MODULE FIVE QTS315/305

ECONOMICS OF BUILDING DEVELOPMENT

THE ESSENCE OF DEVELOPMENT
Every development whether it is for public authority or private investor has a market value. A
market value is a potential worth or earning power of a development project. Every building
has accessible value and it is a cost above which it is not reasonable or feasible to build. The
most economic development is that which shows the greatest return for minimum capital
invested. However, this does not imply that the cheapest is the best.

One of the objectives of a skillful developer is to ensure that an investment gives an early
return which can be used to pay for less remunerative items. In a project development
planning stage, time between capital expenditure and completion of a project should be kept
to a minimum. It is also essential for private developer to carry out financial appraisal or
feasibility study to determine the likely capital expenditure and probable revenue in order to
arrive at the anticipated return on the money invested. This is essential to appraise the
viability of the project. It is also essential for developer to know the nature and extent of the
proposed development, its cost and time required to complete it. Since construction
development is becoming complex, it essential that every proposed development is appraised
from aesthetic, fiscal and social perspective.

Since every developer wants to be sure that return will justify investment in any
development, it is therefore necessary to assess as accurate as possible the value of all the
expected returns and benefits and to compare them with the estimated cost. To achieve this,
the quantity surveyor is often consulted to make cost comparisons of different design
proposals. The task of the quantity surveyor is to inform the developer which is the most
economical scheme after taking all costs into consideration. This necessitates a need for
quantity surveyor to have general knowledge of value as well as detailed knowledge of
building cost. Some of the cost items that quantity surveyor needs to consider when making
general financial appraisal include cost of the works, land purchase, compensation for
extinguishment of lease, bridging finance, long-term finance, rental and capital values,
profitability, and maintenance and other outgoings.

Also, some of the more important matters to be resolved by the project development team
include:
i. Ensuring development to maximum plot ratio
ii. Planning the most economical use of available floor space
iii. Implications of different methods of placing the building contract
iv. The speed of construction balanced against financial considerations, such as the cost
of bridging finance and loss of rent or interest
v. The effect of incurring extra capital costs including expensive finishings, balanced
against additional net and rental value (if any), and
vi. The effect of incurring extra capital costs balanced against a consequent reduction in
future maintenance costs, including depreciation allowances

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NATURE AND SCOPE OF CONSTRUCTION DEVELOPMENT
The development of the construction industry embracing building and civil engineering
works and; associated mechanical and electrical services started by a gradual process of
differential fragmentation. Previously the relationship between the procurer and the producer
was simple and straight forward. However, as the requirement became more complex through
technological innovation and increased expectations, the production process began to be more
specialized; thereby giving rise to a wide spectrum of environmental and management
oriented disciplines. Environmental studies deal with the planning, design, construction and
management of the human habitat. The functions of the various disciplines which are
involved with the human habitat are concerned with the ordering of the surfaces of the earth
so as to make it functional, appropriate, aesthetically and culturally balanced while at the
same time, optimizing the available resources.

Developmental project by the public sector may be for the purpose of meeting political,
social and/or community needs while those by the private sector may be for the purpose of
owner’s occupation, for sale upon completion for profit or for rent of lease to other
organization. Developmental projects comprised new-build-previously undeveloped sites;
refurbishment or rehabilitation (existing structure, same use); conversion of existing structure
for different use; regeneration (blend of demolition) and new-build and refurbishment. It
consists of five phases namely; concept and initial consideration; site appraisal and feasibility
study; detailed design and evaluation; contract and construction; and marketing, management
and disposal.

Most developments are undertaken by developers' borrowed savings that attract payments for their
use in form of interest charges. The decision to develop will therefore be by the relationship between
the rate of net return and the rate of interest. Under such a situation, investment is likely to be
encouraged where the prospective net return is more than the interest on the money to be
borrowed. However, where it is less, developers are likely to be discouraged from development with
loans since they will lose money; and where a developer owns money which he can use for
investment he might prefer to lend the money rather than invest it. Thus high rate of interest tends to
restrict development and low rate of interest tends to encourage development.

The nature and scope of development are further outlined below:

Phases of development
i. Concept and initial consideration
ii. Site appraisal and feasibility study
iii. Detailed design and evaluation
iv. Contract and construction
v. Marketing, management and disposal
Clients for development
i. Federal, State and Local governments in meeting the public infrastructure needs
ii. Financial institutions act as investors
iii. Public and private companies for the personal use
iv. Individuals for personal use or purpose of investment

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Stakeholders to development
i. Land owners
ii. Federal, State and Local governments
iii. Financial institutions
iv. Professional consultants
v. Amenity and pressure groups
vi. End users and investors
Constraints to development
i. Issues related to time, cost, and quality and getting value for money
ii. Planning procedures
iii. Policies on land release and use
iv. Rezoning of inner urban areas - commercial activities squeeze out residential use
v. Volume of abandoned land
External influencing factors
i. Government policies
ii. Taxation like VAT reduction
iii. Capital allowances
iv. Energy efficiency requirements - BREEAM. Building Regulations, carbon tax
v. Grants and other incentives
Sources of demand for development
i. New representation - new venture or relocation
ii. Expansion of existing requirement
iii. Rationalization of space
iv. Image change
Reasons for development
i. Public sector: To meet political, social or community needs
ii. Private sector: For business and profit making
iii. Project to rent or lease to other organisations
Modes of development provision
i. Demand-led provision - propose and provide
ii. Supply-led provision
iii. Joint ventures - typically private sector partners
iv. Public Private Partnerships and PFI hybrids