- A feasibility summary distils a development’s financial viability into key metrics.
- Focus on gross realisation, total development cost, profit margin, and return on equity.
- Question every assumption — small changes in inputs create large swings in outcomes.
- A sensitivity analysis reveals how resilient the project is to market changes.
- If a feasibility only shows the best case, ask to see the downside scenario.
A feasibility summary is the financial heartbeat of a development project. Whether you are assessing an investment opportunity or reviewing your own development, understanding what the numbers mean — and what they do not mean — is essential. This guide walks through the key components of a typical development feasibility and explains what to look for.
The Core Structure of a Feasibility
Most development feasibility summaries follow a consistent structure. They begin with gross realisation, which is the total revenue expected from selling all completed products. This is typically the largest number on the page and the most important assumption to scrutinise. Below that sits the total development cost (TDC), which includes every expense required to deliver the project from site acquisition through to settlement. The difference between gross realisation and total development cost is the development profit. This profit is then expressed as various metrics including profit on cost, profit on gross realisation, and return on equity.
Revenue: Gross Realisation
Gross realisation (GR) is calculated by multiplying the number of products by their expected sale prices. For a four-townhouse project where each is expected to sell for six hundred and fifty thousand dollars, the GR is two million six hundred thousand dollars. The critical question is whether those sale prices are realistic. Check whether prices are based on recent comparable sales evidence, whether an independent valuation supports the assumptions, and whether the evidence comes from the immediate area rather than a broader suburb average. A five per cent reduction in revenue on a two million six hundred thousand dollar GR is one hundred and thirty thousand dollars — a material impact on profit.
Costs: Total Development Cost
Total development cost typically includes land acquisition and stamp duty, consultant fees for architects engineers and planners, statutory fees including council contributions and utility charges, construction costs as the largest line item, finance costs covering interest and loan fees, sales and marketing expenses, a contingency allowance, and project management or developer margin. Each line item deserves scrutiny, but construction cost and land cost together typically represent eighty to ninety per cent of TDC. Ensure both are based on substantiated figures rather than rough estimates.
Key Metrics to Understand
Development margin on cost is calculated as profit divided by TDC. A project with a profit of four hundred thousand on a TDC of two million two hundred thousand has a margin on cost of approximately eighteen per cent. This is the metric most commonly used to assess project viability. Development margin on GR is profit divided by gross realisation. Using the same example, four hundred thousand divided by two million six hundred thousand equals approximately fifteen per cent. Return on equity measures the profit relative to the equity (cash) the developer or investor has contributed. If the developer contributes five hundred thousand in equity and earns four hundred thousand in profit, the return on equity is eighty per cent. This figure can look impressive but it reflects the use of leverage and carries correspondingly higher risk. Internal rate of return (IRR) accounts for the timing of cash flows and expresses the annualised return over the project period. It is the most sophisticated measure but also the most sensitive to timeline assumptions.
The Sensitivity Analysis
A robust feasibility includes a sensitivity analysis showing how the profit metrics change when key assumptions are varied. Typically this involves modelling scenarios where construction costs increase by five to fifteen per cent, sale prices decrease by five to ten per cent, the project timeline extends by three to six months, and a combination of these adverse scenarios occurs simultaneously. If the project remains profitable under a moderate stress scenario, it has a reasonable buffer. If a five per cent revenue reduction eliminates the profit margin, the project is fragile.
Checklist: Reviewing a Feasibility Summary
- Gross realisation is supported by current comparable evidence
- Land cost reflects actual or contracted purchase price
- Construction cost is based on a builder quote or QS estimate
- Contingency of five to ten per cent is included as a separate line
- Finance costs reflect actual or indicative loan terms
- Sales and marketing budget is realistic for the product and market
- Profit margin on cost exceeds fifteen per cent for the risk profile
- A sensitivity analysis is provided showing downside scenarios
- Timeline assumptions are reasonable with built-in buffers
- The developer’s equity contribution is clearly stated
Common Mistakes
The most frequent errors when reading feasibility summaries include accepting the headline profit figure without checking the underlying assumptions, not distinguishing between margin on cost and margin on GR, ignoring the sensitivity analysis or not requesting one if absent, comparing projects with different risk profiles on the same metric, overlooking finance costs or underestimating their impact on longer projects, and not checking whether the contingency has been included in the TDC or sits outside it.
Frequently Asked Questions
What is a good profit margin for a residential development?
A margin on total development cost above fifteen to twenty per cent is generally considered healthy for small to medium residential projects, though this varies with risk and complexity. Higher-risk projects should command higher margins.
What does residual land value mean?
Residual land value (RLV) is the maximum a developer should pay for a site to achieve their target profit margin. It is calculated by deducting all non-land costs and target profit from the gross realisation.
How reliable is a feasibility model?
A feasibility model is only as reliable as its assumptions. It is a planning tool, not a guarantee. The value lies in testing different scenarios and understanding the project’s sensitivity to change.
Should I trust a feasibility prepared by the developer?
Use it as a starting point but verify independently. Cross-check revenue assumptions against market evidence, confirm cost estimates with independent sources, and have your advisers review the document.
What is the difference between a feasibility and a valuation?
A feasibility is a forward-looking financial model prepared by or for the developer. A valuation is an independent assessment of market value prepared by a qualified valuer. Both serve different purposes and should not be confused.
How often should a feasibility be updated?
A feasibility should be updated at each major project milestone — after site acquisition, after planning approval, after builder procurement, and during construction if material changes occur.
Kaizen Projects provides detailed feasibility summaries to all prospective investors with full transparency on assumptions and methodology. Download our Feasibility Checklist or contact us to review a current opportunity.
General information only, not financial, tax, or legal advice. Seek independent advice for your circumstances.