If you’re a developer, you’ve probably gone through a few versions of appraisals. You might start off with a simple feasibility model. If that’s got legs, you then get into more detail – detailed cashflows, financing, etc. You probably run multiple scenarios before you finally get to the version that gives you the green light to develop the site. Once you start spending some real money, the gap between appraisal and cost tracking rears its ugly head.
From Appraisal to Live Project: A Common Challenge
Going from an appraisal to a live project often seems to be a challenge for developers. You move from estimations and assumptions to real costs, and the two are never the same. They were always just assumptions and best guesses, inevitably leading to inaccuracies. Bridging the gap is crucial, as the sums involved can be significant. Reforecasting costs as you become aware of changes can be the difference between managing cashflow needs and falling into financial difficulty.
Key Appraisal Milestones
1. Basic Feasibility Model
This is your simplest version to see if the development stacks up in principle. The aim is to meet the criteria for progressing to the next stage of due diligence. Ideally, you have market data, basic design, and a high-level cost plan to back up your assumptions, with a good amount of contingency built in. From a governance perspective, this is your first checkpoint before unlocking funding for the next stage. If this version stacks up, you commit more money to progressing the design.
2. Detailed Appraisals
Here’s where you get into more detail. Cashflows, detailed financing options, etc. You start spending money on fees to develop the current design stage. This is where the gap between actual spend and appraisal costs begins, but the spend might be minimal initially. You’re likely to run different early-stage designs and scenarios, tweaking numbers and timings to understand their impact on overall returns and cash requirements. As more market information and detailed costs come to light, they get factored in. You then lock down a final version for this design stage. Each stage of design is a checkpoint before unlocking funding for the next stage. Each stage means committing more funds, and if the appraisal doesn’t stack up, you pause before committing more money. Sunk costs are a topic for another day.
3. Appraisal for Each Design Stage
Repeat this appraisal process for each design stage. Each appraisal becomes more detailed, accurate, and hopefully less volatile.
4. Final Appraisal Before Build Contract
This is your all-important version. By now, you might have gone through a mountain of different versions depending on the size and complexity of the scheme. The final version becomes your benchmark. Treat this as your bible. Make a copy, lock it down, and password-protect it if necessary.
Tracking Costs in a Live Project
Now you have a live project to track. You’ve likely been spending a fair bit already, possibly in the millions for large projects. How have you been tracking spend so far, and how will you track it going forward? Throughout the earlier stages of appraisals, you will ideally have built in the functionality to track your actual costs. Your project governance should have ensured you signed off budgets at each design stage. Ideally those staged budgets will all be in your appraisal with the corresponding expenditure tracked against it. Many businesses detach their cost tracking from their appraisals, leading to complications. If actual spend isn’t considered early on, you might find you have to adapt a later version of your appraisal to accommodate retrospective costs, which can be difficult and harm the integrity of your appraisal.
The Importance of Accurate Cost Apportioning
Be aware of apportioning costs. If a cost is to be spread over different blocks or phases, consider how it’s actually going to be spent. On bigger schemes, I’ve dealt with appraisals that assume apportioned costs against are spent later on blocks that are delivered later, but the actual spend is more front loaded with earlier blocks. Apportioned costs in their nature are not spent inline with block delivery, so bear this in mind when building your cashflows. If you don’t factor in the timing of apportioned costs correctly, you could end up spending a lot of time trying to correct it retrospectively in your appraisal, which can be difficult and harm the integrity of your appraisal.
Conclusion
My advice, especially if you’re heavily reliant on MS Excel, is to build in cost tracking functionality to your development appraisals early. You may want to run a separate cost tracker to manage costs, but it try to align it with your appraisal. As you refine your versions of appraisals, plan ahead by building in budget stages that align with how you intend to spend/commit money. Ideally, use technology to help you; construction software that allows you to track budgets, produces work orders, tracks committed spend, variations, and valuations, and syncs with your accounting systems is a great way to narrow the gap between appraisals and tracking costs. If you use development appraisal software that’s isolated from your cost tracking, be aware of the potential growing information gap that could be building up.
Make sure you have strong project governance in place to reduce risks to projects.
If any of this resonates with your business and you need extra support, or want to talk about financial modelling (which I love) just to feel free to reach out.