In a Cost Plus Contract Example, all that is required is that the business’ project budget be approved by the lender and then it becomes part of the overall plan to carry out the proposed project. This will usually include an estimate of how much money will be needed to complete the project.
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In most cases, lenders will require these two prior documents: a copy of the previous loan documents and the Proposal/Cost Summary from the business. If the loan was secured by mortgage-backed securities, the lender may require the presentation of mortgage documentation or an appraisal of the property, as well. Often, however, if the business has repaid its previous loans, the lender will not require these documents.
The cost of the project is not usually the only expense to be considered in a Cost Plus Contract Example, however. After the loan has been approved, a specific period will be designated for the completion of the project, known as the funding period. This period typically includes the sum of the total project costs and financing fees. The financing fees are generally a percentage of the amount financed.
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A Cost Example must be submitted to the lender before any monies being advanced to the business. This submission may also be on a timely basis, such as when the total cost is approaching or is already at the loan value. All costs must be clearly stated on the budget and cost document.
The cost must be consistent with the other cost information, the business submitted to the lender. Even if the lender approves the cost, it does not necessarily mean that the project will be completed on schedule.
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It is important to carefully review the cost statement from the lender. It will include the estimates of the number of materials used and how much the project is estimated to cost.
Also, the budget must indicate how much of the project costs can be budgeted for each month. Also, the cost should not reflect additional funds that may be required by the lender during the project. Therefore, if there is a contingency, the project will be adjusted in the budget as needed.
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It is important to be realistic about the amount of money the business expects to raise from the loan. Once the business has been approved the cost will be subject to approval by the lender at regular intervals during the project, which is why a proper budget must be established for the duration of the project.
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