Ask most people how a development is going and you get a figure for what has been spent. It is the least informative number available, because a scheme can be exactly on budget to date and already committed to finishing well over it. The figure that answers the question is the forecast final cost, and putting it in front of investors every month is the main job of investor reporting.
It is also the figure a lender tests, a board asks for and a joint venture partner is entitled to. Once you have it, most other reporting becomes supporting detail.
What the number is made of
Four components. The committed cost: the contract sum plus every instruction already issued, plus the subcontracts and orders already placed. The value of change that has been instructed but not yet valued, which is cost incurred with a price still to be agreed. The cost still to come, priced at today’s rates for the work remaining. And an allowance for the risks that are still open.
Against that sits what remains of the contingency, which is not a component of the forecast but a measure of how much room is left if the forecast is wrong. Reporting the two together is what makes the figure readable.
Costs outside the building contract belong in it too: fees still to run, finance cost to completion, utility connections, the items planning obliged you to provide, and the cost of selling. A forecast that covers only the builder is a construction forecast, not a development one, and the distinction is the subject of the costs that sit outside the building contract.
Why it moves, and what each movement means
A forecast that never moves is not being maintained. Movement is normal, and the reason for it is the information. Change instructed by the client side moves it up and that is a decision you made. Design development, where the detail turns out to cost more than the allowance, moves it up and that is a cost plan question. Conditions differing from those assumed move it up and that is a risk materialising.
Delay moves it up through time-related costs, whether the contractor’s preliminaries or your own finance and holding costs. A package let below the allowance moves it down, which is the one movement nobody questions and the one worth checking, because a cheap package sometimes means a scope gap.
What should never move it is the discovery of something that was always there. A forecast that jumps because an item was missing from the cost plan is not a forecast failing, it is the original estimate failing, which is why it should be built from measurement rather than a rate, as argued in why a build cost per square foot misleads investors.
Reading it against the appraisal
The forecast only means something next to the figure the scheme was bought on. That comparison has to be against the original appraisal, not against a budget that has been revised twice along the way, because each revision quietly moves the benchmark until nothing appears to be wrong.
Three things should be read together: the forecast final cost, the sales or rental evidence as it stands now, and the remaining funding. A scheme can absorb a cost increase if values have moved with it, and cannot absorb a small one if the facility has no headroom. That last point is covered in facility headroom and what eats it.
The forecast also needs reading against the programme rather than on its own. A scheme forecasting on budget but three months late is not on budget, because the extra interest, the extra preliminaries and the shifted sales period are all real costs that have not yet arrived in the figure. Where the forecast and the programme are reported separately by different people, that gap is where bad news hides.
Where the forecast has moved beyond what the scheme can carry, the decision is commercial rather than technical: revise the specification, revise the exit, or put more equity in. All three are available while there is time, which is the argument for a monthly forecast rather than a quarterly one.
How to tell a real forecast from a reassuring one
A real forecast states its assumptions and its risks. It names the packages not yet let and what they are allowed at. It shows the unvalued instructions as a range rather than a tidy number. It explains the movement since last month. And it is produced by someone who has measured the work rather than taken the contractor’s report at face value.
A reassuring forecast does the opposite. It matches last month, it carries no range, it has a contingency that happens to equal the problem, and it arrives without comment. On schemes that end badly, the forecast was usually flat until very near the end.
The protection is routine rather than cleverness: measure the work in place, value change when it is instructed, keep the risk register current, and report the movement with its cause. That is cost control and variations work done monthly.
What investors should ask for
One number, one page, every month, with four lines under it: committed cost, cost to complete, risk allowance, contingency remaining. Then the movement since last month with reasons. Then the comparison to the appraisal.
If the answer to any of those takes a week to produce, the scheme is not being cost managed, it is being administered. The information is not difficult to maintain when it is maintained continuously, and almost impossible to reconstruct when it is not, which is what makes a scheme that has lost control so expensive to recover, as we describe in taking over a development that is running over budget.
Kept properly, the same figures carry the scheme from the appraisal through funding and the build to the final account without being rebuilt at each stage, which is the reason to run development management and delivery and cost control from one source.
Want a forecast you can rely on?
We build the forecast final cost from measured work and instructed change, and explain every movement against the original appraisal.