For renovation and construction lenders, the level of project review performed upfront plays a critical role in managing draw risk, controlling costs, and ensuring timely project completion. Not every project requires the same level of scrutiny. The size, scope, and complexity of a project should determine whether a streamlined budget review is sufficient or whether a comprehensive full project review is warranted.
Understanding the differences between these two approaches helps lenders, investors, and project stakeholders align due diligence with risk exposure.
Two primary review approaches are commonly used in renovation and construction lending: a budget review for smaller, limited-scope renovation projects and a full project review for larger, more complex renovation and ground-up construction projects.
BUDGET REVIEW FOR LIMITED-SCOPE RENOVATION LOANS
A budget review is generally appropriate for smaller renovation loans where the scope of work is well defined, and construction risk is limited. These projects typically involve minimal structural work and shorter construction timelines. Borrower experience with the lender also plays a role whether a limited budget review may be acceptable versus a full review.
Typical Use Cases:
• Cosmetic renovations (kitchens, bathrooms, flooring, paint)
• Unit turns or light rehab projects
• Minor MEP upgrades without reconfiguration
• Small exterior improvements (siding repairs, windows, roofing)
• Projects with short timelines and limited contractor involvement
Key Components of a Budget Review
• Line-item review for feasibility and completeness
• Identification of missing or underfunded scope items
• Review of contingency adequacy
• Alignment of costs with the proposed scope
• On site inspection identifying any health and safety issues or out of scope costs
Benefits:
• Faster turnaround time
• Lower third-party review costs
• Efficient draw administration
• Appropriate oversight for low-risk projects
For limited-scope projects, a budget review provides sufficient assurance that funds are allocated appropriately without introducing unnecessary complexity.
FULL PROJECT REVIEW FOR MAJOR RENOVATIONS AND GROUND-UP CONSTRUCTION
Larger renovation projects and ground-up construction loans carry significantly higher risk due to longer timelines, multiple trades, design complexity, and higher loan balances. For these projects, a full project review is the recommended best practice.
When a Full Project Review is Necessary
• Major renovations involving structural changes
• Additions or expansions
• Ground-up residential or commercial construction
• Mixed-use or multi-phase developments
• Projects with higher loan balances ($500K+) or longer timelines
Key Components of a Full Project Review
1. Budget Review – Confirms cost reasonableness, completeness, contingency levels, and alignment with the construction scope.
2. Contract Review
• Clear Scope of Work
• Defined payment terms
• Construction Schedule
• Change order procedures
• Adequate risk allocation and protections
3. Plans & Specifications Review – Verifies that architectural plans are:
• Sufficiently detailed and scope matches with Contract
• Buildable within the proposed budget
• Consistent with the construction contract and draw schedule
4. Appraisal Review – Ensures that the projected value upon completion supports the loan amount and that assumptions align with the actual Plans & Specifications.
Benefits
• Stronger risk mitigation for high-exposure projects
• Early identification of scope gaps or budget shortfalls
• Improved draw accuracy and fund control
• Increased confidence for lenders and investors
Matching the Review Type to Project Risk
Applying the correct level of review is not about adding unnecessary hurdles-it’s about aligning oversight with risk. Smaller renovation projects benefit from the efficiency of a budget -only review, while larger, more complex projects demand the rigor of a full project review to protect all parties involved.
By customizing the review process to the project size and complexity, stakeholders can support successful project completion while maintaining prudent risk management.
Contact us today to choose the review approach that matches your project’s risk and protects your investment from the start.
