Yes, utility installation costs are generally included in a construction loan as part of the overall site development budget. Most lenders allow borrowers to draw funds for water, sewer, electric, gas, and telecommunications infrastructure when these expenses are itemized in the approved construction budget. However, the specifics depend on your loan structure, lender requirements, and whether you are financing horizontal or vertical construction.
Understanding how utilities fit into your construction financing is essential for subdivision developers and home builders alike. Utility infrastructure often represents 15% to 25% of total site development costs, and failing to account for these expenses can derail a project before vertical construction ever begins. For developers building subdivisions with 20 to 200 lots, the total cost of water, sewer, electric, gas, and stormwater infrastructure can easily reach seven figures.
If you are planning a subdivision or ground-up development and need financing that covers site infrastructure, contact Clearhouse Lending to speak with an advisor who specializes in horizontal construction loans and full-scope development financing.
What Expenses Does a Construction Loan Typically Cover?
A construction loan covers the full range of costs required to take a project from raw land to a completed structure. This includes land acquisition, site preparation, utility installation, foundation work, framing, roofing, interior finishes, and final inspections. Lenders disburse funds in a series of draws that align with construction milestones, so each phase of the project is funded as it reaches completion.
For subdivision developers, the construction budget typically includes both horizontal and vertical components. Horizontal work covers everything below the surface and at ground level - grading, roads, drainage, and utility trunk lines. Vertical work includes the actual buildings, from foundation to roof. Most lenders review a detailed cost breakdown before approving the loan, and utility installation falls squarely within the approved budget when it is properly documented.
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The key is proper documentation. Lenders want to see itemized bids from licensed contractors, utility company cost estimates, and municipal fee schedules before they approve draws for infrastructure work. If your budget includes utility costs, and your lender has approved the draw schedule, those costs are covered by the loan. Construction loans also typically cover soft costs like engineering, surveying, and permitting fees that are directly tied to utility installation. You can estimate your total project financing needs with our commercial mortgage calculator.
Beyond the physical construction costs, most lenders also allow draws for architectural and engineering fees, permit and inspection costs, builder's risk insurance, and interest reserves during the construction period. The more thorough your budget documentation, the smoother the draw process will be throughout the project.
Are Utility Installation Costs Included in Construction Loans?
Utility installation costs are included in most construction loans when they are part of the approved project budget. Lenders evaluate the total cost of development and include site infrastructure - water lines, sewer connections, electrical service, gas lines, and telecommunications conduit - as eligible expenses. The critical requirement is that these costs appear in your initial budget submission and are supported by contractor bids or utility company estimates.
For horizontal construction loans, utility installation is often the primary use of funds. These loans are specifically designed to finance the infrastructure phase of a subdivision, including roads, drainage systems, and all underground utilities. According to Bankrate, construction loans cover the costs of buying land, drafting plans, obtaining permits, and paying for labor and materials, which encompasses utility work.
There are some exceptions worth noting. Off-site utility extensions - where you must bring water or sewer service from a distant main line to your property boundary - may require separate financing or a larger loan amount. Some municipalities also require developers to fund off-site improvements as a condition of approval, and these costs can be substantial. It is important to identify all utility-related expenses early in the planning process and include them in your loan application.
The draw process for utility work typically follows a predictable pattern. The lender sends an inspector to verify that each phase of utility installation is complete before releasing funds. For example, the inspector might verify that water and sewer mains have been installed and pressure-tested before approving a draw for that line item. This inspect-and-draw process protects both the lender and the borrower by ensuring that funds are spent as budgeted.
How Much Do Subdivision Utility Installations Cost?
Subdivision utility installations typically cost between $10,000 and $35,000 per lot, depending on location, soil conditions, terrain, and proximity to existing utility infrastructure. According to HomeGuide, the average cost to bring all utilities to vacant land ranges from $9,000 to $34,500 or more. For larger subdivisions with 50 or more lots, developers can sometimes negotiate volume discounts with utility providers, but the per-lot cost rarely drops below $8,000.
The biggest variable is distance. If existing utility mains run along the property frontage, connection costs may be relatively low. But if water or sewer lines must be extended a quarter mile or more, the per-foot trenching and piping costs add up quickly. Angi reports that water line installation costs $25 to $200 per linear foot, while sewer line installation runs $50 to $200 per linear foot.
Soil conditions play a major role in determining final costs. Rocky or clay-heavy soils require specialized trenching equipment and slower installation rates, which increases labor costs significantly. Developers working in areas with high water tables may also need dewatering during trench excavation, adding $2,000 to $5,000 or more to the utility budget.
For a 50-lot subdivision, total utility infrastructure costs can range from $500,000 to $1.75 million or more. This is a significant portion of the development budget, which is why most developers finance these costs through a construction loan rather than paying cash. Understanding these numbers before you apply for financing ensures your loan request is accurate and your draw schedule is realistic. For more on how these costs fit into the broader development picture, read our guide on subdivision road construction costs.
What Is the Difference Between On-Site and Off-Site Utility Costs?
On-site utility costs cover infrastructure installed within your property boundaries, while off-site costs cover work required beyond your property line to connect to existing municipal systems. This distinction matters because off-site costs are often harder to predict, more expensive, and may require separate permitting and coordination with utility providers.
On-site work includes trenching within the subdivision, installing water and sewer laterals to each lot, laying electrical conduit from the on-site transformer to individual homes, and connecting gas service throughout the development. These costs are typically straightforward to estimate because they depend on the subdivision layout, which the developer controls. According to BuildingAdvisor, on-site utility installation is generally the more predictable portion of the infrastructure budget.
Off-site costs, by contrast, can include extending water mains from the nearest municipal connection point, building pump stations or lift stations if the sewer system cannot rely on gravity flow, upgrading transformers or electrical substations, and widening roads to accommodate utility easements. Marsh & Partners notes that relocating existing utilities, including vaults and power lines, can be especially expensive and often requires extended coordination with utility providers.
Many developers are surprised by the cost of off-site utility work because these expenses often surface late in the approval process. A municipality may condition subdivision approval on the developer extending a water main half a mile from the nearest connection point, adding hundreds of thousands of dollars to the budget. This is why experienced developers engage with municipal planners and utility providers during the due diligence phase, well before closing on the land.
Lenders will finance both on-site and off-site utility work, but they typically scrutinize off-site costs more carefully because these expenses are harder to control. Having detailed engineering estimates for off-site work strengthens your loan application and reduces the risk of cost overruns during construction.
How Do Builders Budget for Utility Costs in a Subdivision?
Builders budget for utility costs by obtaining detailed engineering estimates during the pre-development phase, breaking down costs by utility type and lot, and building contingency reserves of 10% to 15% into the infrastructure budget. The most successful developers treat utility budgeting as a line-by-line exercise rather than a single lump sum.
The budgeting process starts with a civil engineering study that identifies all required utility connections, determines the routing for water, sewer, electric, gas, and communications lines, and estimates the total linear footage of trenching and piping. Developers then solicit bids from licensed utility contractors and request cost estimates from municipal providers for tap fees and connection charges. This information feeds directly into the construction loan application. For a detailed look at pre-development planning, see our pre-development financing guide.
Experienced developers also account for phasing. In a 100-lot subdivision, it rarely makes financial sense to install all utility infrastructure at once. Instead, builders install trunk lines and main connections during Phase 1, then extend laterals and service lines to each lot as individual homes are permitted. This approach reduces upfront capital requirements and aligns utility spending with home sales revenue.
Another budgeting best practice is to separate hard costs from soft costs within the utility line items. Hard costs include the physical installation of pipes, conduit, and equipment. Soft costs include engineering design, permitting, inspections, and utility company review fees. Keeping these categories distinct in your budget makes it easier for lenders to evaluate your draw requests and helps you track spending accurately throughout the project.
Ready to structure a construction loan that covers your full infrastructure budget? Reach out to Clearhouse Lending for a consultation on development financing options tailored to your project scope.
What Utility Infrastructure Is Required Before Building Starts?
Before vertical construction can begin on any lot, the site must have approved connections for water supply, sanitary sewer or septic, electrical service, and often natural gas and telecommunications. Municipal building departments will not issue a building permit until the developer can demonstrate that these essential services are available at the lot line or will be available by the time the home is completed.
The specific requirements vary by jurisdiction, but most municipalities require the following before issuing building permits: a water main connection with an approved tap, a sewer main connection or an engineered septic system, electrical service available at the lot boundary, fire hydrants installed and operational within required distances, and stormwater management infrastructure in place. Learn more about how horizontal infrastructure sets the stage in our guide on what is a horizontal construction loan.
Failing to complete utility infrastructure on schedule is one of the most common causes of construction delays. If water or sewer mains are not in place, the building department will hold permits, and vertical construction cannot proceed. This is why horizontal construction loans are structured with draw schedules that prioritize utility and infrastructure work in the earliest phases of development.
Timing coordination between utility providers is another critical factor. Electric utilities, gas companies, and telecommunications providers each have their own installation schedules and lead times. In some markets, scheduling a transformer installation or gas main extension can take three to six months from the initial request. Developers who coordinate these timelines early avoid costly delays that can push vertical construction starts back by weeks or months. You can model how draw timing affects your overall costs with our commercial bridge loan calculator.
How Do Tap Fees and Connection Charges Affect Your Budget?
Tap fees and connection charges are one-time municipal fees that developers pay to connect each lot to public water and sewer systems, and they can significantly impact your per-lot development cost. These fees range from $1,000 to $30,000 or more per connection depending on the municipality, with some high-growth areas charging over $20,000 per tap for water alone.
Tap fees cover the municipality's cost of providing capacity in the public water and sewer system for your development. They are separate from the physical cost of installing pipes and are typically non-negotiable. According to the UNC Environmental Finance Center, tap fees often include both a connection charge for the physical tap and a system development charge that helps fund future capacity improvements.
For a 50-lot subdivision where water and sewer tap fees total $15,000 per lot, the developer faces $750,000 in tap fees alone before a single home is built. These costs are typically eligible for construction loan financing, but developers must include them in the initial budget. Some municipalities allow tap fees to be paid at the time of building permit issuance rather than during the infrastructure phase, which can improve cash flow timing.
There is also a growing trend among high-growth municipalities to increase tap fees annually to keep pace with infrastructure expansion costs. Developers who secure fee quotes during the planning phase should confirm whether those rates will be honored at the time of payment or whether the fees in effect at the date of connection will apply. A two-year development timeline could mean a 10% to 20% increase in tap fees if the municipality adjusts rates during that period.
Developers should contact the local water and sewer authority early in the planning process to get exact fee schedules. These fees can change annually, and using outdated numbers in your construction budget can create significant shortfalls.
Can You Finance Utility Costs Separately from Construction?
While it is possible to finance utility costs separately from construction, most developers find it more efficient and cost-effective to include all utility expenses in a single construction loan. Separate financing adds complexity, increases total borrowing costs, and creates additional closing and administrative expenses that reduce project profitability.
Some developers use a phased approach where they obtain a land development loan specifically for horizontal work - including roads, grading, and utilities - and then secure a separate construction loan for vertical building. This structure is common in large subdivisions where the infrastructure phase may take 12 to 18 months before any homes are built. Horizontal construction loans are specifically designed for this purpose and typically cover 65% to 75% of horizontal development costs.
However, many lenders, including Clearhouse Lending, offer unified construction loans that cover both horizontal infrastructure and vertical building in a single facility. This approach simplifies the financing process, reduces total interest costs, and gives the developer a single point of contact for draw management. For projects where the infrastructure and building phases overlap or follow each other closely, a unified loan is almost always the better choice.
There are also alternative funding sources that some developers use to supplement their construction loan for utility work. Special assessment districts, tax increment financing (TIF), and municipal reimbursement agreements can offset a portion of utility installation costs. In some states, developers can form a special improvement district where the cost of infrastructure is passed to future homeowners through annual assessments, reducing the developer's upfront capital requirement.
If you are weighing your financing options for a subdivision that requires significant utility work, schedule a consultation with Clearhouse Lending to explore which loan structure best fits your project timeline and budget.
Frequently Asked Questions
Does a construction loan cover the cost of running electricity to my property?
Yes, most construction loans cover the cost of bringing electrical service to your building site, including utility company charges, trenching, conduit installation, and transformer placement. These costs must be itemized in your approved construction budget. Running power lines typically costs $5 to $25 per linear foot, with the total depending on the distance from the nearest power source.
Are septic system costs included in a construction loan?
Septic system installation is typically covered by a construction loan when a municipal sewer connection is not available. Costs range from $7,000 for a basic system to $25,000 or more for an engineered advanced treatment system. Your lender will require a septic design approved by the local health department before approving draws for this work.
Who pays for utility extensions that go beyond my property line?
The developer generally pays for off-site utility extensions, though some municipalities participate in cost-sharing arrangements for projects that benefit the broader community. Off-site water and sewer extensions can cost $150 or more per linear foot, and these costs should be included in your construction loan budget from the outset.
How much should I budget for utility contingencies?
Industry best practice is to include a 10% to 15% contingency on all utility and infrastructure costs. Unexpected rock during trenching, soil contamination, or changes in utility company requirements can increase costs beyond initial estimates. Lenders typically require a built-in contingency before approving construction loans for subdivision development.
Can tap fees be financed through my construction loan?
Yes, tap fees and municipal connection charges are eligible construction loan expenses. Since these fees can range from $1,000 to over $30,000 per lot, they represent a significant budget item that most developers prefer to finance rather than pay out of pocket. Include the current fee schedule from your municipality in your loan application.
What happens if utility costs exceed the original construction loan budget?
If utility costs exceed the approved budget, the developer typically needs to request a loan modification or provide additional equity to cover the shortfall. This is why accurate budgeting and adequate contingencies are critical. Some lenders offer change order provisions that allow for budget adjustments up to a certain percentage without requiring a formal loan modification.