The Environment and Cost Benefit Analysis in Feasibility Studies Dr. John M. Hutcheson, Senior Lecturer, School of Building, the University of New South Wales, Kensington, NSW. , Australia Summarized by: Kamal Al Dihan ARE 512

Outline Introduction Reason for the Research A Framework The Model Sensitivity Analysis Summary & Conclusion

Introduction Standard format was used to highlight the impact of the following: Taxation, Interest, Profit, and Risk Environmental changes were also analyzed such as: Social, Economic, Political, and Physical aspects 1) This paper intended to establish a clear understanding of the preparation of feasibility studies for a wide range of projects with particular reference to buildings and land subdivision. Provide analytical tools for cost benefit analysis such as: computer programs.

Reason for the Research 1. Reducing The Uncertainty Energy Supply Government Fiscal Policy International Economic, and Political Changes 2. Predict future trends and to make effective decisions 1) To help reducing the uncertainty in the property and resource market due to changes in Socio-economic events such as:

A Framework Market, Financial, and Physical In order to formulate the model, Data was collected from:

The Model Feasibility stage Design stage Pre-construction stage Handover & maintenance stage Sale or management stage 1) Since project cost money over time, it is important to establish the time sequence as per the following stages:

Interest Calculation (Approximate) Time Sequence Model T1 T2 T3 T4 T5 S1 S2 S3 S4 OH S5 S6 TAX TIME L C I COSTS $ OH = Overhead L = Land Cost C = Final Contract Price S = Sales T3 = Contract Duration I = Interest PROFIT (P) This F.S. need to be updated at each stage Cost and review are directly related to time Time create money outflows in the form of holding charges (i) Interest varies over time with economic, political and other changes Other holding charges may also very with time It approximate profit in compare to optimum profit It is useful for construction comparable projects The straight line assumption gives an essential clue whither we accept or reject the project It gives an interpretation of the relationship between the stages of the project under consideration It enables costs and revenue to be calculated quickly (accepts /reject) Stage A use the model mathematically, while other stages use it conceptually Interest Calculation (Approximate) P = I {OH (T1 + T2 + T3 + T4) + L-T2/10 + LT3 + LT4 + C (T4)/2 + (C + L + OH + I) T5/2}

Sensitivity Analysis Overhead (OH) Timing Pre-Construction, and Construction Cost (C) There are items that are difficult to quantify and / or sensitive to change such as: Overhead (OH) Developers discounted the value of the labors of themselves and advisors. During T1, cost such as preliminary design, preparation, research, calling tender etc. should be charged against OH and hopefully OH will be less than 2-3% of the total sum C. Timing Perfect economic judgment is unlikely, panic buying of sites under external pressures from real estate agent and influences of peer groups is a critical weakness in the profitability of projects. Pre-Construction Project profitability is highly sensitive to the length of T3. Therefore, to minimize and possibly eliminate T3, much pre-construction activity should be carried out during T2. Construction Cost (C) Sensitivity of construction costs can be minimized by full documentation with minimum prime cost elements and either fixed price contracts or an ability to offset cost increases against increased in revenue. Unfortunately the research has found a high degree of mediocrity within the estimating profession (s).

Revenue (s) Current Prices / Income Future Prices / Income Patterns of Sales / Income Current Prices / Income So that, the amount of revenue at current price / income can be determined with a reasonably high degree of accuracy. Future Prices / Income Projects have a long contract life or duration, the derivation of actual income or sale price is a real challenge. These Future prices / incomes should not include increases due to inflation as costs would have been incorporated in the feasibility study at current prices. Patterns of Sales / Income Analysis of time to sell a project is probably the most sensitive element of feasibility studies. The author's research has clearly highlighted an inability in appreciate the importance of patterns of sales / income.

Tax and Profit Profit Cash Flows Interest Profit Project development is subject to very high risks far beyond established enterprises. Therefore, the author's research has shown that developers are seeking to achieve an optimum profit of 25% of costs including fees after all outgoings except for the constructor's mark up. Cash Flows The lack of liquidity is the final stage of a project failure. Wherever possible, projects should be designed and phased to minimize cash exposure. Interest Developers do not appreciate the need to calculate interest against cash flows. The model highlights the growing impact of interest on projects. Interest rates have been one of the most highly sensitive elements of feasibility studies. This sensitivity is due to their volatile nature and an inability of project managers to have much, influence on changes in interest rates applicable to their projects. The model gives a simplified version of cash flows and hence interest calculations.

Environmental Impacts Political Action Social Change

Political Action New Taxes, New Philosophies, Fiscal Measures, Subsidies, Decentralization, Discriminatory Taxation, Health Regulations, Development Regulations, Narrow or Overwhelming Parliamentary , Majorities, Grants, Public Expenditure, and Rental Freezes., and Safety rules and labor laws, Highly sensitive to the impacts of government action. These industries are major tax bases for all levels of government. such as:

Social Change Demography, Work force, Household formation, Migration, Natural population growth, and Other social elements Changes in can cause the demand for developments to change.

Risk Assessment Time and Place Location , location, and location Continuing Evaluation Assessment The highest risk over the lowest was assessed by adding a higher reserve to costs, lowering final revenue and lengthening the sells of post turn key period. Time and Place The three roles for successful development ARE LOCATION, LOCATION AND LOCATION Time taken to obtain the development approvals, to construct, and market. Continuing Evaluation Continues update the feasibility study as impotent as the pre-project feasibility study. It is part of project control to minimize sudden unexpected changes.

Impact on the Environment Accountability Cost Benefit Analysis Presentation Project Selection Accountability To ensure public accountability, the research showed significant contrast between local and state government philosophical objectives. Cost Benefit Analysis Provide an overall evaluation of development proposals in financial terms. The research confirms the limitation of cost benefit techniques with regards to artistic and social value judgments. However, planning balance sheets were used to analyze such problems. Presentation Presentation provides the assessment of the total physical costs of development proposals coupled with an environmental impact study or similar documents. Such document show how the proposal met the need of the government authorities and hence the community. Project Selection Project manger need to skillfully maneuver the development application through council putting community benefit as priority.

Computers Format / Programs Holding periods, Financing terms, Taxation and Rate of return. Programs on the profit control format were found to be suitable for sensitivity analysis to determine the impact on profit by changes in variable factors, such as holding periods, financing terms, taxation and rate of return.

Construction Software Project Accounting,  Analytics and Reporting,  Customization,  Distribution,  E-commerce,  Field Service Management,  and Financial Management,  Accounting,  Estimating,  Procurement,  Project Management,  Reporting & Other Tools,  Service Management,  Estimating, and Project Management Estimating Software,  Bidding Software,  Scheduling Software,  Document Management Software,  and Accounting Construction Accounting,  Job Management,  Revenue & Billing,  Payroll,  Reporting,  Inventory,  Document Management,  Estimating

Summary Sensitivity Format

Sensitivity Revenue Assessment (Pattern of Income) Interest Calculation Risk Timing of Cash Flows Project Selection Taxation, and Environmental Impacts The model highlights the impact of all the sensitive elements of the feasibility studies including the misunderstood or neglected elements which considered by the author to be as critical as the others such as:

Format Used discounted cash flow (DCF) methods NPV to assist the feasibility of project Rate of Return for quick assessment (real estate).

Conclusions Risk Format The Environment

Risk Most professionals underestimate the sensitivity of critical elements of project profitability studies especially for neglected sensitive areas.

Format Simple Format Cost Benefits Computers Feasibility studies need to incorporate all the consequences of changes by using a simple format suitable for project control and readily updated. Any feasibility should analyze cost benefits, so that the environmental impact can be seen and assessed. Computers have to become essential tool for project evaluation and to provide accurate calculations including interest based on cash flow.

The Environment Environment and Benefit Analysis Probability Analysis 1) Environment and benefit analysis have direct interrelationship to ensure viability of project. 2) Since the environment is not readily quantifiable, probability analysis must be done in order to provide reasonable degree of certainty otherwise failures are expected.

The Future Educate and re-educate developers and their advisors to understand the rationale behind feasibility studies. Use the best available technology to develop the used model in order to depict all the neglected internal and external elements impacting projects.

Thank you