Define what the budget includes before comparing totals
Separate land, construction, professional and other soft costs, financing, contingency and selling costs. Give each estimate a date, source, scope and confidence level. Ask whether quoted figures include the same items and tax treatment before combining them. Record exclusions rather than allowing them to disappear between a contractor’s estimate and the development budget.
CMHC’s affordable-housing feasibility checklist distinguishes the initial capital budget, operating budget and construction cash-flow planning. That separation is useful for this exercise: a project total does not tell the team when money is needed. Keep an explicit list of items that need an accountant, lender or cost consultant’s review before the model supports a commitment.
- Date estimates and record their scope.
- Show exclusions and unresolved allowances.
- Keep total cost and cash timing as separate questions.
Work through a small sale-project example
Consider a fictional six-unit project. Land is $400,000, construction is $1,500,000, soft costs are $220,000 and financing is $120,000. A chosen contingency of 10% of construction adds $150,000, bringing the modelled cost to $2,390,000. This particular contingency basis is part of the example, not a universal budgeting rule.
At an assumed $500,000 per unit, gross sales are $3,000,000. Assumed selling costs of 3% leave $2,910,000. The difference from modelled cost is $520,000, approximately 17.9% of net sales. Call this a modelled surplus before any excluded items, not a guaranteed return. Another reviewer should be able to reproduce every step from the stated inputs.
- State the basis used for contingency.
- Distinguish gross sales from net sales.
- Label the denominator used for the margin.
Change cost and income together
Now raise construction cost by 10% and reduce the assumed sale price by 5%. Construction becomes $1,650,000 and the same 10% contingency basis produces a $165,000 reserve. Keeping the other inputs unchanged, modelled cost rises to $2,555,000. Gross sales fall to $2,850,000 and net sales, after the assumed 3%, become $2,764,500.
The remaining modelled surplus is $209,500, roughly 7.6% of net sales. The exercise does not assign a probability to this outcome. It demonstrates that individually plausible changes can interact. Ask which input the team can improve through design, procurement or additional evidence, and which exposure it would simply have to accept.
- Change related assumptions in the same scenario.
- Keep a dated copy of the base case.
- Identify which decision changes under the downside.
Treat a rental strategy as a different model
For rental projects, distinguish potential rent, vacancy assumptions, operating expenses and financing cash flows. Define how concessions, taxes, insurance, maintenance and reserves are treated so that figures from different sources remain comparable. An operating estimate should not silently include debt payments in one version and exclude them in another.
If using net operating income divided by an assumed capitalization rate to explore a value, label that output as a scenario. It is sensitive to both inputs and is not an appraisal. Compare asking rents with care: an advertised amount is not proof of a signed lease or stabilized income. Record the observation date, unit type and material differences instead of averaging incompatible examples.
- Define the operating-income calculation consistently.
- Keep debt service and operating expenses distinguishable.
- Label asking-rent evidence and valuation assumptions.
Test timing and cash availability separately
Add a simple delay test alongside the base model. If this fictional project carries an additional $8,000 per month for three months, the extra allowance is $24,000. Explain what the monthly amount includes and avoid adding costs already present in financing or another budget line. A flat monthly allowance is a planning shortcut, not a replacement for a draw-by-draw financing schedule.
Then sketch the timing of major payments and expected receipts. A positive final surplus can coexist with a period when the project needs more cash than is available. Ask the lender or financing adviser to review the actual funding conditions, availability and timing rather than assuming a modelled value can be borrowed.
- Specify what the monthly carry allowance covers.
- Check for double-counted financing costs.
- Map the largest funding gaps before committing.
Write the investment decision in plain language
Finish with a short decision note: the version reviewed, the evidence still missing, the base outcome, the downside outcome and the conditions for proceeding. State whether the target is a margin on revenue or a return on cost. Those measures use different denominators and should not share an unlabeled percentage column.
Use a residual land calculation only as a negotiating scenario. In the base example, a chosen 12% margin on $2,910,000 of net sales leaves $570,800 for land after the $1,990,000 of non-land costs. That arithmetic is not an appraisal or an instruction to offer that amount. Revisit it when costs, revenue or permissions change.
- Define the target measure and its denominator.
- List evidence required before the next commitment.
- Keep earlier scenarios so changes remain explainable.
