🧰 Before You Begin
Before you start building formulas, confirm you have a clean baseline project model: timing, cost, and funding. You’ll need a clear construction schedule (by month or quarter), a detailed Capex draw plan, and a simple baseline operating case for post‑commissioning. If you haven’t already, build or review your Capex schedule module so deposits, progress payments, and retentions are correctly timed.
You also need your financing plan: facility limits, draw order, interest rates, fees, and repayment structure. Decide which borrowings are “project debt” versus working capital lines, because only the former typically drives interest during construction. Align on when construction ends, when commissioning starts, and how you’ll treat partial operations. Finally, agree on the accounting policy for capitalising interest, and how that flows into your working capital management and performance dashboards. Once these decisions are locked, you’re ready to model and calculate working capital and IDC without surprises.
🧮 Step-by-Step Instructions
Step 1 – Map the Construction-to-Commissioning Timeline and Cash Needs
Start by building a clear time axis for the project – monthly is ideal for most corporate Capex. Allocate every major cash outflow to this axis: land, design, long‑lead items, progress payments, commissioning, and initial ramp costs. Use separate lines for base Capex, interest during construction, and any pre‑operational opex so you can track them independently.
Next, integrate this timeline with your Capex schedule module so deposits, draws, and retentions are explicitly timed. Add a simple view that shows cumulative spending and cumulative funding to highlight peak cash exposure. If the project creates pre‑go‑live inventory or customer deposits, reflect those in net working capital rather than Capex, so your working capital balances stay meaningful. At the end of this step, you should see a clean “funding gap” line by period, which becomes the driver for debt draws and IDC.
Step 2 – Set Up Your Debt Draw and Interest Drivers
Now define how you will fund the construction phase. Start with your project facility: opening undrawn amount, interest rate, fees, and whether interest compounds or is paid in cash. Decide on a draw rule that matches reality, for example, “fill equity first, then draw debt to cover any negative cash gap,” or a fixed draw schedule negotiated with lenders.
Implement formulas that calculate opening debt, draws, repayments, and closing debt each period. Use opening-plus-half-of-draws as the base for interest if you’re modeling intra‑period borrowing. Keep project debt separate from working capital facilities to avoid double‑counting interest or mismatching leverage. Add simple parameters so you can easily flex rates or switch between interest‑only and amortising structures. The goal is to have a stable, transparent engine for debt balances that you can reuse across projects, not a one‑off patch.
Step 3 – Model Interest During Construction and Capitalisation
With debt balances in place, calculate IDC. For each period, multiply the relevant average debt balance by the applicable interest rate to generate gross interest. Decide whether interest is paid in cash or rolled up; for construction facilities, it’s often capitalised. Implement this by adding IDC to a “capitalised interest” line that feeds into the project asset, while also showing the same amount as a cash outflow.
This separation lets you reconcile cash paid vs. expense recognised later, and keeps your EBITDA clean during construction. Build a simple audit table: opening capitalised interest, IDC in the period, and closing balance. That makes it easier to explain to auditors, lenders and your own team. If you are using vendor or equipment financing, include a parallel IDC calculation or link to your vendor financing model for consistency.
Step 4 – Flip From Construction to Operations Without Breaking Cash Logic
Define a precise commissioning date and a rule for partial go‑live. On that date, stop capitalising interest: subsequent interest should hit the P&L while still consuming cash. Adjust your formulas so the project asset stops growing, and capitalised interest begins depreciating over the asset’s useful life.
At the same time, bring the operating model online: revenue, opex and working capital cycles. Make sure your opening working capital balances reflect the transition – for example, initial inventory, accrued expenses and customer prepayments built during commissioning. Use simple flags (0/1) that toggle construction vs. operating logic to avoid brittle date‑driven formulas. Cross‑check that free cash flow totals match your earlier project evaluation model and that growth vs maintenance Capex is correctly classified for future decision‑making.
Step 5 – Validate Peak Funding and Project Economics
Finally, stress‑test your structure. Build a view that shows the minimum cash and maximum debt balance over the construction period. Small tweaks to timing or cost often move the peak significantly, so run scenarios for delays, cost overruns and interest rate shocks. Use this to challenge contingency levels and covenant headroom.
Then recalculate project NPV, IRR and payback, including IDC. Compare project rankings against a simple cash‑ladder or “dollars at risk” view so leadership can see which projects truly tie up the most cash. Check that free cash flows reconcile with your broader working capital metrics and that your model behaves well under downside cases. Once validated, package this IDC module as a reusable template so every new project uses the same logic – rather than re‑inventing the wheel each time.
⚠️ Tips, Edge Cases & Gotchas
Watch for facilities with rate resets, step-ups, or multiple tranches; model each tranche separately rather than averaging rates. If the project moves into partial operations while construction continues, consider splitting the model into “phase 1” and “phase 2” assets so you don’t capitalise interest beyond what the standards allow. Be explicit about tax deductibility: in some jurisdictions, capitalised interest still affects tax timing.
Where construction materially changes working capital patterns – for example, building a plant that needs a large initial inventory – model those working capital balances separately rather than burying them in Capex. For very long projects, also track FX on foreign‑currency debt and link that to your treasury model. Finally, document your IDC assumptions clearly inside the model. Future you (or a new controller) should be able to understand and adjust the logic in minutes, not hours.
📌 Example / Quick Illustration
Imagine a $40m project with an 18‑month build. You spend $20m in year one and $20m in year two. Equity covers the first $10m; a construction facility funds the rest at 8% interest, interest‑only during construction. Your model calculates the period‑by‑period funding gap, draws debt when cash goes negative, and applies 8% to the average debt balance each period. IDC is capitalised into the project asset while also appearing as a cash outflow.
As the project commissions, you stop capitalising interest and begin depreciating the full asset (Capex plus capitalised interest). Operating cash flows ramp, working capital metrics (like DSO and inventory days) start updating, and free cash flow turns positive. A quick sensitivity on interest rates shows how much additional equity would be required if rates rise 200 bps. That’s the level of clarity decision‑makers need.
➡️ Next Steps
You now have a practical pattern for modeling interest during construction, from first draw to commissioning. Next, embed this IDC module into your standard Capex evaluation toolkit so every new project is assessed on a consistent, cash‑based basis. Consider pairing it with a standard working capital module so you can see total funding needs across projects and operations.
Once that’s in place, you can refine the structure with automation, scenario dashboards, and standard templates your finance team can reuse across portfolios. The goal is simple: no more surprise funding gaps, and much faster, evidence‑based go/no‑go decisions on capital projects.
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