The Construction Loan Feasibility Study: Cost Build-Up, Absorption, and the 15 Percent Contingency

On an existing business, the feasibility study supports the credit. On a ground-up project, there is no operating history anywhere in the file, so the study is the credit. What the rulebooks actually require, what the cost numbers actually contain, and where the folklore ends.

By Michal Mohelsky, J.D., FMVA. MMCG Invest, LLC. Published August 16, 2026. Current as of August 16, 2026.

Every other loan file has a past. A change of ownership has the seller's tax returns. An expansion has the operator's history. A refinance has the property's own rent roll. A ground-up construction loan has none of that. The cost is an estimate, the schedule is an estimate, the revenue is an estimate, the value is an estimate of what the estimates will produce. Underwriting a construction loan means underwriting a stack of forecasts, and the discipline that organizes those forecasts into something a credit committee can act on is the feasibility study.

That is the honest case for the study, and it is worth separating from the dishonest one, because the dishonest one is everywhere. No SBA authority mandates a feasibility study for construction loans. The entire codified hook is 13 CFR 120.160(b), under which SBA "may require" a feasibility study, and may is not must (1). We have made this point at length in our companion piece on the feasibility requirement generally, and it holds with full force on construction. What construction deals have instead is a set of hard requirements that surround the study, a supervisory expectation that someone independent test the numbers, and a USDA program that, unlike SBA, does mandate the study outright for most ground-up projects above $1 million. This article walks all three, then does the actual work: where the cost figure comes from, how the interest reserve is sized, what the contingency rules really are, and how a lease-up projection becomes an as-stabilized value.

One vocabulary point before the substance, because the confusion is endemic across everything ranking for these queries. A feasibility study and a plan-and-cost review are different work products. A plan-and-cost review (sometimes a quantity surveyor report) verifies that the construction budget and schedule are achievable. A feasibility study asks whether the completed project is economically viable: whether demand exists, whether the projected revenue is defensible, whether the stabilized cash flow services the debt. The NCUA's examiner guidance puts the feasibility question plainly as the likelihood that a proposed project will be economically successful (2). A project can pass a cost review and fail feasibility, and the reverse. This article is about feasibility, with the cost review treated as one input the study must reconcile to.

What the SBA rulebook actually requires on ground-up deals

SOP 50 10 8, effective June 1, 2025 and amended since by notice, is the controlling origination document (3). Its construction provisions sit in Section B, Chapter 5, Paragraph D, implementing 13 CFR 120.174, and they are requirements about process, not about studies. Five of them carry the file.

The appraisal must be at completion value. For loans financing new construction or substantial renovation, the appraisal must estimate the market value the property will have at completion of construction, with substantial renovation meaning rehabilitation expenses exceeding one-third of the purchase price or fair market value at application (4). This single provision is why construction underwriting is prospective by design: the collateral being underwritten does not exist yet.

Then someone must certify the building matches the plans. After construction is completed, the lender must obtain a statement from the appraiser, general contractor, project architect, or construction management firm that the building was built with only minor deviations, if any, from the plans and specifications on which the original estimate of value was based. If the lender cannot obtain that statement, it must notify the SBA Commercial Loan Servicing Center and work out a course of action, including the securing of additional collateral (4). The deviation statement is the closing of the loop the at-completion appraisal opens. The value was estimated from plans; the statement certifies the plans are what got built.

Draws are controlled, not assumed. The construction loan provisions require staged disbursements against verified progress, lien waivers, title protection, and retained documentation. Lenders that fund an SBA construction loan the way they would a conventional term loan, in a lump with no monitoring, are exposed to partial or full denial of the guaranty on an early default (3). We covered the guaranty mechanics in the collateral flagship; the short version is that imprudent disbursement is exactly the kind of failure 13 CFR 120.524 exists to price.

Bonding attaches at $350,000, or a waiver path does. The regulatory baseline is 13 CFR 120.200: every 7(a) loan that finances construction requires evidence of a 100 percent payment and performance bond unless SBA waives it. What the SOP sets is the automatic-waiver threshold, and SOP 50 10 8 lowered it from $500,000 to $350,000, tied to the redefinition of a Standard 7(a) loan as one exceeding $350,000 (5). For construction components above $350,000 the lender either obtains the bond or relies on one of two blanket-waiver paths: a third-party construction management firm providing commercially reasonable and prudent monitoring including funds control for all disbursements, or an internal construction management department that routinely does the same for the lender's similarly sized conventional loans (5). Content still quoting the $500,000 figure is describing SOP 50 10 7.1, which died in June 2025.

Equity goes in before the loan does. Required equity, cash injections, and all other conditions in the credit memorandum must be met before or at the time of disbursement, and the injection must be verified and documented before closing (6). The familiar 10 percent minimums for start-ups and complete changes of ownership are not construction rules, but most ground-up borrowers are start-ups, so in practice the 10 percent rides along.

Two rules you will find attributed to the SOP do not exist in it, and both are worth correcting by name. The first is a supposed clause requiring additional equity when appraised value deviates from project cost by more than 10 percent. No such discrete trigger appears in SOP 50 10 8; the claim appears to be a conflation of the completion-statement requirement, the general injection minimums, and the 504 contingency rule (4). The second is the mandated construction feasibility study itself. The SOP contains no general construction-loan feasibility requirement. What it contains is projection-based underwriting that has to survive review, which is a different thing, and in practice a harder one.

One boundary note. Everything above concerns an eligible business building its own facility, and the occupancy rule is specific: for new construction the applicant must occupy 60 percent of the rentable property, may permanently lease up to 20 percent, and may temporarily lease an additional 20 percent with the intention of using some of it within three years and all of it within ten (7). Speculative construction is barred. Building homes for future sale is ineligible except under one narrow vehicle, the Builders CAPLine, which exists precisely as the exception for small general contractors constructing or rehabilitating property for resale (7). If the deal is spec, the analysis in this article is the wrong analysis, and mostly the loan is the wrong loan.

USDA does mandate the study, and ground-up deals usually trip the wire

The contrast we drew in the feasibility flagship is at its sharpest on construction. USDA's OneRD rule requires, at 7 CFR 5001.306(a)(3)(i), that for guaranteed loans greater than $1,000,000 to a new business, a feasibility study prepared by an independent qualified consultant acceptable to the Agency is required, with the scope determined by the Agency (8). The load-bearing phrase is new business, and the definition at 5001.3 is broad: a business in operation less than one full year, a business that has operated a year but has not achieved full operational capacity or stable operations, and expressly a new enterprise or new affiliate of an existing business moving or expanding into a new location involving new market or labor areas (8).

Run a ground-up project through that definition and the mandatory trigger catches nearly everything. A brand-new operator is a new business. A single-purpose entity formed to own the project is a new business on the operational-status test. A seasoned operator expanding into a new market is captured by the express expansion clause. The practical rule we give USDA borrowers: if the project is ground-up and the loan exceeds $1 million, plan on the study, and plan on the Agency setting its scope.

The construction machinery around the study is consolidated at 7 CFR 5001.205, and it is deliberately lender-driven: the lender monitors construction and may rely on written materials from an independent engineer and other qualified consultants (9). The requirements worth knowing on a feasibility engagement: the borrower must enter a firm, fixed-price contract with an independent general contractor, with agreed retainage and a disbursement schedule; borrower equity goes in before any guaranteed funds; every draw requires certification that contractors have delivered mechanics lien waivers; where the guarantee is issued before completion, the project timetable and budget must be confirmed as adequate by a qualified independent consultant with demonstrated experience in the project's industry, monthly construction reports are required, and problems must be reported to the Agency within 15 calendar days (9). At completion the lender certifies the funds went to authorized purposes and the project will meet its intended purpose.

Two USDA specifics matter for the financial model. Interest during construction is an eligible use of guaranteed funds, verbatim, including interest on interim financing, during the period before the first principal payment becomes due or when the facility becomes income producing, whichever is earlier, which means it may be capitalized into the loan and belongs in total project cost (10). And on ground-up deals the technical feasibility component of the study carries expanded weight by design: 5001.306(a)(3)(iii) folds the required technical report into the technical feasibility section of the study, and the lender's credit evaluation at 5001.202 expressly reaches demonstrated performance of technology and the complexity of construction and completion (8). A construction feasibility study for USDA that treats the technical section as boilerplate is not responsive to the regulation.

The contingency: one program raised it, one program caps it, one program refuses to name it

If a single number from this subject has traveled in 2025 and 2026, it is the 15 percent. Here is exactly what happened, because almost everyone quoting it gets the scope wrong.

On September 30, 2025, SBA Procedural Notice 5000-872764 took effect. Its operative language: SBA is increasing the construction contingency for 504 projects from 10 percent to 15 percent, revising Section C, Chapter 1, Paragraph C.8 so the contingency fund may not exceed 15 percent of the project construction costs. The notice adds a residual rule with a real edge to it: if the leftover contingency does not exceed 2 percent of the debenture just prior to closing, it may be refunded to the small business as working capital when the debenture funds; if the residual exceeds 2 percent, it may not be distributed, and the debenture must be reduced by the unused amount (11).

Three things about that change are routinely misstated. It is 504 only; the notice amends the 504 section and does not touch 7(a). It sits above the codified baseline, because 13 CFR 120.882(b) still reads that eligible 504 project costs include a contingency reserve for cost overruns not to exceed 10 percent of construction cost, so the notice is an SBA instruction running ahead of the regulation text, with the successor SOP expected to carry it forward (12). And the 2 percent residual rule means contingency sizing is not free: pad the budget and the surplus above 2 percent shrinks the debenture rather than converting to working capital.

Now put that number in its actual context, which no page ranking for contingency queries currently does. HUD's MAP Guide sets new construction contingency at 2 percent, embedded in a 4 percent working capital escrow that is non-mortgageable, while substantial rehabilitation carries a 10 to 15 percent contingency that is mortgageable, and a draft Mortgagee Letter published February 26, 2026, not yet effective, proposes making the new-construction contingency a mortgageable 2 to 5 percent (13). USDA takes the opposite philosophy from both: Part 5001 requires contingency and refuses to number it. The regulation demands evidence of sufficient cash flow to complete the project construction, including contingencies for cost overruns, and separately, evidence in form and substance satisfactory to the Agency that there is sufficient contingency funding in place to handle unforeseen cost overruns without seeking additional guaranteed assistance (14). The 5 to 10 percent you see in USDA feasibility studies, including ours, is a market convention sized to design completeness, not a Part 5001 requirement, and we label it that way in the study.

So the honest answer to what is a normal construction contingency is that it depends on which sentence is asking. As a rule: 15 percent ceiling on a 504 project, 10 percent in the still-unconformed CFR, 2 percent on HUD new construction and 10 to 15 on HUD substantial rehab, no number at all at USDA. As a convention: 5 to 10 percent of hard costs on reasonably well-defined ground-up work, more when design is early or the work is adaptive reuse. A study that states the convention as a rule, or the rule of one program as the rule of another, has already told a careful reviewer how carefully it was built.

Where the cost figure comes from, and what is already inside it

The cost build-up is the chapter of a construction feasibility study most likely to be checked against an independent source, because the independent source exists and every reviewer knows its name. Marshall & Swift has published the standard commercial cost manual since 1932; the product line now sits under Cotality, the name CoreLogic took in its March 24, 2025 rebrand, and the working tools are the Marshall & Swift Valuation Service and the SwiftEstimator calculator suite covering more than 220 occupancy types (15). Our studies carry the source line "Marshall & Swift CoreLogic, MMCG" on every cost exhibit for exactly this reason: the reviewer should know the estimate can be re-derived.

What a reviewer should also know is how the number is built, because the arithmetic is multiplicative, not additive. A base cost per square foot is selected by occupancy, construction class, and quality. Component adjustments are applied for exterior walls, heating and cooling, sprinklers, elevators, and similar features; elevators in particular are not in the base and must be added. The subtotal is then multiplied through a chain: a story-height multiplier, a shape multiplier reflecting that irregular perimeter costs more than a compact rectangle, a current cost multiplier updating the manual to the present, and a local multiplier for geography. A worked illustration: a $110 base in a market at a 0.96 local multiplier with costs up 1 percent since publication is $110 x 0.96 x 1.01, or $106.66 per square foot, before land, site improvements, and depreciation (15). Get the chain order or a single multiplier wrong and every downstream number moves with it.

The most misused fact in cost reconciliation, and the one worth committing to memory, is the inclusion and exclusion boundary. Per the Valuation Service's own section language, base costs are averages of final costs that already include architects' fees, contractors' overhead and profit, sales taxes, permit fees, insurance during construction, and, notably, normal interest on the actual building funds during construction, which typically averages half of the going rate over the period (15). Also inside: normal site preparation and utilities from the structure to the lot line. What is excluded and must be added: land, entrepreneurial or developer profit, financing costs beyond that interim building-fund interest, real estate taxes, brokers' commissions, offsite improvements, and furniture, fixtures, and equipment (15). The distinction that trips reviewers constantly: contractor overhead and profit is in the number; developer profit is not. A cost build-up that adds a general conditions and contractor fee line on top of an unadjusted Marshall & Swift base has double counted, and one that forgets FF&E on a hotel or assisted living project has under counted, and both errors are visible to anyone who knows the boundary.

How does the cost-service figure relate to the contractor's bid? As a check, not a substitute. A signed guaranteed maximum price contract is the stronger primary cost basis; the cost-service estimate tests the bid for reasonableness. No supervisory source publishes a numeric acceptable variance between the two, and the framing in the interagency guidance is qualitative: methods, assumptions, and conclusions must be reasonable and supported (16). In our practice the reconciliation is line-visible in the study: the build-up, the bid, the variance, and the explanation for the variance, because a gap explained is information and a gap discovered is a finding.

Two structural notes complete the chapter. The conventional taxonomy runs hard costs at roughly 65 to 80 percent of a ground-up budget and soft costs at 20 to 35, with financing costs (construction interest, loan fees, the SBA guaranty fee) shown either as a distinct financing block in the sources and uses or folded into softs; that split is a working baseline, not a rule (17). And cost escalation belongs in the study as dated index readings, not vibes. As of this writing: Turner's Building Cost Index printed 1552 in Q2 2026, up 1.44 percent for the quarter and 5.15 percent year over year; ENR's March 2026 review put the Construction Cost Index up 2.7 percent annually and the Building Cost Index up 4.3; and AGC reported in May 2026 that input costs rose 6.6 percent year over year while contractors' bid prices rose 3.6, a spread that compresses contractor margins and eventually surfaces in bids (18). Those are index movements, not project-level escalation, and a study should say so while using them.

The interest reserve: small line, loud signal

The interest reserve is the budget line that pays the construction loan's own interest until the property can. Sizing it is arithmetic; judging it is underwriting, and the supervisory record treats it as a place where problem loans hide.

The sizing convention first. Interest reserve equals loan amount times average outstanding balance percentage times annual rate times months divided by twelve. The 50 percent average-outstanding figure is the standard straight-line proxy, resting on the assumption that draws build roughly linearly from zero to full balance. Worked: a $1,000,000 construction loan at 6 percent over 11 months at 50 percent average outstanding is $1,000,000 x 0.50 x 0.06 / 12 x 11, or $27,500 (19). A draw schedule that is front-loaded deserves a higher percentage; an S-curve with heavy middle draws is best modeled month by month against the projected cumulative draw curve rather than a single average; and a lease-up tail during which the full balance sits outstanding pushes the effective average toward 100 percent for those months. One error circulating on calculator blogs is worth correcting because it is off by exactly a factor of two: computing interest on the full loan balance for the entire construction period, which on the example above produces $55,000 against the correct $27,500. Construction loans draw progressively; a reserve sized on the full balance from day one has misunderstood the instrument it is funding.

Program treatment differs and the study should say which regime it is in. Under 504, interest during construction is captured by regulation: eligible project costs include repayment of interim financing including points, fees, and interest, which is how the permanent debenture takes out the construction loan's carry (12). Under 7(a), the eligible-uses list does not enumerate a discrete capped interest reserve; carrying costs are generally addressed through working-capital proceeds and structure rather than a named reserve line (3). Under USDA B&I, capitalized interest during construction is expressly eligible, as covered above (10).

Now the judgment layer, which is where the supervisory language earns its place in a feasibility study. The OCC's handbook states that inappropriately administered interest reserves can mask a poorly performing project, increase the bank's loss exposure, and have been a major contributor to banks' losses in acquisition, development, and construction lending (20). The FDIC's primer on the subject documented the mechanism: lenders added extra reserves when projects underperformed, which can mask loans that would otherwise be reported as delinquent and erode collateral protection (21). And the OCC names the tell: where a borrower cannot replenish a depleted reserve and the bank elects to increase, or repack, the reserve by extending additional debt to keep the loan current, the bank is potentially masking a nonperforming loan, and the decision to revise the budget and repack the interest reserve with debt is a red flag indicating possible credit deterioration. The examiner's prescribed response is a new appraisal and a re-evaluation of project feasibility (20). Read that last clause again from where we sit: when the reserve runs dry, the regulator's instruction is to re-run the feasibility analysis. The reserve is not a math problem. It is the first place a construction credit tells the truth.

Loan in balance: the sentence that connects the study to the draw budget

Everything in a construction file converges on one supervisory concept, and it is the concept that makes a third-party cost build-up worth commissioning rather than merely nice to have. A construction loan is in balance when the remaining undisbursed proceeds, plus any required borrower equity, are sufficient to complete the project. When estimated cost to complete exceeds remaining available funds, the loan is out of balance, and standard loan agreements require the borrower to cure with a deficiency deposit that is spent before any further advances; failure to deposit is an event of default, and no further disbursements are made while the loan is out of balance (20).

The OCC's expectations around that concept are written in unusually direct language, and they are the documented answer to a question we are asked constantly, which is why a lender cannot simply rely on the borrower's own study. Verbatim: feasibility studies commissioned by the borrower may be biased and should be critically reviewed, and while studies and appraisals can be helpful, the bank should conduct its own analysis of the project, with the person conducting it holding the requisite knowledge and skills to assess project feasibility (20). The detailed line-item budget should be reviewed by a qualified individual to assess its appropriateness and reasonableness. Budgets that lack detail or appear overly optimistic should be thoroughly evaluated. And the handbook states a feasibility test blunt enough to quote at credit committee: construction costs that closely approach or exceed the expected value of the project's income generally indicate that a project is not feasible (20).

The monitoring expectations complete the loop, and they map one to one onto draw mechanics. Monthly reports of work completed, costs to date, costs to complete, deadlines, and loan funds remaining. Architect or engineer inspection reports with each draw verifying work done to specification. Watchfulness for front loading, where a builder deliberately overstates the cost of early-stage work. Cost overruns from poor projections covered by the borrower rather than by drawing down the contingency. Retainage, which the OCC describes at 10 to 20 percent of each payment, released against completion. Lien waivers with each draw request, and a title policy updated with each draw so the title company confirms no intervening liens before funds move (20). The standard paper for all of this is the AIA G702 Application and Certificate for Payment with its G703 continuation sheet, on which the architect's certification is expressly a qualified statement, to the best of the architect's knowledge, information, and belief, and not a guarantee of the work (22). The waiver mechanics have their own discipline: conditional waivers signed before payment, unconditional waivers only after payment clears, current-draw conditionals paired with prior-draw unconditionals, and twelve states mandating statutory waiver forms where a non-conforming waiver may be unenforceable (23).

Here is the point of reciting all of that in a feasibility article. The draw budget the lender administers and the cost build-up the study contains are the same numbers wearing different clothes, and the supervisory expectation quoted above, that the bank obtain its own analysis by a qualified individual and critically review anything the borrower commissioned, is precisely the gap an independent third-party study fills. Our construction studies reconcile the cost build-up line by line to the schedule of values that will drive the G703, state the interest reserve assumption and its draw-curve basis, and size the contingency against the program rule that governs, because a study that cannot be laid next to the draw budget is a document about a different project.

Absorption and stabilization: three values, one bridge, and a misattribution to retire

A construction appraisal on a lender's file typically carries three values, and the interagency guidance is the cleanest authority for what they are. For a construction or renovation transaction, an institution would generally request the property's current market value in its as-is condition and, as applicable, its prospective market value upon completion and its prospective market value upon stabilization, where as-completed reflects value as of the time development is expected to be completed and as-stabilized reflects value as of the time the property is projected to achieve stabilized occupancy (16). Between the second and third value sits the absorption period, and the guidance is explicit about what must happen to the numbers in that gap: for properties that have not achieved stabilized occupancy, the appraiser must make appropriate deductions and discounts, naming leasing commissions, rent losses, tenant improvements, and entrepreneurial profit, and should include consideration of the absorption of the unleased space (16). As-stabilized minus those deductions is not a rounding exercise; on a slow lease-up it is the difference between a loan that sizes and one that does not.

Now the misattribution, which we see in studies, appraisals, and marketing content weekly. The definitions of stabilized occupancy, absorption period, and absorption rate are Appraisal Institute definitions, published in the Dictionary of Real Estate Appraisal. USPAP does not define them. What USPAP supplies is the framework for a prospective value opinion, one whose effective date falls after the date of the report (24). Writing "stabilized occupancy per USPAP" cites a document that does not contain the term. The correct chain is: the AI Dictionary for the definitions, the Interagency Guidelines for the operational requirements, and USPAP for the prospective-value framework the whole exercise sits inside.

Where do the hard numbers live, if anywhere? Mostly nowhere, and a study should say so. No federal regulation and no SBA or USDA rule sets a numeric pre-leasing threshold for construction loans; the percentages that circulate, fifty percent pre-leased for office and the like, are bank credit policy and market convention with no traceable primary origin, and any pre-leasing figure quoted in a study must be attributed to a named, dated market source and labeled convention (25). The nearest genuinely hard numbers sit at the takeout end, not the construction end: Fannie Mae defines stabilized residential occupancy for properties of ten or more units as at least 90 percent physical occupancy by qualified occupants for the 90 days before commitment, and HUD's 221(d)(4) program requires stabilization to be projected as achievable within 18 months of the certificate of occupancy (26)(13). The supervisory loan-to-value limits are the other fixed points: 65 percent on raw land, 75 on land development, 80 on commercial construction, 85 on one-to-four family construction and improved property (27). The OCC ties loan structure to the same bridge, stating that tenor is generally based on the time needed for construction and stabilization or sale, and that extension options should be consistent with expected construction time plus the projected absorption period (20).

One SBA-specific translation, because it changes what absorption means on most of the deals this article serves. SBA construction is owner-occupied by rule, 60 percent on new construction as covered above, so the absorption analysis on an SBA ground-up deal is usually not a lease-up of third-party tenants at all. It is the ramp of the borrower's own business inside the building: months to opening, months to break-even, months to the stabilized revenue on which the debt service coverage was underwritten at 1.15x for Standard 7(a) or 1.10x for Small Loans (3). The feasibility study's market chapter quantifies that ramp from demand data, and the financial chapter must hold coverage at the floor on the as-stabilized numbers while the interest reserve or working capital carries the gap. Call it absorption or call it ramp-up; it is the same bridge, and it is where projection-based construction credits succeed or fail.

The overrun numbers everyone quotes, and where they actually come from

Construction feasibility content leans on two dramatic statistics: nine out of ten projects run over budget, and projects run as much as 80 percent over. Both numbers are real, and almost nobody quoting them says what they measure.

The nine-in-ten figure is Bent Flyvbjerg's, from a database of transport and infrastructure megaprojects, rail, roads, bridges, tunnels, dams, Olympics, built across 20 nations and seven decades. His 2014 Project Management Journal paper reports rail averaging a 44.7 percent cost overrun paired with a 51.4 percent demand shortfall, and roads averaging roughly 20 percent (28). The 80 percent figure is McKinsey's, from its 2017 construction productivity work, and it describes projects with contract values over $1 billion, where a review of more than 300 such projects found average overruns of approximately 80 percent, alongside the finding that 98 percent of megaprojects overrun by more than 30 percent (29). Both are serious research. Neither is a dataset of US commercial buildings. A 40,000 square foot flex building in Texas, a cold storage plant financed on a USDA guarantee, or a garden apartment deal bears no statistical resemblance to the Channel Tunnel, and transplanting megaproject overrun rates onto small-balance US commercial construction is not conservatism, it is citation of the wrong population.

Several adjacent claims do not survive sourcing at all, and we decline to use them: the blend that 85 percent of projects exceed budget by an average of 28 percent, which welds Flyvbjerg's frequency to a percentage that traces only to software-vendor marketing; the claim that 8.5 percent of projects finish on time and budget, circulating through blogs citing an unlocatable 16,000-project study; and the attribution of the 98 percent and 80 percent figures to Flyvbjerg, which are McKinsey's numbers about a different dataset (28)(29). What a study can honestly do instead is threefold: cite Flyvbjerg's underlying insight, that forecasts skew optimistic and reference class forecasting is the corrective discipline, without importing his transport percentages; carry current, dated index readings for escalation, as in the cost chapter above; and size contingency to the program rule and the design completeness of the specific project. The overrun literature is a reason to build the analysis carefully. It is not a percentage to paste into one.

How a construction feasibility study earns its place in the file

Assemble the pieces and the study's job description writes itself. It is the one document in a ground-up file built to answer the supervisory expectations quoted throughout this article, and it does so in five moves.

It builds the cost from source. A Marshall & Swift build-up with the multiplier chain shown, the inclusion boundary respected, land and FF&E and developer profit added where they belong, reconciled line by line to the contractor's bid with variances explained, in the house format lenders on our files will recognize: the item, cost, cost in percent, and cost per square foot columns, hard costs, improvements, and financial costs subtotaled, with the source line stating where every number can be re-derived.

It sizes the carry honestly. The interest reserve stated with its formula, its average-outstanding assumption tied to the actual draw curve, and its adequacy stress-tested against a slow ramp, because the regulator's own instruction when a reserve runs dry is to re-run feasibility, and a study that would fail its own re-run was not a study.

It applies the contingency rule that governs. Fifteen percent ceiling and the 2 percent residual mechanics on a 504 project, sufficiency demonstrated without a fixed percentage at USDA, convention labeled as convention everywhere, sized to design completeness rather than habit.

It quantifies the bridge. Demand evidence converted into an absorption or ramp schedule, the deductions and discounts between as-completed and as-stabilized made explicit, and debt service coverage held at the program floor on stabilized numbers rather than on hope, with the months in between visibly funded.

And it reconciles to the draw budget. The study's cost build-up maps to the schedule of values that will drive every G703 for the next eighteen months, which is what makes it the bank's own analysis by a qualified individual rather than one more borrower-commissioned document to be critically reviewed.

The study remains discretionary on the SBA side, as we said at the outset and have argued at length elsewhere. But a discretionary document that answers a mandatory expectation is not optional in any sense that matters at review. On a ground-up deal, every number is a forecast, the regulators have told lenders in writing to test the forecasts independently, and the feasibility study is the instrument built for the test.

Current as of August 16, 2026

The controlling SBA origination document is SOP 50 10 8, effective June 1, 2025 in its Technical Updates version, as amended by Procedural Notice 5000-872764 effective September 30, 2025 and subsequent notices. SBA has posted SOP 50 10 8.1 with an effective date of October 1, 2026; it is not in force as of this writing, and version 8 as amended governs (30). Every page citation in circulation should be re-verified against 8.1 on that date, and we will. The 504 contingency change remains a notice provision running ahead of 13 CFR 120.882(b), which still reads 10 percent. On the USDA side, 7 CFR Part 5001 reflects the amendments effective November 29, 2024, with a December 11, 2025 technical correction that did not touch the construction or feasibility provisions; note that the current eCFR sets the real estate appraisal threshold at $500,000, while some legal mirrors still show the superseded $250,000 figure (9). HUD's February 26, 2026 draft Mortgagee Letter on the new-construction contingency remains a draft. We refresh this section quarterly and on each SOP event.

Questions people actually ask

What is a construction loan feasibility study? An independent analysis of whether a proposed construction project is economically viable: whether demand supports the projected revenue, whether the cost budget is reasonable against an independent source, whether the interest reserve and contingency carry the project to stabilization, and whether stabilized cash flow services the debt at the required coverage. It is distinct from a plan-and-cost review, which verifies budget and schedule but not economic viability (2).

Does the SBA require a feasibility study for every construction loan? No. No SBA authority mandates a feasibility study for any loan category; 13 CFR 120.160(b) says SBA may require one. In practice a study is expected where the credit is underwritten on projections, which describes most ground-up deals, but the expectation is supervisory and lender-driven, not a codified mandate (1)(20).

What are the SBA construction loan requirements? An appraisal at completion value, a post-completion statement that the building matches the plans with only minor deviations, staged draws with lien waivers and title protection, a 100 percent payment and performance bond above $350,000 unless a monitoring-based waiver path applies, equity verified before closing and injected before or at disbursement, and 60 percent owner occupancy on new construction (3)(4)(5)(6)(7).

How do you calculate an interest reserve on a construction loan? Loan amount times average outstanding balance percentage times annual rate times months divided by twelve. Fifty percent average outstanding is the straight-line convention; a $1,000,000 loan at 6 percent for 11 months reserves $27,500. Computing on the full balance for the same 11 months gives $55,000, exactly double, and misstates how construction loans draw (19).

What is a normal construction contingency percentage? By rule: up to 15 percent on SBA 504 projects since September 30, 2025, 2 percent on HUD new construction, 10 to 15 percent on HUD substantial rehabilitation, and no set percentage at USDA, which requires sufficiency instead. By convention: 5 to 10 percent of hard costs on well-defined ground-up work. Rule and convention should never be stated as each other (11)(13)(14).

What is the difference between as-complete and as-stabilized value? As-completed is the prospective market value when construction finishes; as-stabilized is the prospective value when the property reaches stabilized occupancy. Between them the appraiser must deduct leasing commissions, rent losses, tenant improvements, and entrepreneurial profit, and consider the absorption of unleased space (16).

Is interest during construction an eligible loan cost? Under 504, yes, captured as repayment of interim financing including points, fees, and interest. Under USDA B&I, yes, expressly, until first principal payment or income production, whichever is earlier, and it may be capitalized. Under 7(a), no discrete interest reserve line is enumerated; carry is handled through working capital and structure (10)(12).

How much does a construction feasibility study cost? It varies with asset class, program, and scope, and we publish our approach to pricing separately rather than a single number here. The relevant comparison is not the fee but the cost of the alternative: a projection-based file with no independent support is the profile the enforcement record punishes.

August 16, 2026 by Michal Mohelsky, principal of MMCG Invest, LLC, a national SBA and USDA feasibility study consultancy

Request a Feasibility Study https://calendar.app.google/EJzWEz3GCqLY2jU86

Michal Mohelsky, J.D. | Principal | mmcginvest.com 

Contact: michal@mmcginvest.com

Phone: (628) 225-1125

Disclaimer: This report is provided for informational purposes only and does not constitute investment, legal, or tax advice. Data presented herein is derived from proprietary MMCG databases and third-party sources believed to be reliable; however, MMCG Invest makes no representation as to the accuracy or completeness of such information. Figures from third-party industry databases have been independently verified and, where appropriate, adjusted to reflect MMCG's proprietary analytical methodology. Statutory and regulatory references are provided for context and must be verified with counsel before reliance. Past performance is not indicative of future results.

Sources

(1) 13 CFR 120.160(b) (eCFR, current through August 2026). (2) NCUA Examiner's Guide, Construction and Development Loans. (3) U.S. Small Business Administration, SOP 50 10 8, Lender and Development Company Loan Programs, effective June 1, 2025 (Technical Updates version, Information Notice 5000-868665); construction loan provisions at Section B, Chapter 5, Paragraph D, implementing 13 CFR 120.174; coverage floors per SOP credit standards and Procedural Notice 5000-876777 (effective March 1, 2026). (4) SOP 50 10 8 appraisal requirements for new construction and substantial renovation, including the completion statement; verbatim language corroborated by SBA lender counsel quoting the SOP. (5) 13 CFR 120.200; SOP 50 10 8 bonding and blanket-waiver provisions; threshold change from $500,000 corroborated by Partner Engineering and Science quoting the SOP. (6) SOP 50 10 8, Section B, Chapter 5, Paragraph D.5, as revised by Procedural Notice 5000-872764; equity injection minimums at SOP 50 10 8 p. 131 as quoted by SBA lender counsel. (7) SOP 50 10 8 occupancy rule (p. 52) and speculative-construction exclusions (pp. 27, 51); 13 CFR 120.391 (Builders CAPLine). (8) 7 CFR 5001.306(a)(3)(i) and (iii); 7 CFR 5001.3 (definitions of new business and feasibility study); 7 CFR 5001.202. (9) 7 CFR 5001.205 (general project monitoring requirements); Part 5001 amendment history through 90 FR 57351 (Dec. 11, 2025); 7 CFR 5001.203 (appraisals). (10) 7 CFR 5001.121(c)(11). (11) SBA Procedural Notice 5000-872764, Revisions to SOP 50 10 8, effective September 30, 2025, Section C, Chapter 1, Paragraph C.8. (12) 13 CFR 120.882 (eligible 504 project costs). (13) HUD Multifamily Accelerated Processing (MAP) Guide, 4430.G (March 19, 2021), Sections 7.13.7 and 3.2.10; HUD draft Mortgagee Letter, Multifamily Improvements for MAP Efficiency (February 26, 2026, not effective). (14) 7 CFR 5001.205(e)(2)(iii) and (viii). (15) Marshall & Swift Valuation Service and SwiftEstimator Cost Information Overview (Cotality; CoreLogic rebrand announced March 24, 2025), Sections 1 and 99. (16) Interagency Appraisal and Evaluation Guidelines, 75 FR 77450 (December 10, 2010). (17) Hard and soft cost taxonomy per industry cost-management sources (secondary; labeled convention). (18) Turner Construction, Building Cost Index, Q2 2026 release (July 24, 2026); Engineering News-Record, Cost Index Review (March 2, 2026); AGC of America construction inflation release (May 13, 2026). (19) Interest reserve sizing convention per PropertyMetrics, First National Realty Partners, and Tactica RES (secondary; labeled convention). (20) Office of the Comptroller of the Currency, Comptroller's Handbook, Commercial Real Estate Lending, Version 2.0 (March 2022). (21) FDIC Supervisory Insights, A Primer on the Use of Interest Reserves (Summer 2008); FDIC construction and land development examination procedures. (22) AIA Documents G702 and G703 (1992 prime editions; 2017 subcontractor variants). (23) State lien waiver statutes, including California Civil Code 8132 through 8138 and Texas Property Code 53.101; twelve statutory-form states per construction-law compilations (secondary). (24) Appraisal Institute, The Dictionary of Real Estate Appraisal; USPAP prospective value opinion framework (Appraisal Standards Board). (25) Interagency Guidelines for Real Estate Lending Policies (1992) and the 2006 and 2015 interagency CRE statements, none of which sets a pre-leasing percentage. (26) Fannie Mae, Multifamily Selling and Servicing Guide, Stabilized Residential Occupancy definition. (27) Supervisory loan-to-value limits, Appendix A to Subpart D of 12 CFR Part 34 (with parallel text at 12 CFR 208 App. C and 12 CFR 365 App. A). (28) Flyvbjerg, B., What You Should Know About Megaprojects and Why: An Overview, Project Management Journal 45:2 (2014); Flyvbjerg, Holm and Buhl (2002). (29) McKinsey Global Institute, Reinventing Construction: A Route to Higher Productivity (2017); McKinsey, Imagining Construction's Digital Future (2016). (30) SBA SOP 50 10 8.1, posted with effective date October 1, 2026 (not in force as of August 16, 2026).