1. 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

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

3. 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.

4. 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:

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

6. 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:

7. Interest Calculation (Approximate)
Time Sequence Model
T T T T 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}

8. 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).

9. 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.

10. 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.

11. Environmental Impacts
Political Action
Social Change

12. 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:

13. 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.

14. 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.

15. 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.

16. 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.

17. 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

18. Summary
Sensitivity
Format

19. 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:

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

21. Conclusions
Risk
Format
The Environment

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

23. 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.

24. 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.

25. 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.

26. Thank you