Contingency

There was a time, not so many moons ago, and not fondly remembered by anyone who underwrote through it, when contingency was arguably the soft part of a development appraisal. The number everyone knew would be squeezed. Build costs were hardened, professional fees were benchmarked, but contingency sat there as the line a broker could shave to make a marginal deal stack, on the unspoken understanding that nobody expected to spend it anyway. That era is over, and we would argue the industry is better for it.

Recent commentary from across the specialist lending sector describes the same shift from different angles. The past eighteen months of higher rates, sticky build costs and uneven sales demand have forced a level of discipline that the boom years never required. Stress-testing now happens before terms are agreed rather than after problems emerge. We require realistic views on GDV, sales rates and, perhaps critically, the quantum of contingency a scheme genuinely needs. Ten per cent is increasingly the norm on many schemes, not the opening position of a cautious credit committee. And the focus has moved from headline numbers to the operational machinery that actually ensures delivery, credible build programmes, robust cost plans, and clear change-control mechanisms for when on-site conditions inevitably shift.

None of this is happening in a benign backdrop. Construction costs are still rising, planning delays persist, and financing conditions remain tight. The Home Builders Federation's latest quarterly SME developer sentiment survey shows a sharp deterioration in confidence among smaller housebuilders. Starts data tells its own story of a market finding its footing rather than sprinting, with England recording just under 34,000 housebuilding starts in the first quarter of 2026, up 18% on the same quarter last year but down 9% on the quarter before.

In this environment, the difference between a scheme that completes on programme and one that limps to practical completion six months late, over budget and into a softer sales market is very often the honesty of the original appraisal.

Talk to anyone assessing development lending propositions today, and a consistent picture emerges of what "bankable" now means. It is not, primarily, about the strength of the headline numbers. Plenty of appraisals show a handsome profit on cost. What gets a deal through is whether the story holds together under scrutiny, whether the valuation, the build costs, the programme and the exit all describe the same scheme, built by the same team, sold into the same market. A GDV that assumes 2027 pricing sitting alongside a cost plan priced in 2024 is not an appraisal; it is a wish with a spreadsheet attached.

The encouraging part for us is that borrowers have adapted faster than the commentary sometimes suggests. SME housebuilders, operating with limited balance sheet capacity, are acutely aware they cannot afford a misstep on programme, costs or exit, and are approaching deals with more pragmatism and greater transparency than at any point in recent memory. The best are stress-testing their own schemes before a lender ever sees them, and they frequently enter the market with sensitivities already run, looking at what happens if sales rates halve, if the build runs three months long, if the exit refinance prices wider than hoped. That is not weakness; it’s preparation, and that is exactly the developer a sensible lender wants to back and, not incidentally, exactly the developer who tends to still be trading through the next cycle.

In our eyes, here is perhaps the argument brokers should be making to clients who bristle at a lender insisting on a proper contingency, a monitoring surveyor with teeth, and a drawdown structure tied to certified on-site progress: that discipline is not the lender protecting itself at your expense, or trying to inflate the facility and costs; it's actually the mechanism by which the scheme gets finished. An under-contingenced scheme does not fail gracefully. It fails at month nine, when a groundworks surprise or a package repricing exhausts the buffer; the facility has no headroom, and the developer is funding the gap from cash flow that doesn't exist. At that point every option is bad: a distressed capital raise, a stalled site accruing interest, a fire-sale of units into whatever market happens to exist that quarter. The 10% contingency that felt punitive at credit stage is, in that moment, the difference between an awkward conversation and an insolvency practitioner. The recent history of this sector, including the failures that have concentrated minds over the past eighteen months, is substantially a history of capital structures and appraisals that assumed nothing would go wrong.

There is also a pricing point worth stating plainly: risk appetite has not disappeared from the market; it has evolved. It is more selective, more focused on resilience, and more contingent on credible teams, realistic programmes and properly evidenced exits. Lenders remain genuinely prepared to back SME housebuilders, but capital flows to schemes that withstand scrutiny. Developers who internalise that are not just more likely to get funded; they are more likely to get funded on better terms, faster, by lenders who can see they are not underwriting hope.

The deeper shift is cultural. For years, the development appraisal functioned as a sales document, a case for the deal, assembled to clear a hurdle. It is reverting to what it should always have been: a truth-telling exercise shared between borrower, broker and lender, in which contingency is not the negotiable residue but a considered judgement about what this scheme, on this site, with this contractor, in this market, might plausibly encounter.

Nobody enjoys a tougher underwriting environment while living through it. But a market that prices delivery risk honestly, insists on genuine contingency and rewards transparent borrowers is a market that keeps building through the cycle rather than lurching between exuberance and paralysis. The developers who will still be delivering homes in 2030 are the ones treating today's discipline not as an obstacle to be negotiated down but as the operating standard it should have been all along, and they are the skilled operators we continue to work with and watch flourish.

Invest & Fund has returned over £389 million of capital and interest to lenders with zero losses, showing the rigour that governs our business. To take maximum advantage of this robust and exciting asset class, please visit www.investandfund.com.

Don't invest unless you're prepared to lose money. This is a high-risk investment. You may not be able to access your money quickly, and you are unlikely to be protected if something goes wrong. Take 2 minutes to learn more.