Construction Project Feasibility: Complete Guide for Developers, Builders & Investors

Why Feasibility Studies Matter in Construction?

There are major risks with construction projects, including cost overruns and delays, scope of changes and regulatory hurdles, as well as uncertainty on demand.

• Research has determined that approximately 90% of the completed construction projects failed to be completed on budget. In fact, actual project costs are typically 15% to 28% higher than the initial projected cost.
• On several occasions, a lack of adequate foresight on behalf of the owner and contractor during the planning and initial stage of the project has been a major reason why construction projects have failed to meet expectations or resulted in unanticipated expenses.

A feasibility study framework can help identify the potential construction risks for each project and provide validation of the feasibility of proceeding with construction before any resources or contracts are committed to the construction process.

How Do Global and Large Developers Use Feasibility Study Frameworks?

Generally, large international corporations and developers take a tiered approach to evaluate opportunity feasibility.

• Concept evaluation: using a preliminary scan of the property, coupled with a rough costing against potential revenues in the marketplace, to eliminate those opportunities that are determined to be nonviable quickly.
• Comprehensive feasibility studies: Involves an extensive analysis and consideration of several elements to arrive at final decision to invest a significant amount of capital into the opportunity.
• Regularly updating feasibility: After approvals are received, companies continue to monitor and assess the cost of the project, raw materials, statutory or industry landscape regulatory environment, as well as changes to the market on an ongoing basis and to make appropriate modification or adaptations in the ongoing strategy or risk management plans.

Following this approach to feasibility. Global companies and its investors will not experience over commitment to a project, will be able to provide realistic projections, and ultimately build confidence in their investors.

Key Benefits of Doing Feasibility Study for Property Development

• Mitigates the risk associated with cost overruns and delays in project completion; globally, 90% of construction projects experience cost overruns.
• Increases the possibility of obtaining financing, lenders and investors want to see credible commercial real estate feasibility study documentation prior to committing funds.
• Enables an optimised design, scope, schedule and resources to avoid overbuilding, undervaluing use or not matching demand within the marketplace.
• Improves decision making capabilities in response to market conditions or costs; increases flexibility and durability.
• Provides the transparency and accountability necessary for stakeholders to have confidence in the organisation and to be compliant with laws, as well as to ensure future sustainability.

What a Robust Construction Feasibility Study Looks Like?

Market and Demand Analysis

• Demand and market size estimates: the size of the market and demand for residential, commercial,or mixed use developments depend on the type of project.
• Competition and Comparability: a review of the existing and proposed projects, along with their occupancy or absorption rates, rental prices, and amenities associated with each project.
• Targeted Segment and Value Proposition: the demographic the project will target, i.e., first time home buyers, budget conscious renters, or investors.

Site and Location Viability

• Location Benefits: access to high speed transportation systems, accessibility to other services, social amenities, and zoning regulations.
• Site Challenges: physical characteristics of the land including soil type, shape, and surrounding areas.
• Access to Utility and Infrastructure Services: availability of electricity and water, public transportation, and public approvals.

Financial and Economic Feasibility

• Cost Estimates: what it would cost to purchase the land, design the project, procure construction materials, and employ construction labour, and any unforeseen expenses.
• Projected Revenue: estimated sale or rental value of the project, estimated absorption rate, and a reasonable estimate of the time required to complete the project.
• Profitability Metrics: return on investment, internal rate of return, payback calculation, breakeven point calculation, and cash flow projection.

Sensitivity and Stress Testing: simulate scenarios to determine what is likely to happen if there is an increase in construction costs, or if there are price changes, demand shifts or delays, and to understand the level of resilience that a project has to the potential for overruns.