CONSTRUCTION

ECONOMICS
Saipol Bari Abd Karim
Faculty of Built Environment
University of Malaya
saipolbari@um.edu.my
O: 03-79676834
M: 016-3968810
FEASIBILITY
STUDIES
CRITERIA OF A FEASIBLE PROJECT
When the expected return meets the criteria specified
No changes to other factors; client will be satisfied as long the project is on
The return, expenditure & time meet the economic condition & requirement.

What does it means when a
project is said to be feasible?
These criteria may change depending on the financial
condition & clients objective.
1. Technology
The necessary construction technology is viable
Competent contractors exist & familiar with the technology
Familiar with the location
Adequate resources (human, physical, financial)

2. Uncertainty level
Feasibility study is conducted at very early stage. Therefore a lot of data
are not known
A lot is assumptions to be made experience & skills
Degree of uncertainty is not so great
Estimates & calculations not in doubt
High confidence level towards the results and can be implemented

3. Economic
Economic conditions meet the clients criteria
During high inflation, reasonable for small projects may have one year
payback period; 2 years for big projects simple payback period
Usage of manpower can be minimized or maximized depending on the
location, unemployment issues, population scale etc.
Feasibility study must show:
Costs to be considered in preparing your feasibility study/report
Excluded
Land cost & its premium payment
Cost of finance & interest rate
Cost of fittings & furniture (or known as FFE)
Effects of inflation and tax

Included
Total construction cost
Building cost
External works/ Infrastructure (site preparation, earthwork,
storm water drainage, sewerage reticulation, STP, water
reticulation & hydrants, road works, TNB subs, external M&E
services, landscaping)
Preliminaries
Contingencies & design reserve
Other pre-development costs
CIDB Levy
Professional fees
Plan & submission fees
Capital contributions
Survey & GIS works
Soil investigation
Developers overhead & maintenance costs
Sales, marketing, legal
Total gross development value (development
income/sales income)
Sales income
Rental income
Profit
Excluded
Land cost & its premium payment
Cost of finance & interest rate
Cost of fittings & furniture (or known as
FFE)
Effects of inflation and tax
Included
Total construction cost
a) Building cost
b) External works/ Infrastructure (site
preparation, earthwork, storm water
drainage, sewerage reticulation, STP, water
reticulation & hydrants, road works, TNB subs,
external M&E services, landscaping)

Preliminaries
Contingencies & design
reserve
Other pre-development
costs
a) CIDB Levy
b) Professional fees
c) Plan & submission fees
d) Capital contributions
e) Survey & GIS works
f) Soil investigation
g) Developers overhead & maintenance costs
h) Sales, marketing, legal
Total gross development
value (development
income/sales income)
a) Sales income
b) Rental income

Profit
Costs to be considered
Item Yardstick/ Measure
Building cost Cost/m2 GFA
Infrastructure cost
Site preparation Area (Hectare/Acre)
Earthwork Area (Hectare/Acre)
Storm water drainage Area (Hectare/Acre)
Sewerage reticulation Area (Hectare/Acre)
STP Total population (Population equivalent, PE)
Water reticulation & hydrants Area (Hectare/Acre)
Road works Area (Hectare/Acre/m2)
TNB substations
- Single chamber
- Double chamber
Number
External M&E works Area (Hectare/Acre)
Landscape Area (Hectare/Acre)
Preliminaries 5% - 10% of construction cost
Contingencies & design reserve 5% - 10% of construction cost
Other pre-development costs
CIDB levy 0.125% of construction cost
Professional fees 8% - 10% of construction cost + 5% tax
Plan & submission fees
- Planning
- Building
- Earthwork

Area (Hectare/Acre)
No/m2
Area (Hectare/Acre)
Capital contributions
- TNB
- JBA (SYABAS, SAiNS, PAiP, SAMB, PBA, SAJ, AKSB, SATU, SADA, LAKU)
- IWK
- JPS
- Telco (TM, Maxis etc)

Area (Hectare/Acre)
Area (Hectare/Acre)
1.65% of income
Area (Hectare/Acre)
Area (Hectare/Acre/Unit)
Survey work
- Boundary
- Pre-computation plan
- Subdivision/ strata

Area (Hectare/Acre)
Unit/m2
Unit/m2
Soil investigation Number per hectare/acre
Developers overhead & management cost 1% - 2% of construction cost
Sales, marketing, legal fees 1% of income/sales of development
Total GDV (development income/sales income)
- Sales income
- Rental income

Cost/m2 or Cost/unit
Cost/m2/year
Profit 20% - 30% of development (depending on type of project)
Types of building Selling price (RM)
3 blocks of 5-storey medium cost flat @ 75
m2/unit, 40 units
85,000.00
10 units of 3-storey shop-office @ 450
m2/unit
650,000.00
150 units of 2-storey linked house @160
m2/unit
380,000.00

A developer plans to buy a 12-acre palm oil plantation near Kuala
Selangor for a mixed development project. He intends to build
the following buildings:

The developer anticipates generating a project profit of 30%
from the total gross development. Prepare a feasibility report
for this developer and advise him accordingly.
EXAMPLE 1
Example 1:
Assumptions:
Description Assumptions
Capital contributions to Local
Authority
a) IWK
b) CIDB levy
c) Professional fees
d) Management cost
e) Legal fees
f) Sales fees

1.65% of total income
0.125% of construction cost
10% of construction cost + 5% tax
2% of construction cost
1% of selling price
1% selling price
Total GDV is based on 100% return from original sale
No detail design Need to assume on appropriate current price for M&E
costs. Building cost is inclusive of M&E installation.
Preliminaries 5% of construction cost
Contingencies cost 8% of construction cost
GFA
5-storey med cost apartment
3-storey shop-office
Ground floor
1
st
floor

2
nd
floor

2-storey linked house
Ground floor
1
st
floor

600m2/floor
450m2
150m2
150m2
150m2

160m2
80m2
80m2
Note: 1 hectare = 2.47 acre; 1 acre = 43,564 ft2 = 4,047.47m2
EXAMPLE 1
EXAMPLE 1
EXAMPLE 1
EXAMPLE 1
EXAMPLE 1
EXAMPLE 1
EXAMPLE 1
EXERCISE 1
Exercise 1:
A property developer has proposed to build 30 units of double-
storey terraced factories, 15 units of semi-detached factories and
15 units of single-storey workshops. The company bought a 10-
acre piece of development land in Shah Alam 2 years ago at a
price of RM7.5 million. The proposed selling prices are
RM300,000.00, RM450,000.00 and RM250,000.00 respectively.

Prepare a feasibility study report for the developer. Advice him
necessarily with suitable assumptions.

If the developer is offered by a buyer to purchase the formers
land at RM11 million, should the developer sell it or proceed
with his construction?

EXERCISE 1
EXERCISE 1
EXERCISE 1
EXERCISE 1
EXERCISE 1
EXERCISE 1
EXAMPLE 2
A developer has purchased 4000m2 of land near Kota Kemuning,
Shah Alam. He is considering 2 alternative developments: to
build a factory with a shorter construction period or a block of
office with a longer construction period. He intends to retain the
office as an investment and the factory will be sold upon
completion. You are required to prepare a brief viability study for
both alternatives and advice him accordingly.

Example 2:
EXAMPLE 2
Information on alternatives
Interest on finance will be charged to both total costs of site and construction
EXAMPLE 2
EXAMPLE 2
Factory development is more profitable with return of 48.50% per year
Office development only provided 28.84% per year of 57.68% in two years.