1. The mechanics of carry cost: simple and pitiless
A development loan is short-term finance whose cost is proportional to time. Its mechanics are arithmetic: for every additional month of construction the developer pays interest on the outstanding balance. On a 2 M€ loan at 5.5 % a year, each month of delay costs 9,167 € of additional interest.
That cost seems small in isolation. Cumulatively it becomes significant: six months of delay is 55,000 € on 2 M€, and 275,000 € on 10 M€. On operations targeting margins of 8 to 15 %, six months of delay erases two to four points of margin, the equivalent of half the profit expected.
| Works cost excl. VAT | Loan rate | Initial duration | Delay | Interest initially planned | Additional interest | Effect on margin |
|---|---|---|---|---|---|---|
| 2,000,000 € | 5.5 %/year | 18 months | 3 months | 165,000 € | + 27,500 € | − 1.4 points |
| 2,000,000 € | 5.5 %/year | 18 months | 6 months | 165,000 € | + 55,000 € | − 2.75 points |
| 2,000,000 € | 5.5 %/year | 18 months | 12 months | 165,000 € | + 110,000 € | − 5.5 points |
| 5,000,000 € | 5.5 %/year | 24 months | 3 months | 550,000 € | + 68,750 € | − 1.4 points |
| 5,000,000 € | 5.5 %/year | 24 months | 6 months | 550,000 € | + 137,500 € | − 2.75 points |
| 5,000,000 € | 5.5 %/year | 24 months | 12 months | 550,000 € | + 275,000 € | − 5.5 points |
| 10,000,000 € | 5.5 %/year | 30 months | 6 months | 1,375,000 € | + 275,000 € | − 2.75 points |
| 10,000,000 € | 5.5 %/year | 30 months | 12 months | 1,375,000 € | + 550,000 € | − 5.5 points |
ℹ The development loan rate: a parameter that doubled in three years Development loans sat around 2 to 3 % a year in 2020–2021. In 2023–2024 they reached 5 to 7 % according to the bank and the operation. An appraisal built at 2.5 % and refinanced at 6 % represents a 70 % increase in finance costs, several points of margin erased before the works even begin. The sensitivity of an appraisal to the interest rate is often under-estimated in feasibility analysis. Any serious appraisal should include a simulation at one and two points above the assumed rate to measure the effect on the margin.
2. The complete appraisal: the items systematically forgotten
A development appraisal brings together all the income and all the charges, land, works, fees, finance costs, taxes, insurance, to calculate the net margin. Its reliability depends on the completeness of the charges, and that is precisely where the most frequent risks lie.
| Item | Indicative order of magnitude | Often forgotten? | Basis of calculation | Note |
|---|---|---|---|---|
| INCOME: sale price excl. VAT | 100 % | No | Price per m² × total habitable area | The reference of the operation |
| Land, price plus legal fees | 15 – 35 % | No | Purchase price plus 7 to 8 % acquisition costs; as a percentage of turnover excl. VAT | Variable by area; the most sensitive item |
| Decontamination and archaeology | 0 – 5 % | ⚠️ Frequent | From the ground investigation; as a percentage of turnover excl. VAT | Often under-estimated on former industrial land |
| Works, the contract sums | 40 – 55 % | No | The economist's estimate; as a percentage of turnover excl. VAT | Excluding VAT |
| External works and services | 2 – 8 % | ⚠️ Frequent | Connections and roads; as a percentage of turnover excl. VAT | Variable with the availability of the networks |
| Works contingency, 10 % | 4 – 6 % | ⚠️ Very frequent | 10 % of the contracts; as a percentage of turnover excl. VAT | To be sized according to the risks identified: no published scale sets this rate, and the MIQCP refers to a provision "to be assessed case by case" |
| Provision for price variation (hypothesis: 4 % over 18 months) | 1 – 3 % | ⚠️ Very frequent | From the value date of the developed-design estimate to the signature of the works contracts, then according to their updating and revision clauses until handover; as a percentage of turnover excl. VAT | See the article on material inflation |
| Design fees: architect, engineers, coordinator | 8 – 15 % | Partly | A percentage of the works by appointment | Often understated; check the full appointment |
| Economist's fees | 0.5 – 1.5 % | ⚠️ Frequent | Lump sum or percentage of the works | Often excluded from the budget, with a very strong return |
| Technical control | 1 to 3 % | ⚠️ Frequent | Of the works envelope, according to the assignment (benchmark published by the MIQCP in 2008) | Mandatory in public buildings and high-rise |
| Finance costs on the development loan | 3 – 8 % | ⚠️ Very frequent | Rate × amount × duration; as a percentage of turnover excl. VAT | Very sensitive to delay |
| The completion guarantee commission | 0.5 – 1 % | ⚠️ Frequent | A percentage of turnover | Mandatory in an off-plan sale of a building for residential use or for mixed professional and residential use, where the buyer pays funds before completion: a financial guarantee of completion or of repayment (CCH, art. L261-10 and L261-10-1). For any other use, those articles do not impose it: it is negotiated in the contract. |
| Marketing costs | 2 – 5 % | Partly | A percentage of turnover including VAT | Agency or in-house, often understated |
| Development taxes | 1 – 3 % | ⚠️ Frequent | Taxe d'aménagement: floor area of the construction × flat-rate value per m² × rates voted; same base for the taxe d'archéologie préventive | Check the planning certificate |
| VAT on the works | By rate | No | The applicable rate by programme | 10 % possible on social housing |
| Structural warranty insurance | 1.5 – 3 % | ⚠️ Very frequent | A percentage of the works | Mandatory |
| Contractors' all-risks insurance | 0.2 – 0.5 % | ⚠️ Frequent | A percentage of the works | Strongly recommended |
| Target operator margin | 8 – 15 % | , | A percentage of turnover | Net of every charge |
The six items most systematically under-estimated or forgotten are, in order of frequency: the works contingency, insufficient or absent; the finance costs, badly calibrated or exposed to rate rises; the structural warranty insurance, at 1.5 to 3 % of the works and often forgotten; the development taxes, which vary by municipality; the economist's fees, often excluded; and the price revision provision, absent from most appraisals drawn before 2021.
3. The sensitivity of the margin
The sale price
The variable with the greatest effect on the margin is the sale price per square metre. A 5 % fall translates directly into a 5 % fall in turnover, with no reduction in charges. On an operation with an initial margin of 10 %, a 5 % price fall erases half the net margin. Pre-selling before the works are launched, with signed off-plan reservations, is the most direct protection against that risk.
The works cost
Every point of overrun on the works, which represent 45 to 55 % of turnover, translates into roughly half a point of margin lost. A 10 % overrun on the works therefore erases five points of margin. A 10 % contingency is the primary protection, but it must be real, provided in cash, not invested, and available.
The carry period
Every month of delay has a double impact: it increases the finance costs and delays the repayment of the loan. On off-plan operations, delay additionally generates contractual penalties towards the buyers (as a hypothesis, 0.33 € per m² of habitable area per day of delay in a high-demand area, that is about 660 € a day on a 30-dwelling programme of about 2,000 m² of habitable area, which can represent 50,000 € to 150,000 € for a delay of about 2.5 to 7.6 months).
4. The financial stress test before committing
Before launching an operation, any serious developer subjects the appraisal to a stress test, a simulation of adverse scenarios to check the margin stays positive even in the unfavourable cases. The table sets out the standard scenarios to test.
| Stress scenario | Probability | Effect on the margin, 5 M€ turnover | Cumulable? | Protection available |
|---|---|---|---|---|
| A six-month construction delay | 30 – 50 % | − 2.75 points, − 137 k€ | Yes | A contractual programme plus delay damages |
| A 10 % overrun on the works | 20 – 40 % | − 5.5 points, − 275 k€ | Yes | A contingency of at least 10 % plus a rigorous estimate |
| A one-point rise in rates | Variable | − 1.5 to 2 points by duration | Yes | A fixed rate or a cap, negotiated at the outset |
| A 5 % fall in sale prices | 10 – 20 % | − 5 points, − 250 k€ | Yes | Pre-selling before the works are launched |
| A third-party challenge blocking 18 months | 5 – 15 % | − 7 to 10 points, on carry alone | No | Neighbourhood analysis before the application, and a rapid settlement |
| A major contractor failing | 5 – 10 % | − 3 to 8 points, through substitution | Yes | Rigorous selection at award plus monitoring of the registry |
| A six-month delay combined with an 8 % overrun | 10 – 20 % | − 8 to 10 points | , | An overall provision of at least 15 % plus a stress test before committing |
The conclusion of the stress test is the rule of two thresholds. The target margin must be high enough to absorb the most likely adverse scenario, a six-month delay plus an 8 % overrun, that is 8 to 10 points of margin, and remain positive. If the initial margin is below 12 %, the operation has no sufficient cushion to absorb the most common combined risks.
5. The protective levers
- Pre-selling before launch: starting the works with 40 to 60 % of units reserved drastically reduces price risk and secures the development loan on better terms.
- An interest rate cap: a financial instrument capping the rate at a maximum level against payment of a premium. On a long operation in a volatile rate environment, the cost of the cap, 0.3 to 0.8 % of the loan, is often less than the risk covered.
- A firm phase and an optional phase: structuring a programme in two phases, an economically robust firm phase and an optional one triggered if sales justify it, limits the financial exposure without sacrificing the potential of the operation.
- A monthly cash flow plan: a month-by-month forecast reconciling the loan drawdowns with the contractors' payment applications and the sales receipts is the central financial steering tool. Any significant gap between forecast and reality should trigger a steering meeting.
In summary
Carry cost is arithmetic and pitiless: six months of delay on 5 M€ at 5.5 % a year is − 137,500 €, that is 2.75 points of margin. The six items most often forgotten in an appraisal are the works contingency, the finance costs, which are sensitive to rate rises, the structural warranty insurance, the development taxes, the economist's fees and the price revision provision. The rule of two thresholds: an initial margin below 12 % has no sufficient cushion to absorb the most common combined risks. The four protective levers are pre-selling, an interest rate cap, structuring in phases, and a monthly cash flow plan.
The nature of the figures quoted
The percentages and amounts quoted on this page are orders of magnitude for framing, not measurements. They illustrate mechanisms and proportions, and they substitute neither for a tender exercise nor for an estimate prepared on drawings.
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Sources: the BT construction cost indices published monthly by INSEE on its 2010 base, used to update the figures · construction cost statistics from SDES, the statistical service of the ministry responsible for construction · regulatory texts published in the Journal officiel and consolidated on Légifrance for the requirements cited.