Why do you need a Project Feasibility Study?

Failing to plan is planning to fail.

If you are planning a property investment in Spain, you need to be sure that the planned project will deliver the returns that you and other investors and shareholders are expecting. While building properties, developments or resorts has been shown to be an excellent long-term investment, there are uncertainties and the possibilities of delays and running over budget, which need to be mitigated to maximise profit in the short and long term.

As we recently wrote on our blog about why projects go over budget, an incredible nine out of ten projects experience cost overrun and large projects typically take 20% longer to finish than expected and are up to 80% over budget. For an investor, looking at the bottom line and calculating profits, this is unacceptable!

In order to avoid issues and embark on your project, the planning stage is absolutely critical. As the well-known phrase goes, “failing to plan is planning to fail”, and this is certainly very true in this case!

You should not start to look for finance or start the ball rolling on a project before you know that it can be delivered within the budget you need for it to be profitable. We recommend that every developer or property investor invests in a detailed and complete project feasibility study before making a purchase and certainly before the first brick is laid, or the foundations are poured. In our experience, project feasibility is the difference between success and failure.

But let’s back-up a little and start with the basics and explain what a feasibility study is.

What is a feasibility study?

According to Investopedia, “A feasibility study is a detailed analysis that considers all of the critical aspects of a proposed project in order to determine the likelihood of it succeeding.” They add that although ROI is a key measure for success, there are also other factors to be considered during a feasibility study, including community reaction and environmental impact.

This is an involved process, which analyses all aspects of the project, as Investopedia adds, “the feasibility study might include a cash flow analysis, measuring the level of cash generated from revenue versus the project’s operating costs. A risk assessment must also be completed to determine whether the return is enough to offset the risk of undergoing the venture.”

What exactly you analyse, will obviously depend on the project and the objectives, but the more you know, the more certain you can be in your investment decision and the more confidence you can have in starting the project.

What happens if the numbers don’t stack up during the Project Feasibility stage?

It is not always the end of the project, as you might think.

The initial stage of planning and feasibility is when you need to ensure that everything is right and that the project will deliver what you want. If the numbers don’t stack up then you need an expert to refocus the direction and scope of the project and introduce Value Engineering methods. Through Value Engineering you can cut costs and improve efficiencies and the savings can be extraordinary.

During a project with Marriott, we were able to cut 5 million dollars from the initial plan and have saved our clients thousands through clever planning, management and negotiation. We achieved substantial economies of scale by “volume negotiations”- guaranteeing a fixed price for a period to deliver several phases – thus eradicating inflationary rises. So just because the numbers don’t stack up initially, it doesn’t mean the project can’t work, it may just need some modifications and rethinking to enable it to go ahead and be a success.

Why is it important?

We believe that no project should be undertaken without a project feasibility study, as it is the only true way to know whether your project has the potential for success.

A comprehensive project feasibility study allows a project manager and an investor to understand all the possible benefits and drawbacks to undertaking a project. It also minimises risk for investors and managers, by ensuring every potential issue or cost has been taken into consideration.

It allows you to look at both the practicality and the viability of your concept, digging down into legal and technical issues, as well as of course ensuring it makes financial sense. It also identifies potential obstacles and allows you to make a plan for overcoming those issues, evaluating the costs and the time needed to overcome the problems and decide whether it’s worth doing.

Without a feasibility study it is very difficult to create a realistic project plan and a budget which factors in all potential issues. On larger, more complex projects such as large developments, residential complexes or hotels, there are even more things to consider and the impact of one unwelcome surprise can be enormous.

Knowledge is definitely power in this case, which is why we believe that project feasibilities are vital.

Why can people be reluctant to do a project feasibility study?

If there is a lot of passion and excitement about a project and the team leaders really believe that it will be a success, they can feel that a project feasibility is unnecessary. In other cases, people don’t want to spend the money or take the time to really drill down into these details.

But in our experience, it is always a false economy, as unexpected issues which are discovered during the course of the project, will always be more difficult to solve on the fly, than to factor into the project plan and budget.

The Benefits of a Project Feasibility Study in Action

In over 20 years of providing professional project management on the Costa del Sol, we’ve helped hundreds of people to achieve project success and also advised them when it’s not a smart move to go ahead with their project. Here is an excellent example of how a feasibility study helped one of our clients make the right decision on a project.

A client was interested in purchasing a plot in Mijas. After investing a lot of time and effort with no clear answers from any of his consultants he approached MDCI and we supplied him with a due diligence report on which he could make a correct decision whether to continue or stop the process.

During the investigation process, we discovered that although the plot was “urban” and therefore had permissions to build, that the infrastructure needs to supply the number of units were costly. Our report revealed that additional transformer stations had to be built to supply sufficient power, because of the layout of the plot many retaining walls were needed and sewage pumping stations were also required. In addition, because of the low height restrictions applicable to the units on the plot, an additional internal road had to be built.

Once these additional costs were factored into the “product cost” calculations, they diminished the potential returns to such a point that they decided not to go ahead, as the investment was no longer viable. While the client had to make a small investment to get all the right information, he saved money and effort in the long term, as he and his funding partners avoided making a costly mistake.

When clients request our planning and feasibility studies right from the outset, an investor can rely on accurate and realistic investment needs and limits and plan on the potential profit. Our detailed studies are prepared by qualified professionals and include cost projections, cash flow projections, land valuation and licensing, and due diligence investigation and fulfilment.

How can we help?

To have confidence and to be able to prove to backers and stakeholders that the project should get the green light you need detailed plans and feasibility studies prepared by qualified professionals.

MDCI offer project feasibility studies on the Costa del Sol. Our team can work with you to deliver cost projections, guide you through financing options and help you avoid the common pitfalls. Our cash flow projections enable you to hit key payment deadlines without delaying the project.

A key part of MDCI’s project management service is Provisional Cost Modelling, which involves an in-depth review of all anticipated costs to determine whether the project will be viable and ultimately profitable. Our wealth of Project Financing experience means that we can guide our clients effortlessly through the multitude of financing options, highlighting the pitfalls to be avoided and making recommendations that will achieve the most favourable outcome.

We can also offer surveys and valuations, investigate licencing and permit issues and undertake due diligence investigation and fulfilment. Contact us to find out more.

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