Time Planning in Feasibility Studies

The Time Schedule in the Feasibility Study

Time Frame Estimation for Real Estate Projects

The Work Program is a scheme that assigns each activity a start date and a completion date. Due to the scarcity of data that is usually inherent in the initial phase of the building project, it is usual that the time schedule is not very detailed, consisting rather in a preliminary plan that will have to be part of the Feasibility Study. The time schedule is performed through four interactive processes:

• definition of activities, which requires the breakdown of the tasks associated with each phase of the real estate project to a level which allows the estimation of the time frame
• arrangement of activities, establishing the sequence based on the dependence between them
• estimation of the time frames, which will depend on the magnitude of the resources used in the performance of each activity
• calculation of the program, usually by applying the Critical Path Method.

Estimation of Time Frames

The PERT (Program Evaluation and Review Technique) prescribes the estimation of three possible durations for each activity:

• the most probable duration
• the pessimistic duration, estimated by considering very unfavorable conditions
• the optimistic duration, estimated by considering very favorable conditions.

The use of these three estimates allows the calculation of a weighted average duration which is the one considered in the study.

Calculation of the Program

The Critical Path Method, commonly used in the timing of projects, consists of following, within the network of activities, all possible paths, adding durations and lags. Thus, it’s possible to estimate the earlier and the later date for the start and the completion of each activity and the entire project. The result of subtracting from the earliest dates the latest ones is called “clearance”. The "total clearance" is the time that an activity can be delayed without affecting the time frame of the project. The Critical Path is the one that provides zero clearance for all activities, so a delay in any of them involves an inevitable delay in the completion date of the project.

Definition of the Final Product in a Feasibility Study

Product Definition in the Feasibility Study

Probabilistic Approach. Selling Prices.

The Feasibility Study of a building project is based on estimates (mainly about time and costs) and assumptions (e.g., evolution of the market). As a result, it can only be considered by way of approximation, subject to an inevitable error margin. Real estate developments are always developed in an environment of uncertainty, so it is necessary to apply a probabilistic approach that considers all risks associated with the project. This approach makes the results provided by the Feasibility Study to be more comprehensive and reliable, but also less precise. The fundamental equation that should condition the Feasibility Study expresses performance as a result of subtracting cost of sales. Performance is deemed acceptable by applying profitability criteria, among which is the comparison with other investments that provide returns with an equivalent risk.

Definition of the Real Estate Product

In real estate developments, product definition is progressive, so from an initial description, the implementation of the successive phases of the project will provide the definitive features and functions. The Feasibility Study must contain an initial definition of the real estate product, which can be complex to the extent that it may be a product composed of multiple partial products. The initial definition process is subjected to conditions, among which are the following:

• contract terms
• the state of offer and demand in the real estate market
• the legal and technical regulations that may result applicable
• economic and financial demands.

Selling Prices in the Feasibility Study

In the initial product definition provisional sales prices should be set. The establishment of the selling prices of the real estate products is a business task that should be based on two essential requirements:

• final prices should be competitive, based on the market situation and based on the marketing strategy
• the income should always cover the estimated costs, within a certain margin of error, considering direct costs plus an appropriate share of indirect costs.

The marketing strategy should be structured in a set of techniques to promote, sell and distribute the final products. Its suitability can allow sales prices slide upward within the range set by the real estate market.

Phases of a Feasibility Study

Phases of a Feasibility Study for a Building Development

Initial Definition, Preliminary Planning and Profit Analysis

Real estate developments are structured in phases that define the life cycle of the building project. Along the life cycle, costs and resources increase progressively until they reach a maximum level and then decrease. Also, the more you advance in the cycle, the probability of success increases and the risks decrease. In large investment projects, the Feasibility Study should be the first phase of the cycle. The approval and acceptance of the Feasibility Study by all parties involved in the development is a prerequisite for the start of any subsequent phases.

Phases of the Feasibility Study

The purpose of the Feasibility Study is to determine the project's profitability and its comparison with other investments with lower risk. Such determination is made by applying certain criteria to monetary flows, which are calculated on the basis of a preliminary planning which, in turn, requires the availability of descriptive data about the final product sought by the building project, structured in an initial definition. Thus, the draft of a feasibility study may be structured into the following phases:

• initial definition of the final product pursued by the building project
• preliminary planning of the project
• profitability analysis.

The Preliminary Planning Phase

The preliminary planning phase includes the following processes:

• time schedule, with the result of a work program
• economic planning, with the results of the budget and the curves of revenues and expenses
• financial planning, which determines project flows from a funding scenario.

In turn, the time schedule of the project includes the following processes:

• defining activities
• estimating a time schedule for every activity
• determining an appropriate order for the implementation of all activities
• calculating the program.

And the economic planning includes the following processes:

• planning of resources
• estimation of costs
• layout of the costs curve.

The Profitability Analysis Phase

The phase of analysis of the building project's profitability includes the following processes:

• applying profitability criteria on the flows obtained in the planning phase
• evaluation of risks impacting on the profitability of the project.