The Construction Contract and Budget Costs First-Time Developers Often Get Wrong
- 1 hour ago
- 5 min read
By Garrett Byrd
What every self-storage developer needs to know about contracts, contingencies, and the hidden costs that can derail your bank loan before you break ground
Building a self-storage facility is one of the most rewarding investments in commercial real estate, but the path from signed contract to open doors is full of financial landmines that catch even smart, experienced developers off guard. Most of those landmines share a common trait: they were never written down, never priced out in advance, and never included in the loan budget.
There are two areas where developers consistently leave themselves exposed: the construction contract itself and the owner-side expenses that rarely make it into the initial budget. Getting both right before you sit down with a lender is not a formality. It is how you protect your project from the moment the ink dries.
The Contract Comes First, and It Has to Be Right
Lenders typically require a signed construction contract as part of the loan package. That contract is not just a formality to satisfy underwriting. It is the foundation of your entire financial model for the project. If the contract is incomplete, vague, or missing key protections, you are taking on risk that will show up later at the worst possible time.
Critical Provision: Subject to Financing
Your construction contract must include a clear stipulation that the agreement is contingent upon the owner securing acceptable bank financing. This is not optional language. Without it, you may find yourself legally bound to a contractor while a lender declines your loan or requires material changes to the deal structure. A financing contingency gives you an exit if the capital does not come together as planned, and it signals to the lender that the contract was structured with professional diligence.
Build in Unit Pricing for the Unexpected. One of the most overlooked provisions in a construction contract is unit pricing for unknown subsurface conditions. Ledge rock, poor soils requiring dewatering, and unstable bearing conditions are not always visible until excavation begins. If your contract does not include pre-negotiated unit prices for these scenarios, the contractor will price them at a significant premium mid-project when you have no leverage and no alternatives.
Unit pricing locks in the rate per cubic yard for rock removal, per linear foot for dewatering systems, or per square foot for engineered footings before anyone picks up a shovel. That one provision can save tens of thousands of dollars on a project that hits unexpected conditions, which in self-storage development is more common than most first-time builders expect.
Everything in Writing. No verbal agreements, no handshake understandings, no informal email approvals treated as binding changes. Every scope modification, every schedule adjustment, every substitution of materials needs to flow through a formal written change order. This protects you legally, keeps your lender informed of any budget impacts, and maintains the project record that your contractor, your inspector, and your bank will all rely on throughout construction.
The Owner Expenses That Rarely Make It into the Budget
Even developers who negotiate a tight construction contract frequently underestimate the cost of getting a project built because they confuse the contractor's budget with the total project budget. Those are two different numbers. The gap between them is made up of owner-side expenses, costs that are entirely your responsibility and that rarely appear in a contractor's proposal.
These costs need to be identified, quantified, and included in your bank loan budget before you submit your application. Missing them at the loan stage means one of three things: you discover the gap mid-construction and scramble for funds, you absorb costs out of pocket that were supposed to be financed, or you go back to the lender for a loan modification, which is an uncomfortable conversation nobody wants to have.
Here is the list of commonly overlooked owner expenses that should be reviewed with your development team and priced into your loan budget:
Here is the list of commonly overlooked owner expenses that should be reviewed with your development team and priced into your loan budget:
Building Permit Fees. Municipalities charge for permits based on the scale and valuation of the project. These fees vary widely by jurisdiction and can range from $10,000 to well above $40,000 on a larger project in a regulatory-heavy market.
Soil and Concrete Testing. Third-party geotechnical and materials testing is required on virtually every commercial construction project. Lenders expect it, and without it you have no independent verification that the structure was built to spec.
Owner's Project Manager. Unless you are an experienced developer with construction management skills, you need someone in your corner watching the job on a daily or weekly basis. This is not the same as the general contractor's superintendent. Your project manager represents your interests, tracks the budget, reviews pay applications, and flags problems before they become expensive.
Architect and Engineer Construction-Related Fees. Design fees are often budgeted upfront, but architects and engineers also charge for construction administration, site visits, responding to contractor RFIs, and reviewing submittals. These fees can add up to a meaningful additional cost beyond the original design contract.
Construction Inspection Fees. Many municipalities require periodic inspections by third-party engineers or local building officials at specific project milestones. The costs are modest individually but accumulate across a full construction timeline.
Utility Connection Fees. Connecting to municipal water, sewer, gas, and electric service typically involves impact fees and connection charges assessed by the utility provider. These numbers should be verified directly with each utility early in the development process, as they are often higher than developers expect.
Utility Construction Fees. Beyond the connection fees, the utilities themselves may charge to extend service lines, upgrade infrastructure, or install meters. This is especially common in developing areas where the surrounding infrastructure was not built to accommodate commercial demand.
Transformer Fees. Climate-controlled self-storage facilities carry significant electrical loads. The power company may require a dedicated transformer, and the cost of procurement and installation is commonly passed to the property owner. Get a written estimate from the utility company before you finalize your budget.
Office Setup Costs. Furniture, computers, point-of-sale systems, management software, security monitoring subscriptions, signage, office supplies, and initial inventory for the retail area are all costs that come due right as you are trying to open the doors and generate your first revenue. They are small individually, but can easily total $15,000 to $30,000 when added together.
Review These With Your Team Before You Go to the Bank
The most effective way to handle these costs is to build a complete pre-loan budget with your development team before your first lender conversation. That team should include your attorney, your general contractor or construction manager, your architect, your civil engineer, and your franchise development team if you are building within a franchise system.
Walk through every line item together. Assign a cost estimate to each owner expense listed above, even if it is a rough number at the early stages. Lenders respect thorough borrowers, and a complete, well-organized budget tells the story of a developer who understands what they are building and what it will truly cost.
The alternative, discovering these costs mid-construction and mid-loan, creates problems that are slow to resolve and expensive to fix. Do the work on the front end, put everything in writing, and go to your lender with a budget that actually reflects the full cost of building a successful self-storage facility.
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