A development can be profitable on paper and still run out of money. The problem often begins in the feasibility: construction is carefully priced, while design, approvals, professional fees, interest, holding expenses and selling costs are treated as secondary items.
They are not secondary. These construction soft costs form part of the total capital required to acquire, approve, build and exit a project. If they are underestimated—or funded at the wrong time—the developer may be forced to inject more equity, delay work or arrange expensive emergency capital.
This guide explains how Australian developers can identify, model and present soft costs so the funding request reflects the whole project rather than the building contract alone.
Soft costs versus hard costs
Hard costs create the physical development. Soft costs enable, control, finance and commercialise it.
| Hard costs | Soft costs |
|---|---|
| Demolition, excavation and site works | Planning, design and approval expenses |
| Concrete, structure and framing | Architects, engineers, surveyors and consultants |
| Labour, trades and materials | Legal, accounting, valuation and quantity surveying |
| Services and permanent equipment | Interest, lender fees, insurance, rates and land tax |
| Fit-out and permanent improvements | Project management, marketing and selling expenses |
The categories occasionally overlap. The important point is not the label but whether every cost is included once, timed correctly and supported by evidence.
What should be included in a soft-cost schedule?
A lender-ready feasibility commonly separates soft costs into the following workstreams.
Design and technical consultants
- architectural concept, design development and construction documentation;
- town planner, land surveyor and building surveyor;
- structural, civil, hydraulic, electrical, mechanical and fire engineering;
- geotechnical, environmental, acoustic, traffic and landscape advice; and
- energy, access, heritage or specialist reports required by the project.
Approvals and statutory expenses
- development-application and planning fees;
- building permits and certification;
- infrastructure, open-space and authority contributions;
- service connections and headworks;
- title, subdivision and registration costs; and
- other council or government charges.
Finance and holding costs
- interest during acquisition, approval, construction and sales periods;
- establishment, line, monitoring, valuation, legal and discharge fees;
- quantity-surveyor reporting and progress-draw expenses;
- council rates, land tax, utilities, security and insurance; and
- extension costs or additional interest under a delayed programme.
Delivery and exit costs
- development and project management;
- marketing, display material and sales commissions;
- settlement, conveyancing and owners-corporation establishment;
- leasing commissions and incentives where stock will be retained; and
- defect, maintenance and post-completion allowances.
Build the total development cost before discussing leverage
Developers often begin with gross realisation value and ask what percentage a lender will advance. That is only half the analysis. A development facility is normally constrained by both value and cost.
A disciplined feasibility begins with:
Total development cost = land and acquisition + hard construction + soft costs + finance costs + contingency.
The capital stack must then show how that total will be funded:
Total sources = developer equity + senior debt + approved subordinate debt + other committed capital.
Total sources should equal total uses, with sufficient headroom for the downside case. A proposal is not fully funded merely because the senior loan covers the building contract.
Basic Finance’s property development finance framework examines the site, total cost, lender-accepted GRV, equity, delivery team, contingency and exit together.
Why timing matters as much as the total
Two projects can have identical budgets but different funding risks because their expenses fall due at different times.
A monthly development cash flow should identify:
- when each consultant and authority payment is due;
- when developer equity must be contributed;
- the expected construction settlement and first draw date;
- progress-claim timing and the lender’s verification period;
- interest and holding expenses during approval and construction;
- practical completion, titles, settlements and release proceeds; and
- the effect of three-, six- and nine-month delays.
A cost that is fully recognised but funded three months too late still creates a liquidity failure.
How construction lenders treat soft costs
There is no universal policy. A lender may include selected soft costs in the approved facility where they are documented, reasonable, project-related and verified within the approved feasibility. It may exclude other categories or require them to be funded from equity.
Common assessment questions include:
- Has the expense already been paid, contracted or merely estimated?
- Is it necessary to obtain approval or complete the project?
- Is it included in the quantity surveyor’s report?
- Does it fall within the approved loan purpose?
- Is the cost available under a drawdown or reimbursable only after settlement?
- Does the cost-to-complete test remain satisfied after the draw?
A lender may recognise historical soft costs as developer equity without reimbursing them. Developers should therefore confirm treatment before assuming that past spending will be released back as cash.
Capitalised interest is still a project cost
Capitalised, retained or prepaid interest can reduce monthly servicing pressure, but it does not make interest disappear. It increases the facility or reduces net usable proceeds and must be included in total leverage and the exit calculation.
A practical interest allowance should reflect:
- the draw schedule rather than assuming the full facility is drawn on day one;
- establishment and unused-line mechanics;
- the approval, construction and sales periods;
- GST timing where relevant;
- extension pricing; and
- a realistic delay buffer.
If interest runs beyond the modelled term, the project needs either additional equity, undrawn facility headroom or another approved source. Relying on an extension that has not been agreed is not a funding plan.
Funding pathways for construction soft costs
Include them in the senior development facility
This may provide the cleanest structure where costs are eligible, fully documented and captured before credit approval. The approved sources and uses should specify which categories are debt funded and which are equity funded.
Release usable equity from the site or another property
A refinance or additional mortgage may generate pre-construction capital. Usable equity is calculated from the lender’s accepted value and leverage after deducting all existing secured debt, interest and transaction costs—not from the owner’s asking value.
Use short-term bridging finance
A commercial bridge may align current soft-cost payments with a future construction settlement, asset sale or refinance. The proposed exit date should be supported by approvals, lender progress or sale evidence. See Basic Finance’s guide to commercial bridging finance.
Add a mezzanine layer
Mezzanine finance may bridge a verified gap between senior debt and sponsor equity. The project must still support the combined senior and subordinate exposure, higher total cost and agreed priority arrangements. Review how mezzanine finance fits within a complete capital stack.
Introduce additional sponsor or third-party equity
Equity does not create a fixed repayment obligation at maturity, but it may dilute control and profit. The shareholder, unit-holder and distribution arrangements should be documented before funds are relied upon.
A finance-ready example
Assume a development has the following preliminary feasibility:
| Use of funds | Amount |
|---|---|
| Land and acquisition costs | $2,000,000 |
| Hard construction costs | $3,600,000 |
| Design, consultants and approvals | $360,000 |
| Holding, marketing and professional expenses | $240,000 |
| Finance costs and interest allowance | $500,000 |
| Construction and timing contingency | $300,000 |
| Total development cost | $7,000,000 |
If the developer presents only the $3.6 million building contract, the funding request conceals $1.4 million of soft, finance and contingency costs. The lender will need to see which amounts have been paid, what remains payable, how much equity is still available and whether the proposed facility is sufficient to complete and exit the project.
The same feasibility should be tested under a delayed scenario. If six additional months add $180,000 of interest and holding expenses and push settlements back, the model must show where that money will come from and whether the exit still clears every debt layer.
Seven steps to a stronger soft-cost submission
- Separate cost categories. Distinguish land, hard costs, soft costs, finance, tax and contingency.
- Reconcile the status. Mark every item as paid, contracted, quoted or estimated.
- Match invoices to the cash flow. Show when each amount becomes payable.
- Confirm lender eligibility. Identify which costs may be included, reimbursed or must be equity funded.
- Update cost to complete. Ensure undrawn debt plus remaining equity covers all remaining expenses.
- Stress the programme. Model delay, interest, escalation and settlement slippage.
- Prove the exit. Refinance or sale proceeds must clear senior debt, subordinate debt, interest, fees and selling costs.
Documents lenders commonly request
- current development feasibility and monthly cash flow;
- title, valuation, existing loan statements and payout figures;
- planning approvals, permits, drawings and consultant reports;
- building contract, cost plan, programme and builder information;
- quantity-surveyor reports and progress claims;
- paid and unpaid invoices;
- entity documents and developer experience;
- presales, leasing evidence or market support where relevant;
- evidence of remaining equity; and
- primary and fallback exit strategies.
Frequently asked questions
What percentage of development cost should be allowed for soft costs?
There is no reliable universal percentage. Project type, approval complexity, professional scope, location, finance structure, marketing strategy and programme all affect the result. Build the allowance from project-specific quotes and contracts, then add appropriate contingency.
Will a construction loan fund permits and consultant invoices?
It may fund approved categories where they are included in the feasibility and satisfy the lender’s conditions. Some lenders require those expenses to be paid from developer equity.
Can soft costs be funded before construction starts?
Potentially, through developer equity, an approved pre-construction component, property equity release, bridging finance, a second mortgage or mezzanine capital. Each option depends on security, total leverage, documentation, cost and exit.
What is the cost-to-complete test?
It tests whether remaining committed funding and equity are sufficient to pay every cost required to finish the project. If the remaining costs exceed available sources, the lender may stop draws until the shortfall is remedied.
Should finance costs be included within contingency?
Base-case finance costs should be modelled separately. A delay or interest-rate buffer may form part of contingency, but combining everything into one unexplained allowance makes the feasibility harder to verify.
Fund the whole development—not only the building contract
Basic Finance assesses eligible Australian development funding across acquisition, construction, refinance, completion, bridging and mezzanine structures. A useful initial review starts with the site, approvals, detailed feasibility, existing debt, equity invested, amount required, programme and exit.
Call: 0439 462 664
Email: info@basicfinanceloans.com.au
General information only. This article is not financial, legal, taxation, accounting or investment advice. Business-purpose finance only. Eligibility, loan amount, valuation, LVR, loan-to-cost, GRV, security, ranking, pricing, fees, term, drawdowns, timing and approval depend on lender criteria, verification, due diligence and final documentation. No approval or settlement timeframe is guaranteed.