Five costs first-time developers leave out of an appraisal

A first appraisal usually has two numbers in it: what the finished scheme will sell for and what the builder says it will cost. Both are defensible. The problem is everything between them, which is where the margin actually lives. Putting that middle section in properly is the work of feasibility and cost planning.

The five items below are the ones we most often add to an appraisal an investor brings us. They are not obscure. Each is a normal cost of developing property, and together they are large enough to turn a scheme that looked viable into one that does not pay.

1. Professional fees, and all of them

The architect is remembered. The rest of the team often is not. A scheme of any size needs structural and civil engineering, building services design, a principal designer, building control, an approved inspector or local authority fee, surveys including measured, topographical and drainage, ground investigation, an energy assessment, and cost consultancy. Where the site is constrained, add party wall surveyors, rights of light, arboriculture, acoustics, transport and ecology.

Fees are usually expressed as a percentage of construction cost, which hides a trap: if the construction cost in the appraisal is understated, the fee allowance is understated by the same proportion. On refurbishment and conversion work the percentage is typically higher than on new build, because the design effort does not scale with the size of the contract.

Fees are also phased differently from the build. A large part of them is spent before there is any funding in place and before anything is on site, which makes them an equity cost rather than a facility cost.

2. The cost of the money

Interest, arrangement fees, exit fees, valuation and monitoring costs, and the legal costs of putting the facility in place are all real cash and all absent from most first appraisals. Interest in particular is not a single figure: it accrues on what has been drawn, for as long as it is drawn, so it depends entirely on the programme and the drawdown profile.

That makes finance cost the one line in the appraisal that gets worse when anything else goes wrong. A delay in planning, a slow start on site or a longer sales period all add interest to a scheme that is already carrying the cost of the delay itself.

The terms differ from lender to lender, so the figures need to come from the facility actually on offer. What a funder will want to see before agreeing it is set out in what a development lender checks before releasing funds.

3. Contingency that means something

Many appraisals carry a contingency, and many carry one that is too small to absorb anything. The figure should relate to how much is actually unknown. At the point where there are no drawings, no ground investigation and no tender, the unknown is large, and the contingency should reflect that rather than reflecting a habit.

Contingency is also not a single pot. There is design development between an estimate and a tender, there is risk inside the construction period, and there is the possibility that the whole market moves. A single percentage covering all three is a simplification, and on a tight scheme it is the simplification that fails first.

The discipline that matters is what the contingency is allowed to be used for. If it is spent on specification upgrades in the first quarter of the build, it is not available for the thing it was there to cover. Keeping that line honest is part of delivery and cost control.

4. The cost of selling or letting

Getting out of a scheme costs money. Sales agency, marketing and particulars, a show unit or dressing, legal fees on each sale, and in some cases incentives or contributions to a buyer’s costs. Where the scheme is to be let rather than sold, letting agency, void periods and incentives replace them.

There is also the holding cost of the period between practical completion and the last unit being sold. Council tax or business rates, service charge on unsold units, insurance, security and the interest still running on the facility all continue. An appraisal that assumes every unit completes in the month the scaffolding comes down is not describing a sales programme.

As an example only, a scheme assuming a three month sell-out and achieving nine has six extra months of interest and holding costs on top of whatever the slower market does to the sales values themselves.

5. What planning asks for

Planning obligations and levies are specific to the authority and to the scheme, and they can be significant. Depending on where the site sits and what is proposed, they may include a community infrastructure levy, contributions secured by agreement, affordable housing provision or a payment in lieu, highway works, drainage and surface water measures, landscaping, play space, parking and travel measures.

There is no general figure to use, because the position depends on the council, its adopted policies and the scheme itself. What there is, on almost every site, is a public record of what the authority has required of comparable applications nearby. That record is the right basis for the allowance.

Conditions carry cost as well as obligations. Pre-commencement conditions have to be discharged before work starts, which is a fee and a programme item, and some conditions dictate materials or methods that are more expensive than the base allowance. Coordinating that sits in planning and design coordination.

Putting them back in

Adding these five to an appraisal does not make a good scheme bad. It makes an appraisal comparable to the cash that will actually leave the account. A scheme that still works with all of them in is a scheme you can fund, build and sell without finding the margin has gone before the roof is on.

The order of work is the same each time: build the construction cost from measurement rather than a rate, add the fees that the scheme actually needs, add the finance cost that the programme actually generates, set a contingency against what is genuinely unknown, and allow for the cost of getting out. Where the construction figure itself is the weak point, cost planning and estimating is the remedy, and the whole exercise sits inside development management.