Model for the full financing structure context.

What are typical uses of funds in a project finance transaction?

Construction and procurement costs, interest during construction, financing and advisory fees, contingency, and initial funding of reserve accounts such as the debt service reserve account.

Why must sources and uses balance exactly?

Because the statement represents a closed system, every dollar of funding must be accounted for by a specific use, and every use must be funded by a specific source. A statement that does not balance without an unexplained plug figure indicates a structural error, most commonly a circularity or timing error in the interest during construction calculation.

How is gearing calculated from the sources and uses statement?

Gearing is the ratio of total debt sources to total sources (or equivalently, total uses), expressed as a percentage. See Gearing Ratio for the full definition.

Is the sources and uses statement static or does it change during construction?

In most project finance models it is fixed at financial close as the base case funding plan, though contingency drawdowns during construction may cause actual sources and uses to diverge from the financial close plan, which the model should be able to represent.

What is the difference between a sources and uses statement and a drawdown schedule?

The sources and uses statement is a static, total-position summary of funding sources against funding uses. The drawdown schedule shows the same funding drawn down period by period across the construction phase. See Drawdown Schedule for the period-by-period treatment.

Is a sources and uses statement specific to project finance, or used elsewhere?

The concept is used across leveraged finance generally, including LBO and acquisition financing, but in project finance it carries additional uses specific to construction-phase funding, interest during construction and reserve account seeding, that a standard acquisition sources and uses does not.

Project Finance Model

A project finance model is a financial model built to analyse the economics of a capital project that is financed on a non-recourse or limited-recourse basis. In a non-recourse structure, lenders rely solely on the cash flows generated by the project — and the security over the project's assets — for repayment of the debt. They have no recourse to the equity sponsors' wider balance sheets. The project finance model is the primary analytical tool through which all parties — sponsors, lenders, advisers, and government agencies — evaluate the project's financial viability, structure the debt, negotiate terms, and, after financial close, monitor the project's ongoing financial performance.

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.

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.

Debt Service Reserve Account (DSRA)

The debt service reserve account (DSRA) is a cash reserve, typically sized to the next one or two periods of scheduled debt service, held to protect lenders against a temporary shortfall in operating cash flow. It is one of the most common reserve mechanics in project finance and sits within the cash waterfall as a funded, ring-fenced tier: the account must be topped up to its target balance from available cash flow before any distribution to equity is permitted, and if operating cash flow is insufficient to cover a scheduled debt service payment, the shortfall may be drawn from the DSRA rather than triggering an immediate default.

Gearing Ratio

The gearing ratio, also called the debt-to-equity ratio or leverage ratio depending on how it is expressed, is the proportion of a project finance transaction's total funding provided by debt rather than equity. It is read directly off the sources and uses statement as total debt sources divided by total sources (debt-to-total gearing) or total debt divided by total equity (debt-to-equity gearing), and is one of the central negotiated parameters of a project finance transaction, since it directly determines how much of the project's risk is borne by lenders versus sponsors.

Sources and Uses Modelling

The sources and uses statement is typically the first schedule built in a project finance model and the first schedule a lender reviews. Building it as a live, formula-driven reconciliation rather than a static summary requires resolving the circularity between total uses (which includes interest during construction, itself dependent on the debt drawn) and total sources (which includes the debt sized against that same total uses figure). This guide sets out the construction sequence and common errors in building a sources and uses statement that reconciles automatically as assumptions change.