Managing cash flow throughout a development project is one of the most important components for success. Understanding which costs occur and when, allows you to forecast and plan for the capital you’ll be needing.
The S-Curve for Property Development
The expenditure for most developments does not involve spending the same amount each month. In the early stages of the project costs tend to be lower. This is when you are doing your planning and the early stages of construction. Then spending tends to rise rapidly as construction gets going, and finally in the latter stages of development, the costs reduce as construction winds down and you wait for consents and paperwork to come through.
This cost distribution can be represented in a S-shaped curve and this model is often used to forecast the construction costs in development feasibility. The graph shows the percentage of work completed vs the percentage of cost incurred.
Performing a Cashflow Forecast or Projection
In addition to understanding when your costs will happen, it’s also helpful to have an estimate of what the costs will be. A quantity surveyor can provide an accurate assessment of this. However, for the broad purposes of planning, the following percentages may be useful. This data has been collected by the team at Vincent Capital and is specific to the New Zealand market. It outlines each building stage in the approximate order it would be completed, and the percentage of the total construction cost associated. It doesn’t include any consulting fees.
Tips for Managing your Project’s Cash Flow
There are a number of ways you can plan ahead to help manage the cash flow for your project.
- Make sure payment terms work for you. Review the building contract so you are not paying large upfront payments and negotiate a penalty clause with your builder so you get paid for timing overruns.
- Be mindful of where delays are likely to occur and how these would affect your expenditure. A delay in the planning stages will not have as large an impact as one in the later stages of your project, such as waiting for your titles or council consent to come through. Plan ahead to avoid delays where possible.
- Work closely with your finance provider so that the drawdown dates match the expected construction progress of your project.
- Think about your GST profile and preference. Vincent Capital can provide development finance on a GST inclusive or exclusive basis and, depending on the specifics of the project, we can assist with the payment of the GST due on drawdowns.
If you would like to know more about how Vincent Capital works with our clients to ensure the terms of a loan are tailored to maximise your success, or if you’d like more information on planning for cash flow management during a development project, please get in touch. Our team is always happy to chat and to share our extensive expertise in property development finance.