Few factors have altered the property development landscape as profoundly as build cost inflation. Even as headline inflation across the economy begins to ease, the construction sector remains under sustained pressure. Labour shortages, material price volatility, and supply chain constraints continue to drive costs higher — forcing lenders to reassess how they calculate Loan-to-Cost (LTC) ratios.
In 2025, lenders are no longer satisfied with fixed-cost assumptions or broad contingencies. They now expect granular breakdowns of every expenditure category and clear evidence that developers have modelled realistic inflation scenarios. For borrowers, this shift has major implications: higher equity requirements, tighter contingency controls, and greater scrutiny of cost reporting.
At Willow Private Finance, we’re working with developers to adapt to this new reality — helping them structure facilities that remain robust, flexible, and fundable despite cost uncertainty.
For related insights, see Phased Development Finance in 2025: How Lenders View Multi-Stage Builds and LTV, LTC, and GDV: The Three Numbers That Shape Your Property Deal.
Construction inflation remains one of the most persistent headwinds facing developers. Although overall CPI inflation has fallen back to around 3%, construction-specific indices have continued to rise at twice that rate, driven by higher wages, regulatory compliance costs, and energy-intensive materials.
Timber, concrete, and steel prices remain volatile due to global logistics issues and decarbonisation pressures on heavy industry. Skilled trades are also in short supply, pushing labour rates to record highs in London and the South East. These pressures mean developers can no longer rely on static build cost estimates established at appraisal stage.
Lenders have reacted decisively. Many now stress-test project costs by applying inflationary uplifts of 5–10% to verify that a scheme remains viable under adverse conditions. Quantity surveyor (QS) reports must show updated cost-to-complete data at each drawdown, while monitoring surveyors verify that contingencies are adequate and that developers have hedged against further escalation.
The combined effect is a more conservative lending environment. While appetite for good projects remains strong, lenders are prioritising robust cost management over speculative margins.
Loan-to-Cost (LTC) represents the proportion of total project costs funded by the lender. It includes land, construction, professional fees, and interest, providing a key metric for both underwriting and risk control.
In 2025, most lenders target LTC ratios between 65% and 80%, depending on project type and borrower strength. However, the “C” — total cost — has become a moving target. As build prices rise, the same absolute loan amount results in a lower LTC ratio, effectively reducing leverage.
For example, if a project’s total cost was £10 million in 2023 and rose to £11 million due to inflation, a £7 million facility that once represented 70% LTC now equates to just 63%. The developer must either inject more equity or renegotiate loan terms — both of which can materially impact return on investment.
Lenders are acutely aware of this sensitivity. They now examine cost volatility as part of credit risk analysis, ensuring that the borrower has the liquidity and flexibility to absorb unexpected increases without compromising completion.
The lending market’s response to inflation risk has been multi-layered. Traditional banks, bound by regulatory capital rules, have become more conservative, tightening leverage limits or demanding higher contingencies. Private lenders and debt funds, meanwhile, have remained active but have introduced new mechanisms to control risk.
Many lenders now require independent QS sign-off on all cost schedules before first drawdown. This ensures the project is not under-costed from the outset. Some also include cost revalidation triggers during the build period, allowing them to pause or reduce drawdowns if QS reports show significant variance.
Contingency levels have risen across the board. A typical allowance of 5% pre-pandemic is now more commonly 8–10%, and in complex or modular builds it may exceed 12%. Developers must demonstrate how contingencies are calculated and when they can be accessed. Most lenders only permit release of contingency funds with written approval supported by updated cost analysis.
There has also been a noticeable increase in collaborative lender-developer communication. Regular cost updates, quarterly monitoring meetings, and transparent project dashboards help maintain confidence and prevent drawdown delays. Developers who communicate proactively often secure greater flexibility from their lenders when unexpected costs arise.
In the inflationary environment of 2025, the role of professional oversight has never been more important. QSs are expected to act as both cost managers and independent validators, bridging the information gap between borrower and lender.
At project inception, a detailed cost plan — broken down by trade package — must be submitted for review. Lenders assess not only the overall total but the methodology behind it: whether materials are fixed-price, how labour rates are benchmarked, and whether suppliers are contracted under inflation-protected terms.
During the build, the monitoring surveyor verifies work completed, cost-to-complete, and any deviations from the original budget. These updates directly influence drawdowns and, in some cases, lender confidence in the borrower’s management capability.
Lenders increasingly value data consistency — ensuring that all reporting, from QS summaries to contractor applications, aligns. Any discrepancy between stated and certified progress can prompt reinspection or delay funding.
Willow Private Finance helps developers establish these professional relationships early, aligning QS reporting templates with lender requirements from the outset.
Rising build costs and stricter LTC calculations have a direct impact on profitability. Developers must now inject more equity to maintain the same loan quantum, or reduce project scope to remain within viable margins.
In many cases, this has led to a shift in strategy. Developers are increasingly partnering with equity investors or family offices to share exposure while maintaining pipeline activity. Others are turning to stretch senior or mezzanine facilities to supplement reduced LTC ratios, though these come with higher pricing.
For lenders, this dynamic is a double-edged sword. Higher borrower equity improves security, but if margins compress too far, project motivation and liquidity both suffer. As a result, lenders are seeking equilibrium — balancing prudence with practicality by allowing reasonable gearing where cost control is demonstrably strong.
Developers who can present credible mitigation strategies — such as fixed-price contracts, material pre-purchasing, or verified contingencies — tend to achieve the best outcomes.
Developers operating in this environment can protect viability by adopting a more analytical approach to cost management and lender engagement.
First, updating feasibility models regularly has become essential. Costs that were competitive at the appraisal stage may be outdated within months. Lenders expect real-time revisions that reflect supplier quotes, labour contracts, and procurement timing.
Second, building cost resilience into contracts is critical. Developers are increasingly negotiating fixed or capped price agreements with main contractors, coupled with performance bonds or warranties that cover key risk items such as materials availability.
Third, data transparency is a differentiator. Developers who can produce detailed monthly cashflows, reconciliations, and progress updates foster trust — a key factor when lenders decide whether to release contingencies or extend leverage.
Finally, phased procurement has become a valuable tactic. By staggering material purchases and locking in prices at optimal moments, developers can smooth exposure to market volatility without overcommitting capital upfront.
Willow Private Finance often helps clients integrate these strategies directly into funding applications, presenting them in a way that aligns with lender underwriting frameworks.
A developer in Bristol planned a £12 million residential scheme in 2024, assuming £7 million in build costs. By mid-2025, those costs had risen to £7.8 million due to increased labour and materials. The original senior lender had offered 70% LTC, equivalent to £8.4 million. After reappraisal, the rising cost base reduced the effective LTC to 65%, leaving a £600,000 funding gap.
Willow restructured the facility with a specialist lender offering 75% LTC, supported by enhanced contingency controls and verified fixed-price contracts. The revised structure maintained project momentum and preserved developer liquidity, ensuring viability despite cost escalation.
This example underscores how transparent cost data and professional support can turn an inflation challenge into a fundable solution.
While most analysts expect construction inflation to moderate gradually, structural cost pressures are unlikely to disappear. Energy transition requirements, modern methods of construction, and ESG compliance will all continue to drive pricing complexity.
Lenders will remain cautious but adaptable. Those with access to real-time monitoring data and trusted QS relationships will continue funding viable schemes at sensible gearing levels. Developers who can demonstrate adaptability — both in cost control and communication — will find lenders more willing to accommodate their funding needs.
In the long term, transparency and partnership will define successful development finance relationships. Inflation may be cyclical, but lender confidence is built on consistency — and developers who master that balance will remain competitive regardless of market conditions.
Willow Private Finance specialises in structuring development finance solutions that anticipate and mitigate cost inflation risk. We work with specialist lenders, private banks, and institutional funds to align funding terms with real-world construction dynamics.
Our team helps developers secure facilities that remain flexible under changing conditions — whether through structured contingencies, phased drawdowns, or blended capital layers. We ensure that QS reporting, cost monitoring, and lender communication are integrated from day one, maintaining transparency and confidence throughout the build cycle.
Q1: How is build cost inflation affecting development finance in 2025?
A: Lenders are reducing leverage and requiring higher contingencies to account for rising construction costs and volatility in materials and labour.
Q2: What is a typical contingency allowance in 2025?
A: Most lenders now require 8–10% of total build cost as contingency, though higher percentages may apply for complex or modular schemes.
Q3: Can fixed-price contracts protect against inflation?
A: Yes, they can provide stability, but developers must ensure contractors have capacity to absorb cost increases without compromising delivery.
Q4: How often do lenders reassess costs during a build?
A: Many lenders now require quarterly QS verification or additional reviews if drawdowns exceed projections or delays arise.
Q5: How does Willow Private Finance support developers with cost inflation risk?
A: We structure funding that includes flexible contingencies, phase-based drawdowns, and lender-aligned reporting to maintain liquidity and confidence.
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About the Author
Wesley Ranger is the Director of Willow Private Finance and has over 20 years of experience in property and development finance. He specialises in complex funding structures, including those impacted by inflation, contingency management, and cost escalation. Wesley advises both UK and international developers on structuring robust facilities that align with lender expectations and project realities.
Important Notice
This article is for general information purposes only and does not constitute personal financial advice. Development finance product availability, eligibility, and rates depend on your individual circumstances and may change at any time.
Always seek tailored advice before committing to any financial arrangement.
Willow Private Finance Ltd is authorised and regulated by the Financial Conduct Authority (FCA No. 588422). Registered in England and Wales.
