Every construction project progresses through a series of iterative stages. In this article series, we break down each interconnected phase and explore why they are crucial to the successful completion of a project.

In Part 1 we introduced Stage 0: Project Feasibility and Business Case Development. We focussed on some fundamental requirements when preparing a business case for presentation to potential equity investors and debt finance institutions.

The first article described the process of achieving financial close and then expanded on the requirement for a market study and the importance of selecting the right team.

Part 2 of this series describes the development of the feasibility study and the financial model culminating in a comprehensive business case document that is used to seek funding and attain financial close.

THE FEASIBILITY STUDY

Although the market study does imply a certain feasibility, it should not solely be relied upon to determine a project’s viability. Rather, the market study ought to form part of the overall feasibility study.

Using the insights derived from the market study as well as other data points, a financial model is developed that will confirm the strength of the business case and whether it is a project worth pursuing. The market study, data points and financial model are collectively known as the feasibility study.

We use the market study data to prepare a preliminary rough order of magnitude brief highlighting what rooms and areas would be required to make such a building work.

Once this preliminary brief is composed, it is presented to an experienced quantity surveyor to prepare a rough order of magnitude estimate. This estimate is incorporated into an initial financial model and a baseline conclusion regarding the financial feasibility of the project is drawn.

The Financial Model

As one of the main components of the feasibility study and overall business case, the financial model seeks to predict how the project will perform over a specific operational period. Generally, a 10-year horizon is calculated.

A crucial metric in the model forecasts when the project is set to turn its first profit. This is important as projects that take too long to break even and become profitable are not considered financially viable.

In a hospital model, the prediction also takes into account the bed occupancy expectations – clearly one cannot expect to run at 100% occupancy within the first year. There is a steady build-up of patients.

There are many other metrics that are considered when making an accurate prediction of the commercial and operational viability of a project.

Conceptual Design and Reports

Accurate figures are required when developing a business case for approval at DFIs and indeed for persuading equity investors who have very exacting due diligence requirements.

To achieve more accurate figures as part of the final business case, a more accurate design is required with inputs from the full consultant team: the architects develop their previously approved concept; the quantity surveyor prepares an elemental estimate (one degree of accuracy greater than a Rough Order of Magnitude Estimate) on the basis of the refined concept; while the engineers prepare concept design reports outlining the proposed costs for the provision of building services reticulation.

However, it is at this point that confusion regarding the six-stage construction project may appear: the blending of stage deliverables. The stages of a construction project are iterative and inevitably overlap. In a project where equity and debt finance are required, Stage 0 will partially overarch Stages 1 and 2.

The financial outcomes of these designs, estimates and concept reports are incorporated into a revised financial model resulting in a more refined forecast.

Business Case Packaging

Final checks are made and all the documents generated are packaged into a coherent volume which may be submitted to potential equity investors and debt finance institutions for them to review, identify as potential projects and then conduct their own financial and social developmental due diligence.

The submission and presentation to funders is potentially long and this is because additional information may be requested by the funders for them to conclude their own due diligence processes.

To streamline, every effort must be made to create a business case document that clearly adheres to the requirements set by the selected DFIs and equity investors.

It cannot be overemphasised that a business case which is not specifically tailored and accurate may become a poisoned chalice: every failed attempt, followed by another presentation to a different investor creates an impression of a potentially untenable commercial risk that would not pass financial muster and would therefore be considered a waste of time.

Conclusion

Articles 1 and 2 briefly outline the complex and technical work that comprises the development of a comprehensive business case to attain financial close.

At times it may be that the business case tends to focus on the commercial viability of a project, however, other aspects should be considered like the potential positive social development impact – job creation – for example.

The preparation of a sound commercial and social development business case is important when approaching development finance institutions who have a social development and upliftment mandate attached to their lending criteria.

To be sure, a positive business case with a promising financial model is rarely achieved on the first pass and preparing three or four initial options should be developed concurrently. Through a process of deduction, the best option should be chosen.

This concurrent workflow process forms part of the lean design principles we aspire to. We are able to prevent a merry-go-round of whittling away and endless iterations that often scupper the feasibility and lead to significant abortive work and time wasting.

Preparing a compelling business case is an onerous process that can absorb several months’ worth of work and the costs attached should be carefully considered.

As with any project, preparation is key, it is the foundation upon which the success or failure of a project depends. Without a properly defined business case with reliable, measurable figures and backed up with solid market data, achieving financial close will prove incredibly difficult, if not impossible.

Further Resources

The internet is a great source of information. Some search entries that will yield positive information are

– Construction Project Feasibility Studies

– Development Finance Institutes like:

• IFC
• World Bank
• African Development Bank
• DBSA
• Trade and Development Bank

– Property Development Market Research
– Construction Development Business Case
– Graceland Feasibility Studies Page