What is the primary purpose of developer overhead in construction loans?

The primary purpose of developer overhead in construction loans is to provide operating capital for the developer. This overhead includes all the indirect costs related to the development project that are not directly tied to the physical construction of the project but are essential for managing, overseeing, and executing the development successfully.

Operating capital is crucial for a developer as it helps cover various administrative expenses, such as salaries for project managers, office rent, and utilities, which are necessary for the smooth running of the development process. This overhead ensures that the developer can maintain operational viability, respond effectively to project needs, and manage cash flow throughout the construction timeline.

While profit margins, covering unexpected shortfalls, and reimbursing labor costs are important financial considerations in any construction project, they do not encapsulate the specific role of developer overhead, which is fundamentally about providing the necessary operational support and infrastructure needed to facilitate the successful completion of the project.