DQS386/356

CONSTRUCTION
ECONOMICS III
FEASIBILITY STUDY
 INTRODUCTION TO FS

• Feasible means – practical / viable / possible

• In general, feasibility study can be define as
 “ A study of the current and expected availability of
human, physical and financial resources so as to ensure
their optimum deployment that can be measured
according to specified criteria in the context of prevailing
and predicted commercial and socioeconomic
requirements.”
• It can be summarised as:
• Whether the project is viable or not financially and physically
• What alternatives or options available and which is more practical
• What are the possible results from the decision made
 Categories of FS
There are many categories of FS as there are different types of projects but in
general, there are 3 categories that can be based on:
 National studies or economic sector
 Large scope involved – macro scale
 Similar characteristics as other types of FS
 Eg. FS of new airport, replacing existing airport due to increase in capacity; Pan
Borneo Highway that will spur economic development in Sarawak and Sabah
 In-house studies on individual projects or specific problems
 Involve R&D department and commercial department, usually in large manufacturing
companies
 To study in depth if there changes are made due to increase of production rate or
venturing into a new business. Much simpler and more specific
 Studies on individual projects or specific problem areas undertaken by
external agencies
 Conducted by external agencies – appointed consultant.
 Not necessarily on new areas
 INTRODUCTION TO FS
 A feasibility study helps to formulate not just the business
plan but also technical consideration for the project
implementation.
 FS is a follow up procedure to business idea, dream or
vision for a development or construction project to gauge
its viability that include:
Market and Population Occupational survey Site inspection,
economic research catchment & neighbourhood location study,
(target study terrain, soil
market) condition,
topography, access
Verify land Category of Necessary conversion Etc
encumbrances (legal land use or sub-division
interest other than
owner)
 Example of FS proposal for
Township (Tan, 2004)
 Objectives
 Recommend optimum/maximum usage of the subject property
for maximum returns with minimum investment
 To develop the subject property in phases and stages into a
progressive mixed residential/commercial township as the new
focal point for the state
 To develop the subject property, in keeping with ICT
 To cater to the specific needs of the state and the surrounding
population
 To stimulate economy and development of the state
 To interpret the specific needs of the client and the state
 To use FS for applying for project financing
Tan, Andrew – Why Project Fail? 1001 reasons, Venton Professional (2004)
 Example of FS proposal for
Township (Tan, 2004)
 Policy and procedure
 To work closely with the client and state government
 To work closely with all relevant government authorities to
“fast track” all necessary approvals
 To formulate a Master Development Concept Layout Plan
 To propose realistic and practical phasing and staging strategy
subject to the needs of the client and his project funding
 To propose a program schedule for project implementation

Tan, Andrew – Why Project Fail? 1001 reasons, Venton Professional (2004)
 Example of FS proposal for
Township (Tan, 2004)
 Scope of services
 Market research
 Study existing development and data collection (township, schools,
industry, infrastructure, etc)
 Market survey for the development including other development
activities in the area and supply and demand forces
 Transportation system
 Socio-economic trends
 Population statistics
 Occupational survey
 Property prices in the area
 SWOT (strength, weakness, opportunity, threat) study

Tan, Andrew – Why Project Fail? 1001 reasons, Venton Professional (2004)
 Example of FS proposal for
Township (Tan, 2004)
 Scope of services
 Preliminary site study
 Access, distance from major towns
 Location and present usage
 Terrain, contour and topography
 Site configuration and limitation
 Existing infrastructure and utilities within site and surrounding
 Any squatters?
 Flood prone area?
 Drainage system

Tan, Andrew – Why Project Fail? 1001 reasons, Venton Professional (2004)
 Example of FS proposal for
Township (Tan, 2004)
 Scope of services
 Land valuation
 Determine the current valuation of the piece of land
 Financial study, ROI and Cash Flow Projections
 Project design brief (PDB)
 To enable architect/urban designer to come up with schematic
sketch proposals, site layout, elevations, cross sections, external
perspective
 Preliminary proposed development mix, density of plot ratio,
authority requirements, urban design and architectural schematics,
preliminary cost plan and budget and phasing strategy
 Client’s and end-user’s needs and requirements

Tan, Andrew – Why Project Fail? 1001 reasons, Venton Professional (2004)
 Example of FS proposal for
Township (Tan, 2004)
 Scope of services
 Authority requirements
 Check on zoning, land conversion, density, plot ratio, set back for road
widening, utilities, height limitation, type and nature of surrounding
development, master development plan of the area, title search to
determine conditions, encumbrances, restriction etc
 Specialised requirement (if any)
 Special requirement and technical needs such as “intelligent township”
or “intelligent building feature”
 Business plan and economic study (to attract investor or for loan
application)
 Project Time-scale

Tan, Andrew – Why Project Fail? 1001 reasons, Venton Professional (2004)
 Financial cash flow

• To show the anticipated inflow and outflow of

money
• Inflow represent revenue received from work
done
• Outflow represent expenditure
outflow inflow
 Financial cash flow

• Often required as a supporting document when applying

for loans
• It is also a management tool to plan financial
performance. The proposed cash flow will be compared
to the actual cash flow
• The proposed cash flow will show when the insufficient
fund occurs, which let the management plan when
bridging finance will be required
• It also indicates when the surplus of funds available so
that it can be used effectively
Cash flow
 CRITERIA IN PREPARING FS

 CASH INFLOW
• Revenue – Rental or Sale. Selling or Renting
rate should be based on market rate as advice
by registered valuer
• Current market condition
• The site
• Location – affect the value
• How big is the area
• Essential services i.e. electricity, telephone, water
CRITERIA IN PREPARING FS

 CASH OUTFLOW
• Cost of land which include land cost, conversion fee
and interest on loan. However in most cases is not
included in the cash flow calculation
• Construction cost
• Building cost, facilities, infrastructures, preliminaries
• Fluctuation of prices, contingencies, professional fees
• Developer’s management and supervision, advertising
• Financing charges, CIDB levy
 CRITERIA IN PREPARING FS

• PRE-DEVELOPMENT COST
• Soil investigation
• Survey fee
• Processing fee – Plan & submission fee
• Local authority – Majlis Perbandaran, Dewan
Bandaraya, Majlis Daerah
• Statutory contribution – TNB, SYABAS, KWB,SESCO
• EIA Report – housing development 50 hectares or
more
CRITERIA IN PREPARING FS

Revenue
 Total sales – Development cost =
Gross Profit
 Net profit = Gross profit – Tax
 Rental income = GDV – Outgoing
cost (management fees, security,
tax, cleaning etc)
 Cash Surplus/Deficit = Total Inflow – Total Outflow

Interest on deficit = only applicable if the total is deficit

Formula = (Interest x Deficit)/Duration

Cash Surplus/Deficit (CF) = A + B + C

A
B
C
Sep 2011 answer

 Total cost of finance = RM-580,099

22,851,914
 Profit margin (before tax) = 58,967,987
x 100% = 38.75%
 Amount of bridging loan = RM-
27,378,577.23
Exam Apr. 2009
Interest = 7% x RM1,324,000 /4
4 = 3months/12months
Profit Margin ? Profit/GDC x 100
RM 6,385,200/RM55,750,000 x 100
= 11.45%
ANSWER
 From the cash flow table, calculate the following:
 GDV
 GDC
 Total construction cost
 Amount of Bridging Loan
 Cost of Finance
 Percentage/amount of professional fees
 Percentage of interest rate
 Net profit, if tax is _%
 Profit margin
 Management cost during construction per month
 GOOD LUCK IN
YOUR TEST II AND
FINAL EXAM