Sources and Uses: Why the Two Sides Balancing Proves Nothing

Every sources and uses statement balances. It has to: one line on the sources side is a plug, and whatever does not balance becomes sponsor equity.

So a balanced table tells you nothing. It is an identity, not a test, and treating it as a check is the single most common misreading of the document that sits at the front of every project finance model.

The two questions it cannot answer are the only ones that matter. Is every use complete — or is there a cost nobody has put in the table? And is every source committed — or is a number sitting in the sources column that nobody has actually agreed to provide?

This post covers what belongs on each side, where the circularity comes from, and the two tests worth running on a document that always balances.

ℹ️ Note: All figures are labelled assumptions, solved consistently including the funding circularity. Line items vary by project and jurisdiction.

What Is a Sources and Uses Statement?

The project's capital budget and funding plan on one page: everything the project must pay for before it earns revenue, and everything that will pay for it. The two sides are equal by construction, because the last source is sized to meet the total.

It is the foundation of the model. The debt sizing tests from the first post in this series apply to the total uses figure, so every line on the uses side feeds the gearing constraint — and as the construction post showed, some of those lines depend on the debt, which is where the circularity comes from.

The Uses Side

Use	Worked example
EPC contract price	$190,000,000
Owner-supplied equipment	$12,000,000
Interconnection and network upgrades	$20,000,000
Land, permitting and development costs	$8,000,000
Development fee to sponsor	$10,000,000
Contingency	$9,500,000
Subtotal — construction	$249,500,000
Interest during construction and commitment fees	$9,510,426
Arrangement and financing fees	$2,545,617
DSRA initial funding	$7,976,458
Working capital	$2,000,000
Total uses	$271,532,502

Four observations about what is easy to miss.

The financing costs are 8.0% of the construction budget. IDC, fees and reserve funding add $20.0m to a $249.5m project. A sponsor quoting "a $250m project" is describing the construction cost of a $271.5m financing.

The development fee is a source as well as a use. A fee paid to the sponsor for development work is a use of funds and, economically, a return of and on the development capital already spent. Lenders scrutinise it because it is the one line where the sponsor pays itself out of the financing, and a fee that is large relative to genuine development spend reduces the sponsor's real equity at risk.

Interconnection appears as a use but is partly a receivable. As the network upgrades post established, upgrade costs are generally reimbursed through credits against future transmission service. The full amount belongs in uses because it has to be funded; the fact that roughly half of it comes back in present value terms belongs in the returns model, not here.

Contingency is a use that is intended not to be spent. At 5% of EPC on this example. Whether it is drawn determines whether the final equity number is the one in the table.

The Sources Side

Source	Worked example	Committed?
Senior debt facility	$203,649,376	Committed at financial close
Sponsor equity	$67,883,125	The plug
Total sources	$271,532,502

Other sources appear in real structures and each carries a different quality of commitment: tax equity contributions, which fund at a defined milestone against conditions; proceeds of a §6418 credit transfer, which arrive only after a return is filed; grants, which are conditional on compliance; subordinated or mezzanine debt; and vendor financing.

What Is Actually in the EPC Price?

Less than the number suggests, and the gap is where uses-side omissions live.

An EPC contract price covers the contractor's defined scope. Everything outside that scope is the owner's, and the boundary is drawn in the contract's scope schedules rather than in anyone's assumptions.

Items that commonly sit outside a renewable EPC scope include: the high-voltage substation and the interconnection facilities beyond the point of interconnection; owner-supplied major equipment where the sponsor has procured modules or turbines directly under a supply agreement; spare parts inventory; site security and access roads beyond the contractor's needs; permitting and environmental compliance; and utilities and telecommunications connections.

Two structures change the boundary materially.

A wrapped EPC places almost everything with a single contractor under one price and one liability cap. It is the simplest to finance — the lender has one counterparty, one schedule and one set of liquidated damages — and it costs a wrap premium, typically several percent of contract value, for the contractor taking interface risk.

A multi-contract structure splits supply, installation and balance of plant across several parties. It is cheaper in headline terms and leaves the interface risk with the owner: if the modules arrive late and the installer claims delay, there is no single party responsible, and the delay LD analysis from Series D becomes considerably more complicated.

The financing consequence is that a multi-contract structure typically requires more contingency, a higher sponsor completion obligation, or both — which means some of the wrap premium reappears on the uses side under a different name. The comparison worth running is total uses under each structure, not contract price against contract price.

How Much Contingency?

More than convention suggests, and sized against the distribution rather than as a percentage.

Five percent of EPC is the conventional figure and it appears in the worked table above. The difficulty with a conventional percentage is that it bears no relationship to the risk of the specific project, and the risk is not symmetric.

The network upgrades post made the point in a different context: cost estimates revise upward far more often than downward. A contingency sized as a symmetric buffer around a central estimate will therefore be systematically short, because the distribution it is buffering has a long right tail and almost no left one.

Three factors should move the number materially.

Contract structure. A wrapped EPC with a firm price and a strong contractor needs less contingency than a multi-contract structure with interface risk and several parties able to claim.

Interconnection maturity. A project whose network upgrade costs are fixed in an executed interconnection agreement carries a different risk from one still awaiting a facilities study — and the 25% and 100% exemption thresholds from the interconnection post define exactly how much that estimate can move.

Technology and supply chain. First-of-a-kind equipment, a new supplier, or a component exposed to tariff or trade action all widen the distribution.

The practical test is simple and rarely applied: what does the contingency have to absorb before the cost-to-complete test fails? That figure, computed from the construction post's mechanics, converts contingency from a convention into a stated amount of protection — and a project where the answer is "one adverse change order" is under-provisioned regardless of what percentage the line represents.

Why Is the Plug a Problem?

Because it absorbs every error on the other side, silently.

The sponsor equity line is computed as total uses less every other source. That means a cost understated by $5m produces an equity number $5m too low, and the table still balances perfectly. A cost omitted entirely does the same thing. So does an optimistic contingency.

The consequence is that the equity number in a sources and uses statement is an output, not a commitment — and the gap between that output and what the sponsor has actually agreed to fund is where cost overrun undertakings and equity commitment agreements do their work.

This is why the construction post's cost-to-complete test matters so much. It is the only mechanism that tests, repeatedly and with third-party certification, whether the uses side was right.

The Development Fee Question

The one line where the sponsor pays itself out of the financing, and it attracts attention accordingly.

A development fee compensates the sponsor for taking a project from an idea to a financeable asset — site control, permitting, interconnection, offtake procurement, and several years of expenditure at risk on projects that mostly do not reach financial close. It is a legitimate cost and a real one.

It is also, mechanically, a partial return of the sponsor's equity at the moment of financial close. Ten million dollars of development fee, funded 75% by debt, means $7.5m of the sponsor's equity cheque is returned to it from the lender's money on day one. The sponsor contributes $67.9m and receives $10m back, so real equity at risk is closer to $57.9m — and the effective gearing on a cash basis is higher than the 75% the term sheet states.

Lenders test it in three ways, and a sponsor should expect all three.

Against actual development spend. A fee that approximates the documented cost of developing the project is straightforward. One that substantially exceeds it is a distribution wearing a cost's label.

Against market. Development fees are typically expressed as a percentage of project cost, and a fee well above the range for comparable projects will be questioned regardless of the underlying spend.

Against the sponsor's remaining commitment. The important question is not the fee's size but what equity the sponsor still has at risk after receiving it. A sponsor left with meaningful capital in the project behaves differently from one that has been made whole at close.

Where a fee is large, the common resolutions are deferral — paying it from operating cash flow rather than from the construction budget — or subordination, which converts it into a claim ranking behind the debt. Both preserve the fee and restore the alignment, which is what the lender was actually concerned about.

Where Does the Circularity Come From?

Three lines on the uses side depend on the size of the debt.

Uses          = Construction + IDC + Fees + DSRA + Working capital
Senior debt   = Gearing % × Total uses
IDC           = f(debt drawdown profile)
Arrangement fee = % × facility size
DSRA          = f(debt service) = f(facility size)

More debt means more IDC, more fees and a larger DSRA, which means larger total uses, which means more debt. As the sculpting post set out, this loop is genuine, algebraic, and separate from the operating-phase sculpt that is not circular at all.

On the worked example it converges quickly: the debt settles at $203,649,376 against total uses of $271,532,502, and the equity plug at $67,883,125 — exactly 25% of the total, as the gearing constraint requires.

Note what that means. The sponsor's equity cheque grew from $62.5m on the bare $250m construction budget to $67.9m once financing costs were included — an $5.4m increase arising entirely from the cost of the financing itself.

The Two Tests Worth Running

Since balancing proves nothing, run these instead.

Test one: is every use complete?

A checklist, because omissions are the failure mode:

• EPC price, and everything explicitly outside the EPC scope
• Owner-supplied equipment and spares
• Interconnection, network upgrades and the security postings behind them
• Land acquisition or lease prepayments
• Permitting, environmental studies, legal, technical and insurance advisory
• Development fee, and the development costs it is replacing
• IDC, commitment fees, arrangement fees, agency fees
• Hedge costs, including any upfront premium
• All reserve accounts at their initial required balances
• Working capital and initial spares inventory
• Insurance premiums for the construction period
• Contingency, sized against the actual risk rather than a convention
• Taxes and duties on imported equipment
• Startup and commissioning costs

The lines most often missing are the security postings, the advisory costs, and the taxes on imported equipment — each of which is real cash and none of which appears in an EPC price.

Test two: is every source committed?

Classify, and report the percentage:

Senior debt          $203,649,376    COMMITTED (facility agreement signed)
Sponsor equity        $67,883,125    COMMITTED (equity commitment agreement)
                     ------------
Committed sources    $271,532,502    = 100.0%

Now a version that is common and much weaker:

Senior debt          $180,000,000    COMMITTED
Tax equity            $55,000,000    CONDITIONAL (funds at COD, on conditions)
Credit transfer       $20,000,000    UNCOMMITTED (buyer not identified)
Sponsor equity        $16,532,502    COMMITTED
                     ------------
Committed at close   $196,532,502    = 72.4%
Funding gap          $75,000,000     ← the real number

That second table balances exactly as well as the first and describes a completely different project. A financing with 72.4% of its sources committed at close has a $75m gap that somebody has to bridge — usually the sponsor, usually through a construction facility sized to fund ahead of the tax equity and credit proceeds, and always at a cost.

Three grades of commitment are worth distinguishing, because "committed" is doing a lot of work as a single word.

Unconditionally committed. A signed facility agreement with satisfied conditions precedent, or cash already contributed. The only remaining risk is the counterparty's solvency.

Conditionally committed. A signed agreement whose funding depends on conditions that are not yet met — tax equity funding at commercial operation subject to performance tests, a grant conditional on compliance certification, a facility whose remaining CPs include items outside the sponsor's control. These are real commitments and they can fail, and the diligence question is who controls each condition.

Uncommitted. A number in the table with no counterparty behind it. A credit transfer with no identified buyer, a mezzanine tranche still being marketed, an expected grant not yet awarded. These are plans, and treating them as sources is how funding gaps get discovered during construction rather than before it.

The useful output is not a single committed percentage but the three-way split, with the conditional tranche annotated by what each condition depends on. A project whose conditional sources all turn on its own performance is in a very different position from one whose conditional sources turn on a third party's decision.

How Do You Model This in Excel?

As a solved circularity with commitment status as a first-class field.

The solve

Iterate or solve algebraically:
   Total_Uses   = Construction + WC + DSRA + IDC(Debt) + Fees(Debt)
   Debt         = MIN( Gearing × Total_Uses , DSCR_Sized_Debt )
   Equity       = Total_Uses − Debt − Other_Sources

Converges in a handful of passes. Keep it separate from the operating-phase model.

The outputs nobody publishes

PF_FinancingCostPct  = (IDC + Fees + DSRA) ÷ Construction     =  8.0%
PF_EquityIncrease    = Equity with financing costs − without  = $5.4m
PF_CommittedPct      = Committed sources ÷ Total uses         =  see test two
PF_FundingGap        = Total uses − Committed sources

The bridge nobody models

Tax equity funds at COD        →  months 0-24 must be bridged
Credit transfer proceeds       →  arrive year 2, after filing
Bridge requirement             =  peak cumulative gap
Bridge cost                    =  requirement × rate × duration

The direct pay and transferability posts made this point from the tax side: credit proceeds are a receivable, not a source at commercial operation. The sources and uses table is where that distinction has to be made explicit, because a table listing $20m of credit proceeds as a source, with no bridge, has funded the project with money that arrives eighteen months after the last invoice.

ℹ️ Note: Add a column to the sources table for when each source funds, not just how much. A funding plan that is correct in total and wrong in timing is a liquidity failure, and the table as conventionally drawn cannot show one.

To build the solved sources and uses, the commitment classification and the bridge requirement, prompt Dezzmond with your capital budget and funding plan.

What Do Sponsors and Lenders Actually Check?

• What percentage of sources is actually committed at financial close?
• When does each source fund, and what is the peak cumulative gap?
• Is the equity number a plug, and is there a commitment agreement behind it?
• What is in the EPC price and what is explicitly outside it?
• Is contingency sized against the risk or set at a conventional percentage?
• How large is the development fee relative to actual development spend?
• Are the financing costs in the table — IDC, all fees, and every reserve at its initial balance?

Frequently Asked Questions

Why does a sources and uses statement always balance?

Because sponsor equity is calculated as the residual. Any error or omission on the uses side is absorbed into the equity line, so balancing is an identity rather than a check.

How large are financing costs relative to construction?

On the worked example, IDC, fees and initial reserve funding add $20.0m to a $249.5m construction budget — 8.0%, and $5.4m of additional equity.

What causes the circularity?

IDC, arrangement fees and the DSRA all depend on the size of the debt, while the debt is sized as a percentage of total project cost including those items. The loop is genuine and algebraic, and should be solved separately from the operating model.

What is the most common omission?

Security postings, advisory costs and import duties — each is real cash and none appears in the EPC contract price. Reserve accounts at their initial balances are the next most frequently forgotten.

What is outside an EPC price?

Whatever the scope schedules exclude — commonly the substation and interconnection facilities beyond the point of interconnection, owner-supplied equipment, spares, permitting and utility connections. A wrapped EPC narrows the gap at a premium; a multi-contract structure widens it and leaves interface risk with the owner.

How much contingency is enough?

Not a convention. Size it against the distribution of cost outcomes, which is asymmetric — estimates revise upward far more often than down. The useful test is how much the contingency must absorb before the cost-to-complete test fails.

Should tax credit proceeds appear as a source?

Only with the timing attached. Transferability and direct pay proceeds arrive after a tax return is filed, which is well after commercial operation, so listing them as a source without modelling the bridge funds the project with money that has not arrived.

Closing: A Document That Cannot Fail the Test It Is Given

Sources and uses is usually the first exhibit in a financing package and the least interrogated. It balances, the numbers look sensible, and attention moves on to the cash flow model.

That is a mistake of category. The table is a statement of a plan, not a verification of one. Its equity line is a residual that absorbs every error above it; its sources column says nothing about whether anyone has agreed to provide what it lists; and its totals say nothing about when any of it arrives.

Three additions fix most of that, and none is difficult. Add a commitment status to every source, so the gap between "listed" and "agreed" is visible. Add a funding date, so a plan that is right in total and wrong in sequence shows up as the liquidity problem it is. And report the financing cost as a percentage of construction, so the difference between a $250m project and a $271m financing is stated rather than buried.

None of those makes the table stop balancing. They make the balance mean something.

The next post takes the instrument that exists precisely because of the funding gaps this document reveals: the equity bridge loan.

Sources: Ryan O'Connell, CFA — Building a Project Finance Financial Model · Pivotal180 — What Is a DSRA? · Breaking Into Wall Street — Debt Service Reserve Account in Project Finance · Edward Bodmer — Project Finance Model Funding and Sculpting Exercise