Funding of Construction: Pro-Rata versus Equity Up-Front

The videos and files in this lesson set address alternative methods of borrowing money that has been committed by lenders. Pure project finance would involve putting all of the equity money in before debt is drawn. But now with some kind of direct or indirect support from either sponsors or EPC contractors, the debt can be borrowed on a pro-rata basis with equity. Further with a guarantee from the parent, equity bridge loans have been used. These bridge loans involve borrowing money for the equity and then paying back the loan at commercial operation. As equity bridge loans would not be made without a parent guarantee, interesting conceptual issues arise as to whether the benefits of the bridge loan should be attributed to the project or whether the project return should be computed without the equity bridge loan.

Other issues associated with borrowing money during the construction involve capitalisation of interest rather than payment of interest, the accounting treatment of cash flow and profits generated during construction, treatment of interest during construction on a shareholder loan, evaluation of the risks and costs for a construction over-run facility, liquidated damages for delay and other issues. Capitalisation of interest makes hardly difference at all either where a debt to capital constraint is applied or whether a DSCR constraint is used. In fact, if equity is contributed before debt it makes no difference at all. If profits during construction are measured as income rather than cash flow, the amount of cash equity input into the project can be dramatically reduced. This has an effect if the debt to capital constraint is applicable. The lesson set also deals with liquidated damages for delay in construction associated with the cost of money that occurs while a project is delayed. This requires alternative assumptions with respect to how the delay in construction occurs. Finally, the lesson includes working capital that may be funded during construction and the alternative ways working capital can be financed.

Borrowing Money During the Construction Period

The video below works through the issue of funding during construction where a project can be divided into multiple parts. This can occur for small gas engines where in Jordan a portfolio of engines that have 20 MW of capacity were put together to generate a 500 MW plant. It can occur in nuclear plants were a station of 4 plants in China had different dates for the start of power production. The video and associated file demonstrates how to put together multiple projects and assess where the income from one project can be used to fund other project. Other videos associated with this lesson set describe how to program alternative draw-down techniques in the construction phase of a project. Circular issues arise with interest during construction and fees during construction. Further, the models use monthly periods and demonstrate the effect of alternative construction periods. As with other lessons, I am in the process of making shorter introductory videos that focus on the economics and finance issues.


Files Associated Funding During Construction

As with lesson set 1 of this page, I have set the exercise files up with open-ended conceptual questions in the first page of the file. The idea is to answer the questions with the model that is developed in subsequent pages by messing around with different construction periods and different funding or construction strategies. I have not provided answers in the excel files and I will comment on some of the real-world answers that I have received from people that have participated in my class and who have responded to the exercises. As with the first lesson set, to make you feel good (according to modern marketing theory), I will charge a fee of 40 Euros for the course. Again, if you have ever taken any of my classes, you are lucky and you do not have to pay the fee.


  • Multiple projects.xlsm
  • Basic Delay Exercise.xls
  • Development fee timing.xlsm
  • Funding Cascade and Circularity.xlsx
  • Liquidated Damages with Goal Seek.xls
  • Operating Cash During Construction.xlsm
  • Operating Cash During Construction and Equity Bridge Loans.xlsm
  • S-Curve with Normal and Weibull.xlsx
  • Shareholder Loan IDC.xlsm
  • Working Capital Analysis.xlsm