Interest and Fees During Construction (IDC): The Mechanics Lenders Expect
- stlepova
- Jun 28
- 3 min read
Updated: Jul 15
Interest and fees during construction, commonly abbreviated as IDC, represent the financing cost a project accrues between financial close and commercial operations date.
This is the period before the asset generates any revenue.
Because this cost is usually capitalized into total project cost rather than paid in cash during construction, it directly increases the amount of debt and equity required to fund the project.
A poorly modeled IDC calculation can materially understate the project’s total financing need.
Why IDC cannot be approximated as a flat percentage
A common shortcut is to estimate IDC as a flat percentage of total construction cost, applied once.
This approach ignores the fact that interest accrues on the actual outstanding debt balance in each period.
That balance depends entirely on the drawdown schedule.
Debt drawn earlier in construction accrues interest for longer than debt drawn near completion.
As a result, projects with front-loaded capital expenditure, such as long-lead equipment procurement, can have materially higher IDC than projects with back-loaded spend curves, even if the total construction cost and construction duration are identical.
Structuring the drawdown schedule
The first step in modeling IDC correctly is to build a period-by-period drawdown schedule that mirrors the construction spend curve.
This is typically informed by the project’s S-curve cost forecast and the agreed funding mechanics between equity and debt.
Funding structures may include pro-rata funding, equity-first funding or equity-after-debt structures.
These mechanics are often specified in the financing documents as part of the funding sequence required before each drawdown.
Accruing interest on the outstanding balance
For each period in the construction schedule, interest is calculated on the cumulative outstanding debt balance at the relevant interest rate.
The rate may be fixed or floating, often referencing a base rate plus margin.
This accrued interest is then capitalized, meaning it is added to the outstanding loan balance rather than paid in cash.
Because the project has no revenue during construction, this capitalization is a core feature of construction-period financing.
The capitalized interest itself then accrues interest in subsequent periods, which is why the calculation compounds over the construction period.
The circularity problem and how to solve it
IDC creates an inherent circularity in the financial model.
Capitalized interest increases total project cost.
Higher total project cost increases the total debt required.
Higher debt then increases the interest accrued during construction.
This loop must be solved explicitly.
Models usually handle this either through an iterative calculation with a defined convergence tolerance or through a closed-form algebraic solution that solves directly for the debt balance inclusive of capitalized interest.
Sponsors who fail to close this circularity correctly typically understate total financing requirements.
This error is usually identified quickly during lender due diligence and can require late-stage re-sizing of the financing facility.
Commitment fees and upfront fees
IDC calculations should also include commitment fees charged on the undrawn portion of committed facilities.
These fees compensate lenders for capital held available but not yet disbursed.
The model should also include upfront fees, arrangement fees or other financing fees charged at financial close.
Both commitment fees and upfront fees are real financing costs that affect the total project funding requirement.
In many financing structures, they are capitalized into the debt balance in the same way as accrued interest.
Sensitivity to construction delay
IDC accrues for the full duration between financial close and commercial operations date.
For this reason, any construction delay directly increases total IDC.
This relationship should be explicitly modeled as a sensitivity.
Lenders will often test how a three-month, six-month or twelve-month delay affects total project cost, required debt sizing and overall funding requirements.
Construction delay risk is one of the most common drivers of cost overruns in project finance, so the IDC schedule must be able to show its financial impact clearly.
How R7 Economics helps
R7 Economics builds IDC schedules that integrate drawdown timing, compounding interest accrual, commitment fees, arrangement fees and correctly solved circular calculations.
Our models also link IDC to construction delay sensitivities, helping sponsors present a defensible and lender-ready total project funding requirement.
Download the Excel Tutorial: Interest and Fees During Construction
This step-by-step Excel tutorial shows how to model interest and financing fees during the construction phase of an investment project. Using a practical logistics-hub example, it explains how to build a construction cost schedule, calculate equity funding and debt drawdowns, model capitalized interest, commitment fees and upfront fees, and determine the final debt balance at construction completion.
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