The report that resizes your development facility

There is a moment on a development facility worth planning for. The offer is agreed, the land has exchanged, the programme is set — and then the lender's monitoring surveyor produces an initial appraisal report. If it prices the build higher than your cost plan did, the facility is resized to match.

That difference has to come from your equity, which is usually already committed. The good news is that it is entirely foreseeable, and a cost plan built the right way avoids it.

What the initial report is actually testing

The monthly visits are a verification exercise: has the work certified been done, and was the money spent on it. The initial report is something different. It is an independent view of whether the scheme you have described can be built for the money you have said it will cost, in the time you have said it will take.

The surveyor takes your cost plan and prices it against their own data — actual tender returns from comparable schemes in that region, current material and labour rates, and their view of the site's particular difficulties. They look at the programme against the season, the procurement route, and whether your contingency is adequate for the risk profile.

They also form a view on you. A cost plan built from a proper measured schedule reads differently from one built from a contractor's verbal estimate and a spreadsheet, and the report says so.

Where cost plans are usually light

Preliminaries. Site set-up, welfare, security, scaffolding, plant hire, temporary works and site management typically run at 10% to 15% of build cost on a small scheme, and they are frequently either understated or missing entirely from a developer's own appraisal.

Externals. Drainage, service connections, roads, driveways, landscaping and boundary treatments. On a small site these run to 8% to 12% of the total, and they are worth costing properly early.

Professional fees beyond the ones you have already paid. Building control, structural engineering, party wall awards, warranty inspections, sales agents and legal fees on plot sales. And the finance costs themselves — arrangement fee, monitoring fees, interest and exit fee — which belong in total project cost and often are not there.

Abnormals. Ground conditions, contamination, asbestos in a conversion, an unexpected level change. A contingency of 5% on a new-build on a clean greenfield plot is defensible. The same 5% on a 1960s office conversion is not, and the surveyor will say so.

What a resized facility does to your equity

Take a scheme with a £1.4m total cost, funded at 85% loan to cost — £1.19m of debt against £210,000 of your money. The surveyor marks the build up by £140,000. Total cost is now £1.54m, and at the same 85%, the facility rises to £1.31m.

That looks fine until you notice your equity requirement has gone from £210,000 to £231,000, and the £140,000 of extra cost is real money that has to be spent. Worse, if the lender holds the facility at the original £1.19m because the loan to gross development value ceiling binds instead, your equity requirement is £350,000. You have found £140,000 you did not have.

This is why the initial report, not the offer, is the moment a development facility becomes real.

How to get in front of it

Have the cost plan prepared by somebody who prices for a living. A quantity surveyor's schedule on a £1.5m scheme costs a few thousand pounds and routinely pays for itself several times over in what it prevents.

Put the contingency where the risk is. A blanket 5% across everything reads weaker than 3% on the new-build element and 15% on the part of the scheme involving an existing structure that has not yet been opened up.

Cost the whole project, not the construction. Finance costs, professional fees, warranties, sales costs and the section 106 or CIL payment all belong in total project cost, and a lender sizing against a cost plan that excludes them is sizing against the wrong number.

And build the programme with a real winter in it. A programme that assumes twelve months of dry groundworks is a programme that will need an extension, and extension fees on development facilities are not small.

The version worth acting on

Occasionally a scheme only works on a cost plan the market says is optimistic. That is worth knowing at appraisal stage, while there is still room to reshape it — a smaller first phase, a different procurement route, a revised contingency, or a facility structured to release the land differently.

Most schemes that look marginal on a first cost plan turn out to be workable once the plan is right. Having that conversation early is usually the most valuable thing we do on a development case, and it is the part clients tell us they did not get elsewhere.