APC Interview

Preparation
Webinar

The Association of South African

Quantity Surveyors 1
 The Associa on
of South African
Quan ty Surveyors

APC Interview Preparation Webinar

The Interview
• Assessment of Professional Competency:
• Are you able to demonstrate the knowledge, experience and professionalism you
have gained?
• Are you able to uphold the best interests and reputation of the profession, without
supervision?
• Do you have the confidence to take charge of your field of expertise?
• Are you able to protect the interest of your client in an ethical manner?
• Are you able to market yourself | Your profession?
• Problem solving | Your ability to consider various solutions?
• Do you have a broad knowledge of different types of projects and contracts?
• Understanding the roles, duties and responsibilities of a professional practice

3
 • Do not arrive/join late for your interview
• Be patient if you need to wait
• Stay calm
• Be familiar with “everyday” QS and construction
related terminology
Some tips… • Answers should be clear and concise and of
sufficient length. (Not one or two words)
• Do not mumble.
• Guard your language
• Be respectful

4
 Verbal Communication

Eye contact

First Body language

impressions Voice projection

count!
Attitude

Dress Code – Neat | Presentable | Appropriate

5
 • A minimum of 3 QS’s with professional practice experience (Building
and/or engineering)
• The Registrar or a representative
• As interviews are conducted in English
• Panel decisions are unanimous
• Candidates either receive a Professional Registration Certificate or are
deferred.
The panel… • Deferred candidates:
• Reasons must be given at the interview. This is followed up
within 7 days by providing the panels decision, comments and
recommendations for the deferment in writing.
• Deferral conditions can vary
• The minimum deferral period is 8 months
• The re-interview will be based on the areas of deficiency only

6
 Interview Structure (+/- 60 minutes)

Welcome and introduction Chairman

Presentation of project report Candidate

Project related questions Assessors

Practice related questions Assessors

Interview Panel deliberates (Final decision is unanimous) Assessors

Candidate feedback and result Chairman

(Certificate [electronic] issued if successful or deferral)

7
 • To assess your personal involvement in a
project from inception to completion
• Select it carefully
• Be familiar with the report
• You will be quizzed on all aspects of the project
Your Project whether you were directly involved or not.
• Questions:
specific • Could test your theory
Report… • Could be presented as a scenario typical of the
construction industry

8
Practice related questions:
• Financial feasibility studies
• Estimating
• Cost advice, cost planning, cost control, cashflows
• Value engineering
• Procurement strategies
• Tendering methods, processes, and adjudication
• Post Tender documentation
• Contract documents and conditions | Alternative contracts

9
Practice related questions: (Continued)
• Contract administration
• Valuations | Certificates
• Escalation
• Retention | Alternatives
• Final accounts
• Professional fees
• Professional ethics | Code of Conduct
• Other (Current trends, prevailing conditions, opportunities, etc.)

10
 THE SOUTH AFRICAN COUNCIL
for the
QUANTITY SURVEYING PROFESSION
Established in terms of the Quantity Surveying Profession Act 49 of 2000

DECLARATION OF ETHICAL COMPLIANCE

for

APC Interview

Candidate no. Candidates Name

Declaration by the Candidate

I declare that I will only have a copy of my APC submission on my desk during the interview and
will only review the contents thereof during my presentation. The candidate can utilise visual aids
during the presentation but these should be set aside on conclusion thereof.

I declare that the environment in which I will conduct my interview will exclude all study materials,
reference documents, secondary screens and/or any other form of electronic devices that might
assist me in my interview.

At any point during the interview, the assessing panel have the right to confirm compliance to
above requirements by scanning the environment. Should I be caught referring to any such
material, the consequences thereof will be immediate suspension of 5 years as a registered
Candidate with the Council.

Signed: Date:
Candidate
 • JBCC GUIDE TO COMPLETION, VALUATION,
CERTIFICATION, AND PAYMENT (JBCC Website)
• 2015 GUIDELINE TARIFF OF PROFESSIONAL FEES
Some (SACQSP Website)
recommended • SACQSP CODE OF PROFESSIONAL CONDUCT
(SACQSP Website)
reading… • APC – THEORY PREPARATION (SACQSP Website)
• ETC.

12
 Procurement Strategy
Includes
Tendering methods & adjudication
Contract documents and conditions & Alternative contracts

13
Tendering methods

Provisional
Bills of
Bills of Lump sum
Quantities
Quantities

Schedule of
Turnkey Cost plus
rates

14
Tendering methods (Continued)
• Open
• Competitive
• Used primarily by the Public sector
• Lowest tenderer not always the most suitable
• Selected
• Competitive
• Invite selected tenderers based on their suitability for the project
• Used primarily by the Private sector
• Combination of the above
• Openly invite interested tenderers to submit their credentials from which a shortlist is
selected
• Negotiated
• Non-competitive
• Used where quality is more important than cost

15
Tender adjudication
• Qualifications
• Do not make tender invalid unless it is a condition of the tender
• Receiving qualified and unqualified tenders makes comparison difficult
• Any qualification to an accepted tender must be included in the contract
documentation
• Arithmetic checks
• Preferential Procurement Policy
• B-BBEE checks
• Preference point system applied
• Reference checks
• Recommendations

16
Arithmetic checks…

1 2 3
If there is a discrepancy If there is an error in the total Where there are errors in
between the amount in of a line item, the total arriving at totals, the sum
words and the amount in should govern, and the unit tendered should govern and
figures, the amount in words rate should be adjusted. the tenderer will be asked to
should govern revise selected rates and/or
adjust the Preliminaries

17
Contract documents…
• JBCC Suit of Contracts
• Developed & published by the Joint Building Contracts Committee
• General Preliminaries
• Principal Building Agreement / Contract Data Edition 6.2 (2018)
• N/S Agreement/CD Ed. 6.2 (2018)
• Minor Works Agreement/CD Ed. 5.2 (2018)
• Small & Simple Works Ed. 1 (2020)
• Direct Contractors Ed. 1 (2020)
• Suitable for building contracts (Public & private sector)
• GCC
• General Conditions of Contract
• Published by the SA Institution of Civil Engineering
• Suitable for engineering contracts

18
Contract documents…
• NEC
• New Engineering Contract
• Created by the UK Institution of Civil Engineers
• Emphasizes co-operation between the contractor and project manager in
order to minimize disputes
• Contains different contract options:
• Priced contract with activity schedule
• Priced contract with bill of quantities
• Target contract with activity schedule
• Target contract with bill of quantities
• Cost reimbursable contract.
• Management contract
• New in NEC4:
• Design, build, operate contract
• Alliance contract
19
Contract documents (Continued)
• FIDIC
• Created by the International Federation of of Consulting Engineers
• Red Book – Works designed by employer
• Yellow Book – Design and execution by contractor
• Silver book – Turnkey projects by contracting entity
• Gold Book – Operation and maintenance
• Pink Book – Design and execution financed by an international funding
institution
• Green Book – Smaller projects designed by employer

20
Sub-Contracts…
• Nominated
• Nominated by employer. Appointed by contractor. Contractor is not liable for
nominated sub-contractor’s non-performance.
• Selected
• Contractor participates with employer in the selection process. Contractor
appoints the selected sub-contractor and is liable for their non-performance.
• Direct
• Appointed by employer under separate agreement to carry out work prior to
practical completion. Contractor is not liable.
• Domestic
• Appointed by main contractor. Contractor is liable.

21
Type Description Profit Attendance Comment
Provisional An amount included in the Where stated, may be 1. To cover all the Amount is net
Sum contract sum for the supply allowed for if required contractors' costs for
and installation of work by a “attending” to the N/S
N/S subcontractor subcontractor.
2. Ditto but for
“special attendance”
as described

Prime Cost An amount included in the Where stated, may be Allow for taking Amount is net.
Amount contract sum for the allowed for if required delivery and storing of Includes for delivery
delivered cost of materials materials and goods to site.
and goods obtained from a
supplier as instructed by the
PA
Budgetary An amount included in the Can be deducted in whole or in part if not required.
allowance contract sum for work
intended for execution by the
contractor, the extent of
which is identified but not
detailed
22
 Cost Management
cost advice | cost planning| cost control I cost reporting
cashflow projections

23
Order of magnitude estimate
• 1st estimate (Broad, rough)
• Based on limited information
• Revise as more information is made available
• Use appropriate industry related rates
• Subject to iteration with increased accuracy

24
Traditional built environment cost models for estimating

Design stage Cost modelling type User Example

1
Brief stage

Unit Cost/bed, cost/seat

2
Sketch design

Space Cost/m2
The type of the cost
3 model/estimate to be applied

QS
Element Cost/functional element
depends on the amount of
4 design information that is
Approximate quantities Cost of grouped items
Detailed design

available at the time that the

5 cost information is needed.
Working drawings

Standard Method of Measurement Bills of Quantities

6

Contractor
Operations Cost/operation
7 Cost of labour, plant
Resources material, supervision, etc

25
Cost Planning/Control Cost Control
Concept Design Tender Construction Final account
stage stage stage stage stage
Initial Revised estimates and Budget Closely monitor costs. Contract sum
Estimate cashflow projections finalized Provide regular updated +/- variations
with progressively cost reports and
improving accuracy cashflow projections

• Providing cost advice at design stage. Ensuring that the project is completed
• Using value engineering to keep the design within budget, plus or minus approved
and specification within budget variations. All approved variations to the
• Ensuring consistency between the final contract sum should be accurately
estimate and the tender amount. Any priced, timeously reported,
differences should be identified, approved contractually justifiable and included in
and included in the final budget the final account.
26
Contract Administration
Includes
Post tender documentation | Valuations & Certificates
Escalation | Retention & Alternatives | Final accounts

27
 JBCC%Principal%Building%and%Minor%Works%Agreements

Practical Completion - JBCC

CONTRACT VALIDITY PERIOD
PA%in%tender%documents%specifies%
start%+%dura6on%of%construc6on%

DATE%&%comple6on%%PRACTICAL

DATE%&%expiry%PRESCRIPTION
DATE%&%comple6on%%INTERIM
period%+%comple6on%criteria

DATE%&%comple6on%%FINAL
PA/agents%direct%standard%of%work

DATE%&%Site%possession
DATE%&%Tender%award

DATE%&%expiry%%L%D%L%P
+%quality%of%finish%required

C%no6ce%to%PA%to%inspect%for%PC

PA%%inspects%works,%issues%List%for
Prac6cal%Comple6on,%and%if%%ready,%
issues%Cer6ficate%of%Prac6cal%
Comple6on%and%List%for%Comple6on

C%claim%revision%of%date%of%PC

PA%assesses%6me%+%money%claims%
PA%assesses%penal6es% 90day DLP 5 year LDLP

Note:%Issue%Cer6ficate%of%Prac6cal%Comple6on%
C's CONSTRUCTION PERIOD = Private Sector &%employer%occupies%works,%penalty%liability%
ends,%contract%works%insurance%>%building%
insurance,%value%of%securi6es%reduces%

C's CONSTRUCTION PERIOD = Public Sector Note:%C%%fixes%items%on%list%for%comple6on

Note:%PA%+%C%%+%SC%resolve%final%account
28
• The issue of the certificate of practical completion may not occur before the specified/revised date for practical
completion, unless agreed by the parties, as the contractor’s obligation is to hand over the works on the date for
practical completion and not earlier
• The principal agent must issue a certificate of practical completion (and later a certificate of final completion) to
the contractor for each defined section. The certificate for the last section is for the whole works. Thus multiple
completion dates are applicable to product warranties, the defects liability period and the latent defects liability period

3.4 CONSEQUENCES

On achievement of practical completion:

▪ The (legal) responsibility for the works passes to the employer
▪ The employer is entitled to possession of the works and site
▪ The contractor is not obliged to carry out any contract instruction for additional works
▪ The principal agent must issue a list for completion
▪ The contractor is no longer liable for penalties (may apply before the date of practical completion)
▪ The principal agent must prepare the final account within ninety (90) calendar days
▪ The value of the Guarantee for Construction (variable) reduces to 4% of the contract sum
▪ The Guarantee for Construction (fixed) expires and the payment reduction reduces to 2,5% of the contract sum
▪ The Guarantee for Payment remains valid unto the final payment has been made by the employer
▪ The contractor becomes entitled to compensatory interest (PBA only)

©JBCC® Guide to Completion, Valuation, Certification and Payment - Edition 6.1, March 2014

29
 JBCC%Principal%Building%and%Minor%Works%Agreements

Final Completion - JBCC

CONTRACT VALIDITY PERIOD
C%rec6fies%items%on%List%for%%%%
Comple6on%to%suit%occupants

DATE%&%comple6on%%PRACTICAL

DATE%&%expiry%PRESCRIPTION
DATE%&%comple6on%%INTERIM
C%>%no6ce%PA%to%inspect%before%%

DATE%&%comple6on%%FINAL
expiry%of%90C&day%DLP

DATE%&%Site%possession

DATE%&%expiry%%L%D%L%P
DATE%&%Tender%award
PA%%inspects%works,%issues%List%for%
Final%Comple6on%(updated%List%for%
Comple6on)%done?%%issues%
Cer6ficate%of%Final%Comple6on%
Note:%PA%+%C%%+%SC%resolve%final%
account%including%outstanding%%
6me%and%money%claims,%penal6es
Final%Account%agreed,%PA%issues%
Final%Payment%Cer6ficate%

90C-day DLP 5 year LDLP

Note:%%
CONSTR. PERIOD = Private C's%public%liability%period%ends%
Value%of%securi6es%reduces%
NSSA%warran6es%ceded%to%E%
%
CONSTR. PERIOD = Public
30
5.2 ACHIEVEMENT OF SECTIONAL FINAL COMPLETION

Where sectional completions are required - each section (other than the last section) must be treated as un
completion purposes. Thus each section requires:
▪ A certificate of interim completion for each subcontractor
▪ A certificate of practical completion
▪ A certificate of final completion (other than the last section)
On
5.3
achievement of final completion
CONSEQUENCES

Payment is always made for the works as a whole - never for a section - by issuing the following documents:
▪ A (monthly) interim payment certificate
▪ A (monthly) recovery statement
▪ A (monthly) payment notification to each subcontractor
▪ A final account
▪ A final payment certificate
▪ A certificate of final completion for the works as a whole incorporating the last section

©JBCC® Guide to Completion, Valuation, Certification and Payment - Edition 6.1, March 2014

31
 Interim(payment(cycle1
33

applicable1to1all11JBCC1Building1Agreements

Interim Payment Cycle - JBCC

Contract(Data( Contract(Data( Contract(Data(
Issue(cer.ficate E(pays(C C(pays(SC's

1st 7th 21st 28th

Claims Valuation 14 C-day E payment window 7 C-day C pay Claims

Period1agreed1 Period1agreed1 Period1agreed1

PA1&1C1&1SC's PA1&1C1&1SC's PA1&1C1&1SC's
Contractor (QS1+)1Principal1 Contractor
submit1/1agree Contractor submit1/1agree
Agent1agree1
claims1to1 pays claims1to1
valuaCon1and
Principal1Agent Subcontractors Principal1Agent
1issue1Payment
CerCficate1and1
1Recovery1Stmnt,1
Payment1
NoCficaCon
Contractor
Subcontractors Subcontractors
issues11to1SC1
submit1/1agree submit1/1agree
NS1Recovery1
claims1to1 claims1to1
Stmt1and
Contractor Contractor
Payment1Advice

32
12.0 RECOVERY STATEMENT (PBA)
12.1 PURPOSE RECOVERY STATEMENT
The recovery statement deals with financial transactions between the employer and the contractor that do not affect the
contract value and are therefore not part of the valuation of work in progress or the final account. Such transactions can
occur at any time during the construction period. The amounts due to either party are determined by the principal agent
on a monthly basis, and are included in the payment certificate issued at that time. Documentation substantiating the
amounts due must accompany the recovery statement. By dealing with these transactions as they occur and not at the end
of the contract considerable administrative frustration is avoided

12.2 THE STATEMENT

• Amounts due to the to employer • Amounts due to the contractor
Column A Totalinsurances,
• Effecting Amount to be
or recovered
paying charges • Compensatory interest
All amounts as determined by the principal agent are accounted for on an accumulative basis
• Work executed by others • Default interest
• Termination
Column B of N/S subcontract
Less Previously recovered agreement • Advance payment made
• Contractor not paying
Previously the accumulative
determined employer anamounts are accounted• Damages
for
amount due
• Termination
Column C of the
Recovered this agreement
Period
• Default The
bydifference
the between the column A and B subtotal amounts are carried to the referenced item in the
contractor
payment certificate
• Direct payments to a subcontractor
Penalties levied
12.3 • AMOUNTS DUE TO THE EMPLOYER
• Default interest
There• are ten conditions
Recoupment not related
from to theof
contractor contract value that the employer may recover from the contractor. These are:
an advance
▪
paymentThe first seven (1.1.1-7) are grouped together as they impact on the tax on the certified contract value
▪ Penalties due (1.2) are accounted for before tax but are separated for clarity purposes
▪ Default interest (1.3.1) is tax neutral and is accounted for after tax 33
▪ Advance payment recoupment (1.3.2) is accounted for after tax
 Compensatory interest

• Applies to payment certificates issued 31 calendar

days after practical completion (PBA only)
• Repo/Bank rate

Default interest
Interest, • Applies to late payment of any payment certificate
Penalties…. (PBA, NSSA, MWA)
• Repo/Bank rate + 6%

Penalties

• For late completion

• Public sector – by formula
• Private sector – loss of income

34
DATE%&%comple6on%%PRACTICAL
Compensatory(and(default(interest(calcula-ons(
53

applicable%to%JBCC%Building%Agreements

DATE%&%comple6on%%FINAL
Payment%cycle Payment%cycle Payment%cycle Payment%cycle
30%calendar%days 30%calendar%days 30%calendar%days 30%calendar%days

Pay%within%
C11
14%C%days if%paid%late%=%%
Def%interest

Pay%within%
C12 14%C%days if%paid%late%=%%
Def%interest
ONLY%applicable%to%PBA
compensatory
%interest Pay%within%
C13 14%C%days if%paid%late%=%%
30+15%=%45%C%days
Def%interest
ONLY%applicable%to%PBA
compensatory
%interest Pay%within%
C14 14%C%days
30+30+15%=%75%C%days if%paid%late%=%%
Def%interest

35
 11.7 PAYMENT CERTIFICATE 15
▪ Should final completion and acceptance of the final account not be achieved in ninety (90) calendar days
further interim payment certificates must be issued to maintain the “payment cycle”
Example of compensatory and default interest calculations
▪ The final payment certificate also attracts compensatory interest (PBA only). Should the final payment
certificate be paid late default interest is due and is recoverable by the contractor as a debt

11.8 COMPENSATORY INTEREST CALCULATION

Assumptions:
• Interest rate (Repo/Bank rate- February 2014) = 5.5% (see interest definition)
• Net amount certified = 20 000.00
• Certificate No 12 issued after Practical Completion = 45 calendar days
Calculation: 20 000 x 5.5% x 45 / 365 = 135.62

11.9 DEFAULT INTEREST CALCULATION

Assumptions:
• Interest rate (Repo + 6.0%) = 5.5% + 6.0% (see interest definition)
• Certificate No 3 payment due = 91 200.00
• Payment made after Certificate issue date = 21 calendar days
• Employer (21-14) calendar day default pay period = 7 calendar days (see 11.5.2 above)
• Balance of payment cycle = 9 calendar days
• Next Employer payment (expected) = 14 calendar days
Calculation: 91 200 x 11.5% x 7 / 365 = 201.14
* Assuming the employer makes payment of the certificate amount only:
Add: 201.14 x 11.5% x 9 / 365 = 0.57 (see 11.5.4 above)
Total default interest due at end of payment cycle = 201.71
* Additional interest to expected employer payment date
Add: 201.71 x 11.5% x 14 / 365 = 1.02 (see 11.5.5 above)
Total default interest paid = 202.73

11.10 COMPENSATORY AND DEFAULT INTEREST – ASSUMPTIONS

1 Each payment certificate issued reflects an amount in favour of the contractor

2 The contractor's “payment cycle'' is a constant 30 calendar days = same day(date) every month stated [CD]
3 Default periods given are for demonstration purposes only
** Compensatory interest only applies in the JBCC® Principal Building Agreement

Extract only – for full details see JBCC GUIDE TO COMPLETION, VALUATION, CERTIFICATION AND PAYMENT Page 52
©JBCC® Guide to Completion, Valuation, Certification and Payment - Edition 6.1, March 2014
36
 35

COMPARISON OF GUARANTEE FORM - CLAUSES

Guarantee for Payment Guarantee for Guarantee for Guarantee for

NSSA Guarantee for Advance Payment Construction Variable Construction Fixed
Payment (PBA) (NSSA) (PBA) (NSSA)
Employer > Contractor Contractor > Employer Contractor > Employer
Who provides Contractor > Subcontractor Subcontractor > Employer Subcontractor > Contractor

Who benefits Contractor / Subcontractor Employer to recover ‘loan’ Employer

Contract sum incl Tax yes No = sum of ‘items’ yes yes

Sections? Not applicable Not applicable Not applicable

Documents required PA: Interim Pay Certificate PA: Interim Pay Certificate PA>E+C: Recovery Stmnt, Interim Pay Cert, Final Pay Cert
Works insurance: PA: Final Pay Certificate PA: Recovery Statement 10% of contract
PA>E+C: sum up
Prac Completion to Completion
/ Final 5% of Certificate
contract
• Select: by employerC: or by contractor
Payment Advice 50% completed,
C>SC: then PA: Final Pay
Interim Pay Advice, sum until
Advice
• In the joint names C:ofFinal
thePay
parties
Advice reduced
PA>SC+C: toInterim
6%. At practical
+ Final Pay Notification
Intended completion date Intended completion date practical completion completion.
Expiry date + 6 months + 6 months Intended completion + 6 months
reduced to 4%. At final 2,5% thereafter
Payment … Advance payment … completion reduced
1.0 Construction ‘Variable’to 2% until issue
2.0 Construction of
‘Fixed’

Guaranteed aggregate sum yes yes (multiple ‘products’) until

yesissue of final 5% fxdfinal payment
expires @ Prac Compl

Recoupment 1.1 Number of payment certificate certificate

months 10% > 50% Contract Sum

Recoupment 1.1 ‘Start’ month Then 6% until Prac Compl 5% retention until Prac Compl
37
Recoupment 1.1 Amount/
Insurances
Types of insurance:
• Contract works (includes direct
Select: contractors and free issue if applicable)
• Supplementary insurance (riot,
- By employer strike, lockout, etc.)
• Public liability insurance
- By contractor
• Removal of lateral support
- In the joint names of the parties insurance
• Other insurances

38
 Site 9 Dvorak Street, Symphony Village ..

AGREEMENT

The contractor waives in favour of the employer any lien or right of retention that is or
may be held in respect of the works to be executed on the site

This waiver shall only come into effect on provision by the employer of a security for
payment in fulfilment of obligations in terms of the identified agreement

This done and signed at Symphony Village Date 201?-02-02

Name of Signatory Waiver of contractors Lien

Peter World Capacity CEO

39
For and on behalf of the contractor who by signature Signature of Witness
Materials – when can they be paid for?

On-site Off-site
• Not prematurely delivered • Proof of payment
• Proof of payment • Proof of insurance
• Covered by Insurance • Ring fenced and identified (photos
for proof)
• Signed cession form
• Adequate security in place
• Waiver of landlord's lien
• Signed cession form
• Advanced payment guarantee

40
 Situation Who is the owner? Why?
On site and paid for by Contractor Payment and delivery has
contractor taken place
Onsite and paid for by Owner Payment and delivery has
owner taken place
Set aside on suppliers' site in Supplier Neither delivery nor

Who owns
terms of a credit order by payment has taken place
contractor

the materials Set aside on suppliers' site

and paid for by owner
Owner Payment made

and why?
Set aside on suppliers' site Contractor Payment made
and paid for by means of a
bank overdraft facility made
to contractor

Delivered to site and built in. Owner Accession

Purchased by credit order
from contractor

41
 A = 0,85 x V x (le/lo -1)

15% non-adjustable element (for mark-

up/profit?)

Escalation
Base month = month that tenders closed

Applicable month = month prior if before

15th or same month if after 15th

42
Preliminaries
Payment: Adjustment:
• Option A • Option A
• By PA prorated to value of work done • Within 15 working days contractor to
(Including tax. Excluding provide a fixed, value related, time
preliminaries, contingencies, and related breakdown (Including tax.
CPAP) Excluding preliminaries,
• Option B contingencies, and CPAP)
• Agreed to by PA and contractor • If not, 10% fixed, 15% in proportion
comprising an initial , monthly and to value, 75% in proportion to time
disestablishment charge • Option B
• Within 15 days contractor to provide
a detailed breakdown
• If not, option A applies

43
Professional Fees
2015 GUIDELINE TARIFF OF PROFESSIONAL FEES

44
 2.2.1 Basic fee

Basic fee
Value for fee purposes Primary
Marginal rate
charge
1 2 3
0
Up to R 1 000 000 R 19 000 8,00 % on balance over R 0
R 1 000 000 – R 2 000 000 R 99 000 8,00 % on balance over R 0 1 000 000
R 2 000 000 – R 4 000 000 R 179 000 7,95 % on balance over R 0 2 000 000
R 4 000 000 – R 8 000 000 R 338 000 7,15 % on balance over R 0 4 000 000
R 8 000 000 – R 16 000 000 R 624 000 6,70 % on balance over R 0 8 000 000
R 16 000 000 – R 32 000 000 R 1 160 000 5,90 % on balance over R 16 000 000
R 32 000 000 – R 64 000 000 R 2 104 000 5,27 % on balance over R 32 000 000
R 64 000 000 – R 128 000 000 R 3 790 400 5,15 % on balance over R 64 000 000
R 128 000 000 – R 256 000 000 R 7 086 400 4,10 % on balance over R 128 000 000
R 256 000 000 – R 500 000 000 R 12 334 400 3,96 % on balance over R 256 000 000
R 500 000 000 – R 1 500 000 000 R 21 996 800 3,50 % on balance over R 500 000 000
R 1 500 000 000 – R 3 000 000 000 R 56 969 800 3,12 % on balance over R 1 500 000 000
R 3 000 000 000 and over R103 769 800 2,44 % on balance over R 3 000 000 000

2.2.2 Adjustment factor

An adjustment factor is to be applied to the fee to take into account aspects

that will either increase or decrease the fee for risk, complexity, market
conditions and the like

2.2.3 Examples of fee calculations

45
The following are examples of the most commonly used fee calculations for building works
10.48 “TENANT REQUIREMENTS” means the evaluation of tenant requirements involving
separate accounting for each tenant

10.49 “VALUE FOR FEE PURPOSES” means the final value of the contract, or a fair estimate
where no final value is available, which shall include clauses 10.49.1 to 10.49.5:

10.49.1 Subject to clause 10.49.9, all labour and materials, whether supplied free of
charge or not, provided that where materials are “free issue” and the value of
such materials is not known or disclosed, such value shall be estimated at
market rates current at the date of tender

10.49.2 Any credit for materials from the existing structures which are to become the
property of the contractor, which credit shall be treated as an addition and not
as a credit

10.49.3 All specialist services and installations which form an integral part of the
contract, including services covered by provisional amounts for subcontracts
and/or prime cost amounts

10.49.4 Any amount of adjustment under any applicable contract price adjustment
provisions when certified for payment to the contractor

10.49.5 Subject to clause 10.49.6, taxes and duties

and which final value of the contract shall exclude clauses 10.49.6 to 10.49.10: 46
 10.49.5 Subject to clause 10.49.6, taxes and duties

and which final value of the contract shall exclude clauses 10.49.6 to 10.49.10:

10.49.6 VAT

10.49.7 Any amount set aside for contingencies

10.49.8 Work generally outside the scope of the work carried out by the contractor and
excluded from the contract, in respect of which the quantity surveyor is not
required to perform a service

10.49.9 All supply costs on engineering contracts for major items of permanent plant,
equipment and machinery

10.49.10 For building work the final value of any mechanical and electrical
installations ancillary to building works and of any civil engineering works
ancillary to building works in respect of which the quantity surveyor is
required only to incorporate into the relevant documentation such information
furnished by others, which final value shall include any amounts arising from
contract price adjustment provisions and shall exclude any amounts for profit
and attendance to the principal contractor and any apportionment of the value
of preliminaries

10.50 “VALUE MANAGEMENT” means the facilitation of a systematic multi-disciplinary 47

 An adjustment factor is to be applied to the fee to take into account aspects
that will either increase or decrease the fee for risk, complexity, market
conditions and the like

2.2.3 Examples of fee calculations

The following are examples of the most commonly used fee calculations for building works

Assumptions:

Final value of the contract R 100 000 000

Final value of mechanical and electrical installations ancillary to building
works and civil engineering works ancillary to building works in terms of
clauses 10.10 and 10.24 R 22 500 000

Fee calculation where the quantity surveyor is not required to perform a service in respect of
mechanical and electrical installations ancillary to building works and civil engineering
works ancillary to building works in terms of clause 10.49.10

Value for fee purposes: R 100 000 000 – R 22 500 000 = R 77 500 000

Primary charge R 3 790 400

Marginal rate: 5.15% of R 13 500 000 (balance over R 64 000 000) R 695 250

Guideline fee R 4 485 650

Adjustment factor to increase or decrease the fee in terms of clause 2.2.2 R to be assessed

Adjusted fee R as applicable

4 48
Adjusted fee R as applicable

2.3 Appropriate percentage for building work

Note: Exclusions in terms of clause 10.49.10 are applicable when determining the value
for fee purposes

Appropriate percentage
*Contracts *Contracts Contracts Builder’s Payment Cost-plus
with bills of with without bills quantities valuations contracts
Category quantities simplified of quantities
bills of
quantities

1 2 3 4 5 6 7
Alteration works ………. 125 100 75 25 15 70
Building works ………… 100 75 75 20 15 70
Redecoration works ….. 160 150 75 50 15 70

Replication:
Prototypes and other
non-replication works … Apply applicable appropriate percentage n/a
Replication(s) of
prototype ………………. 60% of applicable appropriate percentage n/a

Multiple procurement
contracts:
Principal contractor
appointed ………………. Increase the fee by 10% n/a n/a n/a
No principal contractor
appointed ………………. Increase the fee by 20% n/a n/a n/a

*Includes contracts with bills of provisional quantities or schedule of rates

49
 Replication(s) of prototype ……………….. 60% of applicable appropriate percentage n/a

*Includes contracts with bills of provisional quantities or schedule of rates

2.5 Appropriate percentage for management services

Note: Exclusions in terms of clause 10.49.10 are not applicable when determining the
value for fee purposes

Appropriate percentage
Category
Building works Engineering works
1 2 3
Principal agency .………………………….. 45 42,5
Principal consultancy …….....…………… 30 27,5
Project monitoring ………………………… 25 22,5
Quality inspection …………………………. 15 15

50
Management services
• Principal Agency
• Appointed by the client to manage and administer the agreement between the employer
and contractor
• Principal Consultancy
• Appointed by the client to manage and administer the services of all the professional
consultants
• Project Monitoring
• Appointed by the client to carry out a watching brief and to financially monitor the project
• Quality Inspection
• Inspection of the work at appropriate intervals to assess and report on whether the works
are being completed in accordance with the drawings and specification. (Excludes
mechanical, electrical, structural and other specialist work)

51
2.7 Apportionment of fee to stages

Percentage of fee
Stage 1 Stage 2 Stage 3 Stage 4 Stage 5 Stage 6

Documentation
development
Concept and

procurement

Construction
Category

Close-out
Inception

viability

Design

and
1 2 3 4 5 6 7
Bills of quantities and engineering
bills of quantities contracts:
Bills of provisional quantities …………. 2,5 5 7,5 17,5 62,5 5
Bills of quantities ……………………….. 2,5 5 7,5 35 45 5
Schedule of rates ……………………… 2,5 5 7,5 12,5 67,5 5
Builder’s quantities ……………………. n/a n/a n/a 100 n/a n/a
Contracts without bills of quantities …. 2,5 7,5 10 20 52,5 7,5
Cost norms …………………………….... 15 15 15 20 25 10
Cost-plus contracts …………….………. 2,5 7,5 10 15 57,5 7,5
Payment valuations ………..………….. n/a n/a n/a n/a 92,5 7,5
Principal agency ……..………………… n/a n/a 7,5 7,5 70 15
Principal consultancy .………………… 25 25 25 25 n/a n/a
Project monitoring ………………….…. 2,5 5 10 17,5 50 15
Quality inspection …………………..…. n/a n/a n/a n/a 85 15
Replication of prototype ……………….. 2,5 5 5 17,5 62,5 7,5
Schedule of materials …………………... n/a n/a n/a 100 n/a n/a
Simplified bills of quantities contracts:
Bills of provisional quantities …………. 2,5 7,5 10 17,5 55 7,5
Bills of quantities ……………………….. 2,5 7,5 10 35 37,5 7,5
Schedule of rates ……………………… 2,5 7,5 10 12,5 60 7,5
Targeted procurement .……………….. n/a n/a n/a 20 60 20

Stage 4

Stage 5
During

During
Multiple procurement contracts
(overrides all other category
apportionments) …………………...…….. 2,5 5 7,5 15 20 45 5

2.8 Fee for consortium representative and apportionment 52

2.8.1 The fee for the consortium representative is 10 per cent, which is not an
entitled, without providing any further services, to charge a fee of 20 per cent of the afore-
mentioned fee

4.0 EXCESSIVE VARIATION

4.1 Should a contract incorporating bills of quantities be varied to such an extent that the
total value of measured work omitted in the adjustment of variations exceeds 10 per cent
of the value of measured work in the value for fee purposes, then an additional fee of
50 per cent of the marginal percentage listed in column 3 of clause 2.2.1 applicable to the
value for fee purposes is charged on the amount of such excess

4.2 Should a contract incorporating bills of provisional quantities be varied to such an extent
that a separately identifiable portion thereof originally included in the documentation is
subsequently omitted, then an additional fee of 30 per cent of the marginal percentage
listed in column 3 of clause 2.2.1 applicable to the value for fee purposes is charged on
the estimated value of such omitted work

4.3 Should the actual construction period less any extension of time allowed for additional
work and less any period(s) of more than 28 days during which the site was abandoned,
exceed the initial contractual construction period by more than 15 per cent, then an
additional fee is charged which shall be calculated by multiplying 80 per cent of the fee
for Stage 5 for the relevant category in column 1 of clause 2.7 by the said excess and
dividing it with the initial contractual construction period

The initial contractual and the actual construction periods shall be taken as commencing
on the same day and all time periods shall be calculated in calendar days without any
deduction for builder’s holidays. The site shall be considered to be abandoned if no or
very little work was performed by the contractor during the period of being abandoned
and the quantity surveyor was not required to perform any service during that period

5.0 COMMISSIONS TERMINATED

EXCESSIVE VARIATION calculations (in accordance with 2009, 2010, 2011, 2012,
2013 & 2015 tariff of fees)

Clause 4.3: Construction period Calendar days

A Initial contractual construction period 300

B Actual construction period (up to practical completion date) 600

C Less: Extension of time allowed for additional work (10)

D Less: Period of more than 28 days during which the site was abandoned (180)

E Net construction period (B-(C+D)) 410

F Less: 15% Non-adjustable portion of initial contractual construction period (45)

G Excessive construction period (E-F) 365

H Less: Initial contractual construction period (A) (300)

I Excessive construction period subject to additional fee (G-H) 65

Ditto, expressed as a percentage of A = (I/A x 100) 21.7%

Additional Fee:

Calculation: 80% x Stage 5 fee x (I/A)

= 80% x R 1,022,400 x 65 / 300 calendar days

= R 177,216
Clause 4.3 Excessive Variation and its application
Note: The example below makes use of the same time periods and fee values as the attached worked example.

Actual construction period

600 calendar days

Extension of time Extension of time allowed

Period of more than 28 days during 28 days during which site
Initial construction period allowed for for reasons other than
which the site was abandoned was abandoned
additional work additional work

300 calendar days 10 calendar days 82 calendar days 180 days 28 calendar days

Calendar
days
600 Actual Construction period
Extension of time
allowed for
-10 additional work
Period of more than 28 days during
-180 which the site was abandoned
410 Net construction period ✚ Net construction period ✚ Net construction period

THE CALCULATION:
Where the net construction period exceeds the initial contractual construction period by more than 15%
i.e. 410 days exceeds 300 days by 36,7% (110 days) which is more than 15% of 300 days (45 days)
then
an additional fee is charged and is calculated as follows:
80% x Stage 5 fee x the "said excess" / initial contractual construction period
80% x Stage 5 fee x [(net construction period - 15% of initial contractual construction period) - initial contractual construction period] / initial contractual construction period
i.e. 80% x stage 5 fee x [410 - 45) - 300] / 300
80% x R 1,022,400 x [365 - 300] / 300
80% x R 1,022,400 x 65/300
R 177,216
Professional Ethics
Includes
Code of Conduct

56
 Registered Professional Quantity Surveyors…

May not review for a particular client the quantity surveying work of another registered professional quantity
surveyor except;

• with their prior knowledge and written consent which such consent shall not be unreasonably withheld.
• Furthermore, the other registered professional quantity surveyor must be afforded a reasonable
opportunity to submit their comments to the client in response to the findings of the review.
• after receipt of a notification in writing from the client that the engagement of the other registered
professional quantity surveyor has been terminated or,
• where the review is intended for purposes of a recognized and competent court of law in the Republic of South
Africa or for legal proceedings.

Such interview may only be undertaken following the full settlement by the client who is mandating that the
quantity surveyor's work be reviewed. Accordingly, the above provisions will not waive any lien or right of
retention that the quantity surveyor whose work is being reviewed, may have held or hold, in respect of the work
that they have undertaken.
57
Financial Feasibility Studies
Includes
Estimating | Cost Advice and Cost Planning | Value Engineering

58
The financial feasibility study
• Aim and purpose
• The purpose of a feasibility study is to provide an objective independent analysis of the development
opportunity and sufficient information for the client to make a decision as to whether the project should
proceed and if so, in what form.
• Characteristics
• The objectives of the developer must be determined before the success of the development can be evaluated
• Feasibility studies are future directed and based on the subjective evaluation of uncertain future events
• There is normally no single optimal solution, as a variety of possibilities exist, each with their own returns,
risks and uncertainties
• A proposed development is limited by the resources available to the developer (financial resources, time,
etc.). The optimum solution is not always feasible within the limits of the developer’s resources
• A feasibility study is unique to a specific project. In spite of certain mutual characteristics, a study is set in a
specific time and context and is applicable to a specific site.

Given the developers objectives and aware of the external constraints, a solution should be sought that
both fits the context and results in a financially viable project.
Property • The steps

development
7 8
1 Contractual Design and
commitments documentation
Inception
Preliminary 6 9
financial feasibility
Final investment
study Construction
decision

2 5 10 10.1

Gaining control of Detailed financial

Marketing Letting
the site feasibility study
10.1.1
3 4 10.2

Detailed feasibility Financial Manage

Selling
research structuring
10.1.2

Terminate

60
The project feasibility framework
• The socio-economic feasibility
• The physical and legal feasibility
• The marketing feasibility
• The financial feasibility
• Provides financial indicators to assess the financial viability of a project.
• Is a data driven decision enabling tool.
• Increases in accuracy from inception through to the final investment decision.

61
 The method of measuring floor areas (construction
area; rentable area)

The method of estimating (per unit; Per m2;

elemental; rough quantities)

Feasibility tools Construction cashflow projections

Escalation calculations (pre-construction; during

construction)

Project timelines (date of estimate……date of last

transfer)

62
The measurement of floor areas T1
Using the Method of Measuring Floor Areas (MOMFA) by SAPOA
• Construction area – intended use is for determining the building’s cost. It comprises of the entire
covered built area on all levels measured over external walls and includes basements. Only the
lowest levels of atria are to be included, and all openings on other levels to form atria, are to be
excluded.
• Building area – intended use is as a parameter for planning developments in accordance with the
permissible Floor Area Ratio (FAR), which is derived from the zoning of the property. It comprises
of the construction area excluding major vertical penetrations, basements and parking.
• Rentable area – intended use is in determining the revenue-producing area of the building which
comprises of the rentable area, supplementary area and parking. It is also used by those analysing
the economic potential of a building. The rentable area is the total area of the building enclosed
by the dominant face, adjusted by deducting major vertical penetrations, but not columns.
• The supplementary area - is any additional revenue-producing component that falls outside the
definition of rentable area. These areas need not be waterproofed and include, storerooms,
balconies, terraces, patios, access/service passages, signage/advertising areas and parking areas
demarcated for use by the tenant, etc.

Accurate measurement, is essential for conducting a competent financial feasibility study, particularly
when estimating the construction costs and the rental income based on a rate/m2 of floor area.
63
Methods of estimating T2
Design stage Traditional cost modelling type User Example
Estimating is an iterative process
Brief stage

Unit Cost/bed, cost/seat that grows in accuracy as more

detailed information becomes
Sketch design

Space Cost/m2
available

QS
Element Cost/functional element

Approximate quantities Cost of grouped items Sources of cost information:

Detailed design

Quantity surveyors rely heavily on

Working drawings

Bills of Quantities
Standard Method of Measurement
their in-house cost information,
supplemented by price books such

Contractor
Operations Cost/operation
Cost of labour, plant as Merkels, BUILD-AID, etc.
Resources material, supervision, etc

Figure 20 - Traditional cost modelling

Source – Adapted from (Kirkham, Ferry, & Brandon, 2007)

64
Construction cashflow projection T3
ESTIMATED CONSTRUCTION CASHFLOW AND PROGRESS PAYMENTS

Time
Expended
(months) Date Cash Flow
Progressive Projected Progress Payments by Accumulated Progress
Expenditure Period Payments
The information provided in the progress
1 Mar 2014 R 793 280,00 R 793 280,00 R 793 280,00 R 793 280,00 payment schedule and indicated on the
2 Apr 2014 R 1 138 190,00 R 1 931 470,00 R 1 138 190,00 R 1 931 470,00
3 May 2014 R 1 483 100,00 R 3 414 570,00 R 1 483 100,00 R 3 414 570,00 projected cashflow graph is useful when
4 Jun 2014 R 1 828 000,00 R 5 242 570,00 R 1 828 000,00 R 5 242 570,00
5 Jul 2014 R 2 172 910,00 R 7 415 480,00 R 2 172 910,00 R 7 415 480,00 calculating the cost of capital / interim
6
7
Aug 2014
Sep 2014
R 2 362 600,00
R 1 914 230,00
R 9 778 080,00
R 11 692 310,00
R 2 362 600,00
R 1 914 230,00
R 9 778 080,00
R 11 692 310,00 interest on debt being drawn down during
8
9
Oct 2014
Nov 2014
R 1 396 870,00
R 879 510,00
R 13 089 180,00
R 13 968 690,00
R 1 396 870,00
R 879 510,00
R 13 089 180,00
R 13 968 690,00
the construction phase.
Grand Total R 13 968 690,00 R 13 968 690,00 R 13 968 690,00 R 13 968 690,00

Projected Construction Cash Flow

R 2500 000 R 16000 000 The typical construction cashflow curve
R 14000 000
R 2000 000
R 12000 000 indicates the 0,6 cashflow factor that is
R 1500 000 R 10000 000 applied to the escalation calculation during
R 8000 000
R 1000 000 R 6000 000 the construction phase. The inverse, 0,4 is
R 500 000
R 4000 000
applied to the cost of capital / interim
R 2000 000
R 0 R 0 interest on debt calculation during the same
1 Mar 2014

Cash Flow
2 Apr 2014 3 May 2014 4 Jun 2014

Progress Payments by Period

5 Jul 2014 6 Aug 2014

Progressive Projected Expenditure

7 Sep 2014 8 Oct 2014 9 Nov 2014

Accumulated Progress Payments

period
65
 Construction cashflow projection T3.1

The previous construction cost cashflow projection

was generated from the ASAQS cashflow simulator
software tool based on the widely accepted typical
construction cashflow S-curve. Expenditure curves on construction contracts
usually show that more money is spent during
Typical Construction Cashflow the second half of the contract period (slow
start, site establishment, high volume/low value
12
Pc = Proportion of Construction Value

10
b of work in the early stages, etc.)
S = a/b a
S = 1,6

The effect of this is that more than 50% of the

8

6 contract value is subject to escalation for longer

than the average period that each payment
4
t = 0,6 would have been, if expenditure was spread
2
evenly across the contract period.

0
0 2 4 6 8 10 12 This is referred to as the “cash-flow factor”, or
Pt = Proportion of Construction Time the “S-curve factor”.
66
Escalation T4

Pre-construction escalation:
• Applies to the period from the base date of the estimate to the
tender date.
• Can be calculated at a percentage per annum compounded monthly
over the applicable period
• Can be calculated using the relevant indices in the Bureau of
Economic Research (BER) Building Cost Index

67
Escalation T4.1

Escalation during construction:

• Applies to the construction period, from date of tender to contract
completion.
• Can be calculated at a percentage per annum, compounded monthly
over the applicable period while factoring in the 0,85 CPAP factor and
the 0,6 cashflow factor
• Can be calculated using the CPAP Work Group 181 for Commercial /
Industrial buildings indices, or Work Group 180 for Residential
buildings as applicable, while factoring in the 0,85 CPAP factor and
the 0,6 cashflow factor
68
Escalation calculations T4.2

Escalation calculations
Base Tender Completion
date date date
L M N
Pre-construction period During construction period

Using a % per annum compounded Using a % per annum compounded monthly:

monthly:
Value at L x % pa/12 x months Value at M x %pa/12 x 0,85 x 0,6 x months compounded
compounded

Using BER: Building Cost Index (a): Using CPAP: Work Group 180 Residential
(b):
181 Commercial
Value at L x ((aM/aL) – 1)) Value at M x (((bN/bM) – 1) x 0,85) x 0,6

Estimated Estimated Estimated

construction cost + escalation = construction cost + escalation = construction cost
at base date at tender date at completion date

69
 A project timeline T6
Project timeline

Building Construction Construction

Base date of Date of Date of last
contract tender commencement completion Opening date
estimate transfer of land transfer
date date date
01/09/2013 01/12/2013 17/02/2014 01/03/2014 30/11/2014 01/12/2014 30/08/2014

3 Months 3 Months

6 Months 9 Months 9 Months

Pre-construction planning period Construction period Operational period

Escalation in construction cost up to tender date Escalation in constuction cost during construction
@ 6% per annum period @ 9% per annum x 0.85 x 0.6

Interest on funding during pre-construction planning period @ 8% per annum

Interest on all funding @ 8% per annum
(Only applicable to the accumulative
Interest on funding during construction period @ 8%
residual cashflow calculation)
per annum x 0.4

70
The cost of capital T5

The financing structure is made up of a combination of equity and debt.

The cost of capital is the weighted average cost of the opportunity cost
on equity and the interest on debt.

Assume that the financing structure of a project is made up as follows:

• 20% Equity @ 8% per annum
• 80% Debt @ 10% per annum

The weighted average cost of capital (WACC) = Equity (20% x 8%) +

Debt (80% x 10%) = 9.6%
71
The cost of capital T5.1

The cost of capital in the pre-construction phase:

• Applies to the period from the base date of the estimate to the tender date.
• Is calculated at a percentage per annum compounded monthly over the applicable
period

The cost of capital during the construction phase:

• Applies during the construction phase, from date of tender to contract completion.
• Is calculated at a percentage per annum, compounded monthly over the applicable
period while factoring in a 0,4 cashflow factor (the reciprocal of the cashflow factor used
in the calculation of escalation)

A longer and more accurate method can be used by preparing a detailed income and
expenditure cashflow covering the pre-construction and construction phase and applying
the interest rate per annum compounded monthly to the cashflow. The 0,4 cashflow factor
will be factored into the construction phase only.
72
Property economics – an influencing factor

Macro Economic Indicators: Property market cycles:

• Business cycle • Property market indicators
• GDP • Rates:
• Rental
• Business confidence index • Vacancy
• Employment rate • Discount
• Government policy instruments: • Capitalization
• Fiscal policy (e.g., taxation) • Operational costs
• Monetary policy (e.g., Interest rates)
• Direct policy (e.g., legislation)

73
Property economics
The effect of fluctuations in the property market

Characteristics Recovery Expansion Over Supply Recession

Phase Phase Phase Phase
Vacancy rates Decreases Decreases Increases Increases

New Low Moderate to high Moderate to high Moderate to low

construction
Space Moderate High Low to negative Low
absorption
Employment Low to moderate Moderate to high Moderate to low Low to negative
growth
Rental rate Negligible to low Medium to high Medium to low Low to negative
growth
74
Data required
The site
• The land use as per the planning data (zoning rights):
• Actual use (Residential, business, educational, etc.)
• Size (In m2)
• Height restrictions
• Density (units per hectare)
• Coverage (building footprint)
• Floor area ratios (FAR)
• Parking requirements
• Building line restrictions, servitudes

75
Financial returns can be measured in a number of ways, such as:

For a letting scheme:

• Initial return For a selling scheme:
• Payback method • Return on capital investment
• Discount cashflow techniques (DCF) • Return on equity
• Net present value (NPV)
• Profitability index (PI) • Return on cash
• Internal rate of return (IRR)
• Modified internal rate of return (MIRR) Applicable to both letting and selling
• Financial management internal rate of
return (FMRR) schemes:
• Accumulative residual cashflow • Residual land value
• Terminal value • Sensitivity analysis
• Marginal returns

76
Measures of return
Letting scheme:
Gross rental income
All measures of return require: Less
• An estimate of the total income of the project Operating costs

• An estimate of the total capital outlay (cost) of Selling scheme:

Gross sales income
the project Less
Sales commission

Total income

Life of investment

Total capital outlay • Land costs

• Escalated construction costs
• Professional fees
• Finance costs
• Marketing costs,
• Etc.
77
Financial feasibility tools
• Measures of return
• Yield/Initial return/1st Rental Gross operating income – Operating expenses Utility costs
years return income (In 1st year of operation) Insurance
Security
• The initial return, is used to Cleaning
calculate the return on a Income Maintenance
project in its first year of Management
Net operating Income Etc.
operation. It is calculated by Initial return =
dividing the net operating Total capital outlay
income (NOI) for one year Expenses
by the total capital outlay
(TCO)
Land costs (holding costs, transfer fees, etc.) Construction costs
Finance costs (raising fees, cost of capital, etc.) (Including escalation, contingencies, etc.)
Professional fees Legal costs
Local authority costs (plan approval, bulk Developers profit
services, etc.) Marketing costs
Etc.
 Measures of return
Total capital outlay (TCO) Net operating income in 1st year (NOI)
Land and associated costs R 14,502,711 Gross rental income (1st year) R 13,949,842
Construction costs including
R 61,788,693 Less: Operational costs R 3,487,461
contingencies, escalation, etc.
Other costs including
professional fees, marketing, R 21,835,004
financing costs, etc.
Total capital outlay (TCO) R 98,126,408 Net operating income (NOI) R 10,462,381

Initial return = NOI/TCO = R 10,462,381 / R 98,126,408 = 10,7%

79
The payback period
The capital outlay is divided by the net operating income to determine how long it
will take to get the investors capital back.

Payback period = TCO/NOI per year

Description Year Cashflows Cumulative

Total capital outlay 0 (R 470,000) (R 470,000)
1 R 104,000 (R 366,000)
2 R 115,500 (R 250,500)
Net operating
income after debt 3 R 128,000 (R 122,500)
Breakeven at:
service and tax 4 R 142,000 R 19,500 3 Years and
5 R 157,900 R 177,400 10 months

80
Discounted The time value of money
cashflow FVn = PV(1 + i)n
techniques (DCF)
Compounded at 5%(i)

• The DCF approach takes into Future value

account the effect of time, also FV = R105
referred to as the time value of Passage of time (n)
money. The time value of Present value 1
money is governed by the fact PV = R100
that R1 in the future will be
worth less today through
discounting, and R 1 now will Discounted at 5%(i)
be worth more in the future
through compounding. n
PVn = FV (1/[1 + i] )

81
Financial feasibility tools
• Measures of return
• Net present value (NPV)
• The NPV is found by subtracting a projects initial investment (total capital outlay) from
the present value of its future receipts (net rental income) over a specified time,
discounted at a rate equal to the cost of capital.
• If the NPV is positive, it indicates that the future income is sufficient to cover all current
costs as well as the interest charged and there will be a surplus.
Financial feasibility tools
Calculating the NPV
Discount rate = 8%

• Measures of return (continued) Year

Total captital
Net
operating
Terminal
Net cashflow
PV of 1
NPV

• NPV
outlay value @8%
income
0 -R 450 000 R - R - -R 450 000 1,0000 -R 450 000
1 R - R 36 000 R - R 36 000 0,9259 R 33 333
• If the NPV is positive (NPV >0) 2 R - R 39 600 R - R 39 600 0,8573 R 33 951
3 R - R 43 600 R - R 43 600 0,7938 R 34 611
you can consider proceeding 4 R - R 48 000 R - R 48 000 0,7350 R 35 281

with the project. If the NPV is 5

6
R
R
-
-
R
R
52 700
57 900
R
R
-
-
R
R
52 700
57 900
0,6806
0,6302
R
R
35 867
36 487
negative (NPV < 0) you should NPV
7 R - R 62 000 R 695 000 R 757 000 0,5835 R 441 702
R 201 232
reject the project in its present
form Timeline in years
0 1 2 3 4 5 6 7
TCO NOI discounted @ 8%
-R 450 000 R 36 000 R 39 600 R 43 600 R 48 000 R 52 700 R 57 900 R 757 000

R 33 333
R 33 951
R 34 611
R 35 281
R 35 867
R 36 487
R 441 702
R 651 232

R 201 232 = NPV

Financial feasibility tools
• Measures of return
• Internal rate of return (IRR)
• The IRR is the discount rate that equates the NPV of the investment opportunity with
R 0.00, because the present value of its future receipts (net rental income) equals the
initial investment (total capital outlay) of the project.
• It is the compound rate of return that the business will earn if it invests in the project
and receives the given future receipts (net rental income).
Financial feasibility tools
Calculating the IRR

• Measures of return Year

Total captital
Net
operating
Terminal
Net cashflow IRR
outlay value
• IRR (continued) 0 -R 450 000 R
income
- R - -R 450 000
1 R - R 36 000 R - R 36 000
• If the IRR is greater than the discount 2 R - R 39 600 R - R 39 600
3 R - R 43 600 R - R 43 600
rate (cost of capital) you can consider 4 R - R 48 000 R - R 48 000
15%

proceeding with the project. 5

6
R
R
-
-
R 52 700
R 57 900
R
R
-
-
R 52 700
R 57 900
7 R - R 62 000 R 695 000 R 757 000
• If the IRR is lower than the discount
rate (cost of capital), you should Timeline in years
reject the project in its present 0
TCO
1 2 3 4 5 6
NOI discounted at a rate that equates the NPV of the project with R 0.00
7

-R 450 000 R 36 000 R 39 600 R 43 600 R 48 000 R 52 700 R 57 900 R 757 000

R 450 000

R - = NPV
Measures of return

The modified (adjusted) internal rate of return (MIRR)

• In the regular IRR calculation, an implicit assumption is made that
cashflows are reinvested at the projects own IRR. This is regarded as a
weakness. The modified IRR (MIRR) assumes that cashflows are reinvested
at the cost of capital rate.
The financial management rate of return (FMRR)
• Is a specialized form of the MIRR
(Cloete 2017:104)

“Both the MIRR and the FMRR are said to be examples of mathematical
overkill….the IRR is only one of many pieces of information that will be used to
make the investment decision. Too exclusive a focus on any single investment
criterion is generally a mistake” Adapted from Phyrr et al (1989:224)

86
Measures of return M10

The accumulative residual cashflow approach:

• Requires the generation of a detailed cash flow.
• The financing costs are added to the cash flow and a cumulative total
of all the income and costs including interest, is calculated for the
project duration.
• When the final sale is made, or the project ends, and the cumulative
total displays a surplus - the project is viable.

87
Financial feasibility tools
• Measures of return
• Accumulative residual cashflow
ACCUMULATED RESIDUAL CASHFLOW CALCULATION

Rental income and expenses Financing costs on funding during:

Local
Property Construction Professional Promotional Tenanting Legal Funding Sale of Monthly Pre-
authority Sundries Total
Date costs costs fees costs costs costs costs Operating building total construction Construction Operationa
costs Offices Retail Parking
expenses planning period l period
period
R R R R R R R R R R R R R R R R R R R

01/12/2013 (7 406 807) (68 250) (7 475 057) (50 083) (7 525 140)
01/01/2014 (363 745) (83 891) (15 190) (292 500) (755 326) (55 479) (8 335 945)
01/02/2014 (545 617) (243 388) (15 190) (14 625) (818 820) (61 001) (9 215 767)
01/03/2014 (793 280) (101 040) (15 535) (88 631) (51 622) (88 085) (1 138 194) (61 410) (3 073) (10 418 444) When the
01/04/2014 (1 138 190) (101 040) (15 535) (88 631) (51 622) (88 085) (1 483 104) (61 822) (7 086) (11 970 455)
01/05/2014 (1 483 100) (101 040) (15 535) (88 631) (51 622) (88 085) (1 828 014) (62 236) (12 032) (13 872 737) cumulative total
01/06/2014 (1 828 000) (101 040) (15 535) (88 631) (51 622) (88 085) (2 172 914) (62 653) (17 912) (16 126 216)
01/07/2014
01/08/2014
(2 172 910)
(2 362 600)
(101 040)
(101 040)
(15 535)
(15 535)
(88 631)
(88 631)
(51 622)
(51 622)
(25 823)
(25 823)
(88 085)
(88 085)
(2 543 647)
(2 733 337)
(63 072)
(63 495)
(24 796)
(32 195)
(18 757 731)
(21 586 758)
displays a
01/09/2014
01/10/2014
(1 914 230)
(1 396 870)
(101 040)
(101 040)
(15 535)
(15 535)
(88 631)
(88 631)
(51 622)
(51 622)
(25 823)
(25 823)
(88 085)
(88 085)
(2 284 967)
(1 767 607)
(63 920)
(64 349)
(38 384)
(43 173)
(23 974 030)
(25 849 159)
surplus, the
01/11/2014
01/12/2014
(879 510) (101 040) (23 131) (88 628) (51 623) (25 823) (88 085)
250 488 209 199 8 897 (82 002)
(1 257 840)
386 582
(64 780) (46 583)
(112 109)
(27 218 362)
(26 943 888)
project is viable
01/01/2015 250 488 209 199 8 897 (82 002) 386 582 (112 860) (26 670 165)
01/02/2015 250 488 209 199 8 897 (82 002) 386 582 (113 616) (26 397 198)
01/03/2015 250 488 209 199 8 897 (82 002) 386 582 (114 377) (26 124 993)
01/04/2015 250 488 209 199 8 897 (82 002) 386 582 (115 143) (25 853 554)
01/05/2015 250 488 209 199 8 897 (82 002) 386 582 (115 915) (25 582 886)
01/06/2015 250 488 209 199 8 897 (82 002) 386 582 (116 692) (25 312 995)
01/07/2015 250 488 209 199 8 897 (82 002) 386 582 (117 473) (25 043 886)
01/08/2015 250 488 209 199 8 897 (82 002) 32 980 000 33 366 582 (118 260) 8 204 436

Total (7 406 807) (13 968 690) (1 818 722) (474 693) (797 676) (464 599) (159 497) (792 768) (375 375) 2 254 396 1 882 792 80 076 (738 021) 32 980 000 10 200 416 (734 300) (225 235) (1 036 445) 8 204 436
The termination value

Making provision in the cashflow for a terminal value:

• Some developers use the original total capital outlay
• It can be calculated by capitalizing the net income at the time of sale using a
capitalization rate relevant to the age of the development ( the older the building
the higher the cap rate, resulting in a lower depreciated value)
• Another method is the Gordon Growth Model
• The shorter the lifespan of the investment, the greater the impact of the
terminal value on the internal rate of return
(Cloete 2021:136)

89
 EXAMPLE OF A LETTING SCHEME

5. Total capital outlay

Estimated total capital outlay on completion (excluding VAT) R 27 218 363

BREAKDOWN OF TOTAL CAPITAL OUTLAY

R2 689 233,48 ; R7406 807 ;
10% 27%
R1334 910
5%

R1818 723 ; Property

7%
Construction

Professional fees

Finance charges

Other

R13968 689 ;
51%

6. Net operating income

Estimated net operating income in 1st year of operation R4 638 990

7. Initial return
The estimated initial return for the 1st year of operation 17,04%

8. Internal rate of return (IRR)

The internal rate of return over a 9 month operating period 26,61%
90
9. Sensitivity analysis
Measures of return – Selling Scheme
For a selling scheme:
• Return on capital investment
• Return on capital investment = Net income from sales / Total capital
layout
• Where the net income from sales is the gross income from sales, less
sales commission, less the total capital outlay
• Return on equity
• Return on equity = Net income from sales / Equity
• Return on cash
• Return on cash = Net income from sales / (Equity – cost of capital
on equity = cash)
91
 EXAMPLE OF A SELLING SCHEME

5. Total capital outlay R 27 218 363

Estimated total capital outlay on completion (excluding VAT)

Financing Structure
BREAKDOWN OF TOTAL CAPITAL OUTLAY
Estimate of R 27,218,363 R2 689 233,48 ; R7406 807 ;
10% 27%
escalated TCO R1334 910
5%

Debt funding R 19,500,000 R1818 723 ; Property

7%
Estimated equity R 7,718,363 Construction

Estimated cost of R 272,097 Professional fees

own capital Finance charges

Estimated cash R 7,446,266 Other

R13968 689 ;
51%
6. Net income from sales R 5 761 637
Returns Estimated net income from sales (excluding VAT)
Estimated selling price R 32 980 000
Return on R5671637/R7718363 Less: Total capital outlay R (27 218 363)
equity = 74,65% Net income from sales R 5 761 637

Return on R5761637/R7446266 7. Non time related returns

cash = 77,38% Return on capital investment 21,17%
Return on equity 74,65%

8. Sensitivity analysis
The senitivity of the return on capital investment in response to a positive or negetive 92
deviation in the net income from sales and/or in the total capital outlay
Residual land value (Cloete 2021:140)
Example of a residual land value calculation:

Escalated net operating income for first year of operation R 1 000 000
Capitalized at 10,5% per annum = Total capital layout
R 1 000 000 / (10,5/100) R 9 523 810
Less: Estimated escalated development cost (say)
(Equal to total capital layout excluding land cost,
transfer costs and the cost of capital related thereto) R 8 150 000
R 1 373 810
Less: Cost of capital at 8% per annum (0,67% per month)
compounded monthly for 12 months
FV = R 1 373 810
PV = R 1 268 523 R 105 287
R 1 268 523
Less: Transfer costs at say 10%
R 1 268 523 x (1-100/110) R 115 320
R 1 153 203
Residual land value (say) R 1 150 000
93
 EXAMPLE OF A RESIDUAL LAND VALUE CALCULATION

5. Total capital outlay (Excluding land value) R 19 383 424

Estimated total capital outlay on completion (excluding VAT and land
value)

BREAKDOWN OF TOTAL CAPITAL OUTLAY

R2 689 233,62 ; R172 110 ;
14% 1%
R734 667
5%

Property
R1818 723 ;
9% Construction

Professional fees

Finance charges

Other
R13968 689 ;
72%

6. Net operating income R 4 638 990

Estimated net operating income in 1st year of operation

7. Residual Property value

Capitalized at 16,5% R 8 731 667
Capitalized at 17,0% R 7 904 753
Capitalized at 17,5% R 7 125 090
Capitalized at 18,0% R 6 388 743
94
8. Sensitivity analysis
9. Sensitivity analysis
The senitivity of the initial return in response to a positive or negetive deviation in the
The sensitivity analysis
net annual income and/or in the total capital outlay in the report

SENSITIVITY OF INITIAL RETURN

19,00% 18,32% 18,43%
18,50% 17,90% 17,94%
18,00% 17,47% 17,48%
17,50% 17,04%
17,00%
16,50% 17,04%
16,63% 16,62%
16,00% 16,23% 16,19%
15,50% 15,85% 15,77%
15,00%
14,50%
14,00%
7.5% 5,0% 2,5% Report -2,5% -5,0% -7,5%

In total capital outlay In net annual income

95
SECTION
General D - RETURNS
qualifications
date
General qualifications
Summary:
a)
b) All
SECTION
General
a) All
date
expenses
Returns
Returns
D - RETURNS
have
do not
qualifications
expenses
vacancies. have
(See
been
take
for
intoescalated
accountto
been escalated
qualifications
ainterest,
to letting
the construction
the
in terms ofconstruction
scheme
completion
redemption of loans or
completion
interest under
5. Total capital outlay
Estimated total capital outlay on completion (excluding VAT) R 27 218 363
a)
b) All
date expenses
Returns
accumulated do not havetake been
residual into escalated
account interest,
cashflow) to the construction
redemptioncompletion
of loans or
General date qualifications
b)
c) Returns
vacancies.
No do
allowance not
(See take into
qualifications
has been account
made in interest,
terms
for tax of redemption
interest underof loans or
a)
b) All expenses
Returns do(See have
not take been
beeninto escalated
escalated
account to
to the
the construction
interest, construction
redemption completion
completion BREAKDOWN OF TOTAL CAPITAL OUTLAY
vacancies.
accumulated qualifications
residual cashflow) in terms of interest underof loans or
date
vacancies. (See qualifications in terms of interest under R2 689 233,48 ; R7406 807 ;
1. c)
INITIAL accumulated
allowanceresidual
NoRETURN has beencashflow) made for tax 17,04%
b) Returns
accumulated take into
do notresidual
take into account interest,
account
cashflow) interest, redemption
redemption of of loans
loans or
or R1334 910
10% 27%
c)
EstimateNo allowance
initial return has been made
on total capital for outlay
tax in first year of operation
c) vacancies.
NoRETURN (See qualifications
qualifications
allowance has been made for tax in
in terms
terms of
of interest
interest under
under 5%
1. INITIAL accumulated residual residual cashflow)
cashflow) 17,04%
1. INITIAL
Estimate
c)Net No RETURN
initial return
operating
allowance incomehason total
in
been
been first capital
made
made yearforfor outlay
tax in first year ofRoperation
(NOI)
tax 4 638 990 17,04% R1818 723 ; Property
1. INITIAL RETURN
Estimate initial return on total capital outlay in first year ofRoperation 17,04% 7%
Total
Estimate
capital outlay
initial return
(TCO) 27 218 363
1. Net operating
Initial
INITIAL incomeonintotal
return (NOI/TCO)
RETURN first capital
year (NOI) outlay in first year of R operation
4 63817,04%
990 17,04%
17,04% Construction
Total
Net
Estimate capital
operating outlay
income
initial return (TCO)
in
on total
on first year
total capital outlay(NOI) R 274
outlay in first year of operation 218
638 363
990
Net operating
Initial
Total return
capital income
(NOI/TCO)
outlay (TCO)in firstcapital
year (NOI) in first year ofRRoperation 274 218
638 990
17,04%
363
Professional fees
Qualifications
Total capital outlay (TCO) R 27 218 363
Initial
Net
The return
operating
returm does(NOI/TCO)
income
not cater in first
in first yearfollowing:
for year
the (NOI)
(NOI) RR 44 638 17,04%
638 990
990 Finance charges
Initial return
Qualifications (NOI/TCO) 17,04%
a)TotalThe capital
projectoutlay (TCO)
may(TCO) not reach full maturity during theRRfirst 27 218
27 218 363
year363
of
The returm does not cater for the following: Other
Qualifications
Initial return
operation (NOI/TCO)
(NOI/TCO) 17,04%
17,04%
Qualifications
a) The project maycater not reach
The
b) returmRecoupment does not thefull
forduring maturity during the first year of
following:
The returm
operation does notofcater capital for the following: the income bearing period of the R13968 689 ;
a) The
Qualifications project
investmentor may not
realizationreach full
value maturity during the first
of the investment at theyearendof 51%
a) The
b) returm project
Recoupment may
ofcaternot
capital reach
during full maturity
the income during
bearingtheperiod
first year ofof
of the
The operation does not
the investment period cater for
for the
the following:
following:
operation 6. Net operating income
a)
b) investmentor
The project may
Recoupment ofrealization
not reach
capital
not reach value
during fullthe
full of the
maturity
maturity investment
income during theat
bearing
during the theyear
first
period
first end
year of
of of
the
b) Recoupment of capital during the income bearing period of the Estimated net operating income in 1st year of operation R4 638 990
the investment
operation
investmentor period
2. INTERNAL RATE OFrealization
investmentor RETURN (IRR)
realization
value of the investment at the end of
value of the investment at the end of 26,61%
b) Recoupment of capital during
capital during the the income bearing bearing period
period of of the
the
the investment
Estimated internal
the investment rateperiod
of
period return over aincome 9 month operating period 7. Initial return
2. INTERNAL realization
RATE OF realization
investmentor RETURN (IRR) value of
value of the
the investment
investment at at the
the end
end ofof 26,61%
See Figure 31: Internal rate of return calculation The estimated initial return for the 1st year of operation 17,04%
2. INTERNALthe investment
Estimated internal
RATE OF rate period
of return
period
RETURN (IRR) over a 9 month operating period 26,61%
2. INTERNAL RATE OF RETURN (IRR) 26,61%
See Figure
Estimated 31: Internal
internal rate of rate of return calculationoperating period
2. Qualifications
Estimated
INTERNAL internal
RATE OF rate
RETURNof return
return(IRR)
over
over aa 99 monthmonth operating period 26,61% 8. Internal rate of return (IRR)
2. INTERNAL
See Figure RATE
31: OF RETURN
Internal rate (IRR)
of return calculation 26,61%
a) See Figure
Income
Estimated internal 31:
and Internal
internal rateexpenditure
rate of rate
of return of
return over return
has been calculation
over aa 99 monthtaken
monthinto account
operating at the
period The internal rate of return over a 9 month operating period 26,61%
Qualifications
Estimated operating period
See beginning
Figure 31: of each month
Internal rate of return calculation
a)See Income
Figure 31:
Qualifications andInternal
expenditure rate ofhas returnbeencalculation
taken into account at the
Qualifications
b) No provision for escalation on income and expenditure has been 9. Sensitivity analysis
a) beginning
Income and ofexpenditure
each monthhas been taken into account at the
a) Income
made inand
Qualifications theexpenditure
first year of has been taken into account at the
operation The senitivity of the initial return in response to a positive or negetive deviation in the
Qualifications
b) No provision
beginning of for escalation on income and expenditure has been
each
a) beginning
Income and each month
ofexpenditure monthhas been taken into account at the net annual income and/or in the total capital outlay in the report
a)
b) Income
made
No inand
provisionthe expenditure
first
for hasonbeen
year of operation
escalation income takenandinto account athas
expenditure the been
3. b) No
NET PRESENT provision
beginning VALUE for (NPV)
of each
each escalation
month on income and expenditure has been R 4 823 495
beginning
made in of month
b) made
Estimated
No in the
net
provisionthe first
first
presentfor
year
year
value of
escalation
operation
ofover
operation
on a 9 month
income operating
and period
expenditure has been
3. b) No provision
NET PRESENT VALUE for(NPV)
escalation on income and expenditure has been R 4 823 495
See Figure 32: Netfirstpresent value SENSITIVITY OF INITIAL RETURN
3.
madenet
made
Estimated
NET PRESENT
in the
in the
present
VALUE
first year of
year
value
(NPV)
of acalculation
operation
operation
over 9 month operating period RR 44 823
823 495
495 19,00%
See Figure
Estimated 32:
net Net
present presentvalue value
over calculation
a 9 month operating period
operating period
18,32% 18,43%
3.
3. NET PRESENT
PRESENT VALUE
Qualifications
NET VALUE (NPV) (NPV) RR 4 823 495
4 823 495 18,50% 17,90% 17,94%
See
As Figure
Estimated
for IRR 32: present
net Net present value value
over calculation
a 9 month operating period 18,00% 17,47% 17,48%
Estimated
Qualifications net present value over a 9 month operating period
See Figure
Figure 32: 32: Net
Net present
present value value calculation
calculation 17,50% 17,04%
See
As for IRR
4. Qualifications
ACCUMULATIVE RESIDUAL CASHLOW R 8 204 436 17,00%
As for IRR accumulated residual cashflow over a 9 month operating 16,50% 17,04%
Qualifications
Estimated
Qualifications 16,63%
4. ACCUMULATIVE RESIDUAL CASHLOW R 8 204 436 16,62%
As for
for IRR
IRR 16,00% 16,23%
period
As
Estimated accumulated residual cashflow over a 9 month operating 16,19%
4. ACCUMULATIVE RESIDUAL CASHLOW RR 88 204
204 436
436 15,50% 15,85%
See Figure 33: Accumulative residual cashflow calculation 15,77%
period a 9 month operating 15,00%
4.
4. Estimated
ACCUMULATIVE
ACCUMULATIVE accumulated RESIDUAL residual
RESIDUAL CASHLOW CASHLOW cashflow over a 9 month operating RR 8 204 436
8 204 436
See Figure
Estimated 33: Accumulative
accumulated residual residual
cashflow cashflow
over a calculation
9 month operating 14,50%
period
Estimated
Qualifications accumulated residual cashflow over a 9 month operating
See Figure 33: Accumulative residual cashflow cashflow calculation
calculation 14,00%
period
period
a) All income and expenditure, including interest
Qualifications is taken into 7.5% 5,0% 2,5% Report -2,5% -5,0% -7,5%
See
See AllFigure
Figure 33: Accumulative
33: Accumulative residual
residual cashflow
cashflow calculation
calculation
a) account
Qualifications
Qualifications
income and expenditure, including interest is taken into In total capital outlay In net annual income 96
a) account
All income
Qualificationsincome and and expenditure,
expenditure, including including interest
interest isis taken
taken intointo
a) All
Qualifications
Optimizing the return O2

Return = NOI/TCO = (GOI – OE)/TCO

NOI = Net operating income GOI = Gross operating income

TCO = Total capital outlay OE = Operating expenses

97
 Yield = NOI/TCO

Net operating income = Total capital outlay =

Gross operating income Land costs (holding costs/transfer fees)
(rental income, early occupation, reduced Finance costs (capital structure/raising fees)
vacancy rates, increase rentable area, etc.) Professional fees
Less: operating expenses Local authority costs (bulk services/plan approval)
(utility costs, cleaning & maintenance, Construction costs:
management & rental collection, insurance,
etc.) (design/value engineering/contract period/escalation)
Legal costs
Developers profit
Marketing costs
Etc.

98
Financial feasibility tools (continued)
• Optimizing the return (Continued)
• Increase the gross operating income
🟠 Reduce the total capital outlay
• Obtain interim income through
• Early occupation 🟠 Increase the gross operating income
• Phased completion 🟠 Decrease the operating expenses
• Up front deposits
• Increasing the rental income
• Increase the rentable area
• Increase the quality/cost ratio
• Decrease the vacancy rate by ensuring the right location, quality, flexibility and functionality
• Decrease the operating expenses
• Ensure the lowest quotes
• Increase recoveries from tenants
• Ensure an optimum capital cost/maintenance ratio through life cycle costing
• Rental and operating expense escalations should be in sync
• Ensure the optimum use of energy through energy efficient, cost reduction design and
technology driven management systems
Financial feasibility tools (continued)
• Optimizing the return (continued)
• Reduce the capital outlay
• Decrease the land value/cost 🟠 Reduce the total capital outlay
• Use the correct value (not an inflated value) 🟠 Increase the gross operating income
• Negotiate a better price or terms of payment
• Decrease the cost of capital 🟠 Decrease the operating expenses
• Obtain the best interest rates
• Shorten the planning and/or construction period
• Delay large payments
• Decrease the professional fees and marketing costs
• Decrease the construction costs
• Negotiate fees (and commissions)
• Reduce any overlap in fees
• Ensure efficient and effective marketing
• Decrease the cost of construction
• Obtain the lowest construction price
• Decrease the planning and/or construction period
• Use cheaper building materials
• Ensure efficient and cost-effective specifications and design
• Ensure disciplined project planning and execution
• Pass tenant related installation costs on to tenants
• Compare the value of bulk, and early payment discounts with the risks and the cost of capital
APC Interviews
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definitive interpretation of any law. Anyone contemplating action in respect of matters set out above should obtain advice
from a suitably qualified professional adviser based on their unique requirements.