A construction budget can look good at the start of a project and be completely off target a few short months later. Material prices may change, labor costs may increase, permitting may take longer, and unforeseen site problems can all result in costs exceeding the original estimate.
Construction price indices are currently running about 5% higher than last year, and even more acceleration is expected in the remainder of the year, according to JLL’s 2026 Mid-Year Construction Perspective.
The challenge for brokers is knowing what to do when the approved budget no longer covers the work. For investors in the middle of a ground-up build, a funding gap can quickly derail the project.
Ground up construction projects have traditionally been strong investments, but several market pressures are making them harder to predict in 2026. Material costs, availability of labor, and contractor pricing can all impact the final price of a project, so brokers need to understand where their clients’ budgets are most vulnerable.
Metal furniture and workstations are subject to the June 8 Section 232 expansion at 50 per cent tariff rates, all while the steel, aluminum, and copper imported for use in construction remain at the same high level.
Construction employment growth is on pace to rise only 0.6% in 2026, well below the historical average of 2.7%. Currently, 61% of metro markets are supply-constrained, and that is projected to increase to 72% by 2027. Labor availability continues to be a concern. In certain markets, competition from data center and infrastructure projects is adding more pressure.
Fewer than one in five contractors expect their margins to compress over the next six months, representing their highest confidence since early 2025. This can translate into higher bids and less flexibility for investors when actual construction costs end up higher than their estimates prepared months before.
With construction costs going up, the first question is: Is there enough flexibility in the current financing setup to absorb the additional cost? The original contingency, draw schedule, and payment structure can all affect the amount of wiggle room the borrower has before they need to secure additional financing.
Many construction loans have a contingency allowance that is built into the original project budget. With that reserve, if something comes up that costs more money, like a change in material prices, additional labor, or an unforeseen site condition, the project can absorb that cost without having to immediately go back for new money.
Construction loan funds are disbursed in stages as project milestones are reached. Borrowers and lenders can use these regular draws to compare actual spending with the original budget, and identify potential shortfalls before they become harder to fix.
Interest on construction loans is generally incurred on the amount drawn, not the full amount of the loan. This can help keep cash flowing during the construction period, leaving more capital for project expenses as work proceeds.
When contingency reserves aren't enough, brokers have several paths to help clients bridge the gap without abandoning their project.
Some lenders will accept a revised draw schedule based on updated costs, provided the original loan has room in the approved total. This is especially true if the increase is based on documented and verifiable factors like material pricing based on tariffs, rather than poor initial planning.
For shortfalls that exceed what the original construction loan can absorb, a short-term bridge loan can supply the additional capital needed to reach completion, with repayment planned around the eventual construction-to-permanent conversion or property sale.
When the cost increases are significant, it may make more sense to refinance the existing construction loan into a long-term structure reflecting the updated total cost of the project rather than adding more debt to the original loan.
Clients may need to contribute more equity to the project due to limited financing options.
Brokers can help prepare their clients for these scenarios by having these conversation early, so it doesn’t come as a surprise halfway through the build.
Construction final-cost indices are up about 5% year over year, and further acceleration is expected, so encourage clients to avoid building a budget with little room for unexpected increases. A realistic initial budget can make future financing needs easier to manage.
A larger contingency reserve means more protection against unexpected costs. Projects in markets with high competition for construction labor may require particular attention to the size of the reserve.
Markets that are in direct competition with data center builds for the same labor pool may have longer contractor backlogs. Contractors exposed to data centers are now reporting average backlogs of 12.2 months, versus 8.3 months for contractors not exposed to data centers. For brokers, this is another reason to talk about realistic construction timelines and cost buffers before financing is finalized.
Regular communication in the draw process can identify budget pressure early. If costs start to deviate from the approved plan, brokers have more time to look into the available financing options before the issue affects the progress of the project.
RCN Capital offers ground-up construction financing for non-owner-occupied single-family properties, condos, and townhomes. The current program guidelines include loan sizes between $100,000 and $2 million, terms up to 24 months, and leverage based on the borrower’s ground-up construction experience.
Visit our loan programs page to explore new construction financing and submit your next scenario.