When embarking on a property development project, securing financing is one of the most critical steps in the journey. One of the key documents required by construction loan providers before granting final approval is the Quantity Surveyor’s (QS) report. But why is it so important? And what role does it play in ensuring your project gets the financial backing it needs?
In this blog, we'll dive into the significance of the QS report, how it certifies your project's costs, and how both developers and builders can best prepare for the QS report process to ensure smooth construction loan approval.
Why Is the Quantity Surveyor (QS) Report So Crucial for Construction Loans?
The QS report is more than just another document required by lenders—it’s a comprehensive check on the financial viability of your project. This report is responsible for verifying the total development costs, including both the costs already incurred and the costs required to complete the project.
By providing an in-depth breakdown of the project's financials, the QS report ensures that the loan amount requested will be sufficient to cover the entire construction process. But its role goes beyond that: the report also confirms the feasibility of the project, ensures the loan term is appropriate, and helps the lender budget for interest that will be capitalised during construction.
In other words, the QS report gives your lender peace of mind, showing that the project is financially sound and that their investment is protected.
Key Elements the QS Report Covers
To better understand the value of a QS report, let’s break down some of its most important elements.
1. Certifying the Total Development Costs
The QS report certifies the full scope of development costs, including both the costs incurred so far and the costs required to complete the project. This step is vital to ensure that the developer has enough funding to see the project through to the end.
- Costs Spent to Date: Certifying the money already spent, which is often funded by the developer’s equity, gives lenders a clear picture of how the project has progressed.
- Cost to Complete: The QS ensures the remaining loan amount will be enough to cover all remaining costs. This helps prevent funding shortfalls that could cause delays or, in the worst case, halt the project altogether.
- Sufficient Loan Amount: By assessing the costs already incurred and what remains, the QS can confirm that the total loan provided will be enough to cover all aspects of the project, from construction through to completion.
2. Ensuring the Loan Term is Adequate
Timing is everything. The QS report also assesses whether the loan term will be sufficient to cover the entire construction period. If the term is too short, the project risks stalling if financing expires before the project is complete.
3. Capitalised Interest
Another important aspect the QS report covers is whether the lender has budgeted enough capitalised interest to cover the loan payments throughout the construction phase. This ensures there’s enough money to meet ongoing financial obligations without adding stress to the project.
How Does the QS Report Align with Feasibility and Valuations?
For a project to secure final loan approval, the QS report must align with various other financial assessments, such as the feasibility study and the construction loan valuation. This alignment ensures there are no financial discrepancies that could put the project at risk.
- Feasibility Study: The total development costs certified in the QS report need to match the financial assumptions made during the feasibility study. If these numbers don’t align, it could lead to underfunding or delays in the project.
- Construction Loan Valuation Report: The QS report’s cost assessments must align with the construction loan valuation to reflect the true financial status of the project. Any discrepancies between these documents could create issues with loan approval.
- Lender’s Facility Limit and Funding Table: The report also needs to align with the lender’s facility limit and funding structure to ensure the loan facility is appropriate for the project’s financial requirements.
What Does a Typical QS Report Include?
The scope of a QS report can be quite detailed. Here are some of the typical areas a lender might instruct the QS to cover:
- Project Description: A brief overview of the development and its delivery method.
- Site Conditions: Inspection of the site to confirm any conditions that may affect costs.
- Development Approval: Review of the Approved Development Application to ensure all conditions are accounted for.
- Building Approval: Ensure all necessary building permits are in place.
- Survey Certificate: Verification that the construction is within the boundaries of the approved plans.
- Cost Estimate: A detailed cost estimate for the entire development, typically including a 5% contingency to cover unforeseen costs.
- Timing and Cash Flow: An assessment of the construction period, including proposed drawdowns and a cash flow forecast.
How Developers and Builders Can Best Prepare for a QS Report
Preparation is key when it comes to ensuring a smooth and accurate QS report. Here’s how developers and builders can get ready:
For Developers:
- Provide Detailed Financial Records: Offering clear records of costs already incurred, as well as future projections, is crucial for accurate cost certification.
- Engage Stakeholders Early: Get your QS, builders, and contractors involved early to ensure everyone is on the same page.
- Create a Realistic Budget: Ensure your budget is well-thought-out, including contingencies, to avoid underestimating costs.
- Open Communication: Regular communication between all stakeholders can prevent misunderstandings and discrepancies.
For Builders:
- Present a Proven Track Record: Demonstrating a history of completing projects on time and within budget can boost the confidence of lenders and developers.
- Provide a Detailed Project Plan: Outline the key milestones, timelines, and costs, demonstrating that you can manage the project efficiently.
- Accurate Cost Management: Offer a breakdown of all incurred and future costs to show that the project is financially under control.
Conclusion: Why the QS Report is Vital for Construction Loan Approval
The Construction Loan QS report is a crucial document for obtaining final approval on a construction loan. By certifying total development costs, including those already spent and those still needed, the report ensures the loan is sufficient to complete the project. It also confirms that the loan term and capitalised interest will support the entire construction period.
Alignment between the QS report, feasibility study, loan valuation, and the lender’s facility limit is essential for maintaining financial stability throughout the project. By being well-prepared and collaborating effectively with stakeholders, developers and builders can ensure their projects are on the right path to success.
Interested in securing the right financing for your next property development? Contact Development Finance Partners today to learn how we can help you navigate the complexities of construction loans.
