In a self-redevelopment project, the housing society or its member, rather than the builder, bears the risk of cost overruns. This is because there is no developer to absorb the impact. If actual project expenses exceed the planned budget, the shortfall may have to be made up by member contributions or other project funds.
What Financial Risks can Cost Overruns Create in Self-Redevelopment?
In self-redevelopment, societies serve as developers and take on financial risks. Cost overruns may impact reserves, possession dates, and members' interim accommodation bills.
- Construction costs rise:
If the prices of items like steel, cement, or other construction inputs rise, the project may require additional cash.
- More borrowing:
If the agreed project budget is insufficient, the society may require additional funding, increasing its overall payback load.
- Member contributions:
Based on the project's financial structure, members may need to contribute more money to close a funding shortfall.
- Transit rent and delay costs:
If the project is delayed due to financial concerns, contractor conflicts, or other issues, members may be required to incur temporary accommodation expenditures for an extended period.
- Reduced revenue from saleable area:
Self-redevelopment projects may rely on revenue from extra salable units. If market conditions worsen and these units earn less revenue than expected, the organisation may suffer a financing gap.
A cost estimate does not guarantee the final project cost. Society must understand the risks covered by the contractor, lender, or society as per the agreements.
How Can a Society Reduce Exposure to Cost Overruns?
Create a contingency buffer of 10 to 15% above the expected project cost in the budget and loan approval.
Hire an experienced Project Management Consultant (PMC) to generate accurate cost estimates.
Where possible, use a fixed-price or item-rate contract with the construction agency rather than a cost-plus agreement.
Instead of relying entirely on the sales of more flats, use the society's reserve/corpus fund as a fallback.
Society assumes the project's financial risk unless an agreement specifies otherwise. Members must review redevelopment and financing agreements to understand any potential financial liabilities before project approval.
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Who takes on the financial risk if the self-redevelopment project runs into cost overruns?
Prasad75Rakesh
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2026-08-10T14:09:50+00:00 2026-08-10T14:10:57+00:00Comment
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