Feasibility Study For Construction Projects 1111

Universitas Indonesia
Feasibility Study of Construction Projects
2020. 11.
Sunkuk kim, Prof., PE.

[Contents]
1. Introduction to Feasibility Study
2. Feasibility Study for Construction Projects
3. Formula of Economic Analysis
4. Project Cash Flow
5. References
SMART Construction Engineering & Management Lab. -2-

1. Introduction to Feasibility Study

1.1. What is a feasibility study?
▪ A feasibility study is a study, which is performed by an organization in order to evaluate
whether a specific action makes sense from an economic or operational standpoint.
▪ The objective of the study is to test the feasibility of a specific action and to determine and
define any issues that would argue against this action.
1.2. When should a feasibility study be used?

▪ The study is typically used in situations where an important strategic decision needs to be
taken.
▪ This can vary and some of the example situations include:
- Change in business location
- Purchase of new equipment or software
- Acquisition of another company
- Hiring of additional employees
- Etc.

1.3. Core elements of a feasibility study
(1) Technical feasibility
▪ This part of the feasibility study should answer the following questions:
- What is the proposed product or service?

- Is the product or service already on sale? If not, how far is it from an existing marketplace
and what will the introduction cost?
- How can you protect the product or service from the competition?
- What are the strengths of the product or service?
- What are the main benefits to customers or users?
- What resources are required for producing or providing it?
- How capable is the organization to acquire these resources?
- What are the regulatory standards surrounding the product or service and its use?

(2) Market feasibility
▪ Market feasibility should answer the following questions:
- What market segments are you targeting?

- Why would people buy the product or service?
- Who are the potential customers and how many of them are there?
- What are the buying patterns of these potential customers?
- How will you sell the product or service? Where?
- Who are your competitors? Including past, current and future competitors.
- What are the strengths and weaknesses of your competitors?
- What is your product or service’s competitive edge?

(3) Commercial feasibility
▪ The questions that require answering as part of the commercial feasibility study include:
- What are the strengths and weaknesses of your business?

- What are the potential sales volumes of the product or service?
- What is the pricing structure you’ll use?
- What are the sensitivity points for your business in terms of sales?
- What is the ROI?
▪ Furthermore, if you are conducting a feasibility study as part of launching a business,

you also need to answer the following questions:
- How long can your business survive without a sale?

- How long before you break even with the product or service?
- How much money is required to start operating?
- Will your organization require external finance?

(4) Overall risk assessment
▪ The overall risk assessment should answer the following questions:
- What are the major risks associated with the operation?

- What is the survival outlook for each of the above risks?
- How sensitive are the profits?
- What are the best ways to minimize these risks?

(5) Feasibility of purchasing an existing business
▪ The purpose of this final element is to study whether purchasing an existing business is a
sound investment to make. It requires your organization to answer questions such as:
- Why is the current owner selling the business?

- What is the business’ performance? If it’s poor, what are the reasons behind it?
- What is the competition like?
- What is the valuation of the assets included in the sale?
- What are the advantages and disadvantages of the current business location? Is your
organization continuing operations in the same premises or not? Why?

1.4. Steps to conducting a feasibility study
Step 1: Conduct preliminary analysis
Step 2: Outlining the project scope and conducting current analysis
Step 3: Comparing your proposal with existing products/services
Step 4: Examining the market conditions
Step 5: Understanding the financial costs
Step 6: Reviewing and analyzing data
For more information, refer to the following URL.

2. Feasibility Studies for Construction Projects

2.1. Overview of feasibility study
◆ The purpose of feasibility studies is to [2]:
▪ Establish whether the project is viable.

▪ Help identify feasible options.
▪ Assist in the development of other project documentation such as
the business case, project execution plan and strategic brief.
◆ Various stakeholders, statutory authorities and other third parties may

need to be consulted in the preparation of feasibility studies.

◆ On large or complex projects, there may be a number of different

feasibility studies carried out, sometimes requiring different skills, and
considering issues such as [2]:
▪ Planning permission.
▪ The likelihood that an environmental impact assessment will be required.
▪ Other legal/statutory approvals.
▪ Analysis of the budget relative to client requirements.
▪ Assessment of the potential to re-use existing facilities or doing nothing rather
than building new facilities.
▪ Assessment of any site information provided by the client.
▪ Site appraisals, including geotechnical studies, assessment of any contamination, availability
of services, uses of adjoining land, easements and restrictive covenants, environmental impact,
and so on.
▪ Considering different solutions to accessing potential sites.
▪ Analysis of accommodation that might be included or excluded.
▪ Assessment of the possible juxtaposition of accommodation and preparing basic stacking
diagrams.
▪ Assessing operational and maintenance issues.
▪ Appraisal of servicing strategies.
▪ Programme considerations.
▪ Procurement options.

Who uses the F.S. technique?

When do they use it?
Owners, Clients, Developers

Max. Profit
PM, CM, Marketing, Financing, Procurement
Min. Risks
Project Feasibility Eng. & Procure- Commi- Oper. &
Planning Constr.
Finding Study Design ment ssioning Maint.
Contractors, Subcontractors, Suppliers

2.2. Review items for feasibility study of construction projects
(1) Technically valid?

- Fundamentals for any construction projects
(2) Economically sound?
- What is the return on investment (ROI)?
- When is the payback period (PP) ? When is the break even point (BEP)?
- What is the internal rate of return (IRR)?
- How much is the maximum project finance?
(3) Financially feasible?
- Is cash available?
(4) Managerially reasonable?
(5) Politically appropriate?
(6) Socially, Culturally relevant?
(7) Environmentally sound?
(8) Others: Religiously?

2.3. Steps to conducting economic analysis of construction projects
Step 1. Review of influence factors, requirements, problem statements

- Preparation of bidding overseas construction projects
- Planning of building development projects : Sale price, Sales ratio, ..
- Feasibility study of SOC projects : B/C ratio
For construction projects, please refer to the Site Survey Guideline on

the next slide.

◼ Site Survey Guideline (Barrie and Paulson, 1992)

1. Site Description: Vegetation, trees, terrain, depth of topsoil, drainage, existing structures, existing utilities,
access, etc.
2. Utilities Serving Site: Electricity, gas, water, sanitary sewer, storm sewer, railroad, highway, railroad siding, etc.
3. Building Department: Contract, telephone number, building code, plan check time, fees, zoning, licensing, etc.
4. Labor Unions: Membership, manpower shortages, manpower surplus, current agreements, wage rates,
expiration dates, etc.
5. Recommended Contractors: List recommended general and trade contractors for further consideration.
6. Materials and Method: List favored local materials including current quoted price for ready-mix concrete,
lumber, imported granular base, plywood, masonry, and other key items.
7. Equipment Rental: List local prices or key local quotations.
8. Climatological Data: List average maximum and average minimum temperature, precipitation, and other
significant data by months.
9. Other Projects: Visit other projects nothing productivity, favored methods, favored materials, subcontractors,
etc.
10. General Appraisal: Summarize results of site and area visit and recommend significant conclusions to be
taken into account during the planning of the program.

Step 2. Target or Goal setting.

- Maximizing profit
- Minimizing total cost
- Minimizing input resources
- Minimizing construction time
Step 3. Data collection for feasibility study.

- Site data for design and construction (refer to Slide 15)
- Information for project financing
- Historical data of similar projects
- Commercial data such as transportation, shipping, custom tariff, insurance
and so on
- Information of stakeholders, statutory authorities and other third parties
- Others

Step 4. Creation of feasible alternatives

- Design alternatives
- Financing and investment alternatives
- Construction alternatives
- Marketing and sales alternatives
- Cash flow alternatives
- Technology alternatives
- Resources alternatives or Procurement alternatives
- Process alternatives
- Others

Step 5. Evaluation of alternatives

- Net Present Value (NPV) Cf. Net Future Value (NFV)
- Internal Rate of Return (IRR)
- Return on Investment (RoI)
- Break Even Point (BEP)
- Payback Period (PP)
- Utility analysis
- Linear and dynamic programming

Step 6. Modeling the correlation between target/goal and influence factors

- Graphical modeling: Cash flows
- Mathematical modeling: Calculation algorithms
Step 7. Predicting results for each alternative

- Linear risk analysis: Sensitivity analysis
- Dynamic risk analysis: System dynamics
Ex) A DYNAMIC SIMULATION MODEL OF THE ECONOMIC FEASIBILITY
OF APARTMENT DEVELOPMENT PROJECTS
Risk Management Model

Step 8. Selecting the best alternative Optimization Model
Simulation Model
Generation Model
Modelling concept for problem solving

3. Formula of Economic Analysis

3.1. Understanding interest rates
(1) Simple interest vs Compound interest

▪ Sum of principal and interest by simple interest (Fs)
Fs = P(1+ni)
ex, P=1,000,000, n=3 years, i=10 %/year
Fs = 1,000,000(1+3x0.1)= 1,300,000
▪ Sum of principal and interest by compound interest (Fc)
Fc = P(1+i)n
Fc = 1,000,000(1+0.06)3= 2,197,000

(2) Nominal interest rate (in)

▪ Interest rate calculated by dividing the interest rate by the period.
ex, For nominal interest, an annual interest rate (iy) of 12% is
converted to a monthly interest rate (im) of 1%. Here, n = period.
im = iy ÷ n = 12% ÷ 12 months = 1% per month
(3) Effective interest rate (ie)

▪ Interest rate calculated taking into account interest accrued on interest.
im = (1+iy)1/n – 1 = 𝑛 (1+iy) – 1 = 12
(1+0.12) – 1 ≅ 0.0095

(4) Actual interest rate (ia)

▪ Interest rate actually traded, normally daily or monthly basis.
▪ Internationally, LIBO (London Inter-Bank Offered) + rate, and
domestically, Call rate transacted between banks +.

3.2. Formula of Economic Analysis
■ Single-Payment Compound-Amount Factor

F
F = P(1+i)n = P(F/P, i, n)
0
1 2 3 n-1 n
■ Single-Payment Present-Worth Factor P

i = interest rate
F n = period
P= = F(P/F, i, n) P = Principal or Present value
(1+i)n
F = Sum of principal and
interest or Future value

[Excercise]
(1) If you invest 10,000,000 IDR at an annual interest rate of 12%, what is the total
amount of principal and interest after 4 years?
(2) Which of the following conditions is more preferable from the perspective of the
payee? Here, the annual interest rate is assumed to be 8%.
Condition 1) The payee gets 10,000,000 IDR now.
Condition 2) The payee gets 13,000,000 IDR after 3 years.
(3) How many pieces can be purchased at the current price of 10,000 USD per piece
for 100,000 USD after 5 years? (Assuming that the return on investment for 100,000
USD is 15% per year and inflation is 10% per year)

■ Equal-Payment-Series Compound-Amount Factor

F
(1 + 𝑖)𝑛 − 1
𝐹=𝐴 = 𝐴(𝐹/𝐴, 𝑖, 𝑛)
𝑖
0 1 2 3 n-1 n
■ Equal-Payment-Series sinking-Fund Factor A A A A A
i = interest rate
𝑖 n = period
𝐴=𝐹 = 𝐹(𝐴/𝐹, 𝑖, 𝑛)
(1 + 𝑖)𝑛 − 1 A = Equal payment series
F = Sum of principal and
interest or Future value

[Excercise]
(1) How much can you get before tax after 3 years when you deposit 100,000 IDR
per month as a savings? Assuming that the annual interest rate is 12%.
(2) How much money do you deposit in the bank every month to get 10 million IDR
before tax after 3 years? Assuming that annual interest rate is 12%.

■ Equal-Payment-Series Present-Worth Factor
(1 + 𝑖)𝑛 − 1 A A A A A
𝑃=𝐴 = 𝐴(𝑃/𝐴, 𝑖, 𝑛)
𝑖(1 + 𝑖)𝑛
0 1 2 3 n-1 n
■ Equal-Payment-Series sinking-Fund Factor

P
𝑖(1 + 𝑖)𝑛 i = interest rate
𝐴=𝑃 = 𝑃(𝐴/𝑃, 𝑖, 𝑛) n = period
(1 + 𝑖)𝑛 − 1 A = Equal payment series
P = Sinking-fund or Present
value

[Excercise]
(1) If you win a project to receive 2 billion IDR monthly progress payment for
24 months, what is the total construction cost in NVP? Assuming that the
annual interest rate is 12%.
(2) If you received a 50 million IDR loan from a bank and decided to pay it off
for 36 months at an annual interest rate of 12%, how much would you have
to pay each month?

4. Project Cash Flow

4.1. Key takeaways
▪ A cash flow statement is a financial statement that summarizes the amount of cash
and cash equivalents entering and leaving a project.
▪ The cash flow statement measures how well a project manager manages its cash
position, meaning how well the manager generates cash to pay its debt obligations
and fund its operating expenses.
▪ The main components of the cash flow statement are cash from operating activities,
cash from investing activities, and cash from financing activities.
▪ In A project cash flow statement (PCFS), we can see the maximum size of
financing, Net Present Value (NPV) Payback Period (PP), Break-Even Point (BEP),
RoR, IRR, etc.

4.2. Structure of PCFS

Beauti-Cal Project (As of 25 July 2004, Unit: 100 million Won)
Y2004 Y2005 Y2006
Description Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Sum
M+1 M+2 M+3 M+4 M+5 M+6 M+7 M+8 M+9 M+10 M+11 M+12 M+13 M+14 M+15 M+16
1. Cost
(1) Land cost 0.50 2.00 2.50

Time span 5.00
(2) Land registration cost 0.35 0.35

Costs/Expenses
(3) Design cost 0.11 0.53 0.21 0.21 1.05
(4) Constr. Cost 1.75 1.75 1.75 1.75 1.75 1.75 1.75 1.75 1.75 1.75 1.75 1.75 21.00
Items
Cash allocation
(5) Interior 1.50 1.50 3.00
(6) Furniture & Facilities 1.00 1.00
(7) Bldg registration cost 0.84 0.84
(8) O & M cost 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 1.60
Subtotal 0.50 2.00 2.96 2.28 1.75 1.75 1.75 1.96 1.75 1.75 1.75 1.75 1.96 1.75 3.25 3.34 32.24
(9) Contingency (7%) 0.04 0.14 0.21 0.16 0.12 0.12 0.12 0.14 0.12 0.12 0.12 0.12 0.14 0.12 0.23 0.23 2.26
Total Cost 0.54 2.14 3.16 2.43 1.87 1.87 1.87 2.10 1.87 1.87 1.87 1.87 2.10 1.87 3.48 3.57 34.50
2. Income 분양시점
Income
(1) Medical clinic 1.86 3.71 3.71 3.71 5.57 18.56
(2) Pharmacy 0.58 1.16 1.16 1.16 1.74 5.80
(3) Beuti& Massage shop 0.81 1.62 1.62 1.62 1.62 7.31
Total Income 0.00 0.00 0.00 0.00 0.00 0.00 3.25 0.00 6.50 0.00 6.50 0.00 6.50 0.00 8.93 0.00 31.67
Balance
Monthly Sum -0.54 -2.14 -3.16 -2.43 -1.87 -1.87 1.38 -2.10 4.62 -1.87 4.62 -1.87 4.40 -1.87 5.45 -3.57 -2.83
Monthly Cumulative Sum -0.54 -2.68 -5.84 -8.27 -10.14 -12.02 -10.64 -12.74 -8.11 -9.99 -5.36 -7.24 -2.84 -4.71 0.74 -2.83
Financial Cost 0.00 -0.02 -0.05 -0.07 -0.08 -0.10 -0.09 -0.10 -0.06 -0.08 -0.04 -0.06 -0.02 -0.04 0.01 -0.02 -0.83
Monthly Cum. Total Sum -0.54 -2.70 -5.88 -8.34 -10.22 -12.11 -10.73 -12.84 -8.18 -10.07 -5.41 -7.29 -2.86 -4.75 0.75 -2.85

4.3. Interpretation of PCFS

Y2004
Time span Y2005 Y2006
Description Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Sum
M+1 M+2 M+3 M+4 M+5 M+6 M+7 M+8 M+9 M+10 M+11 M+12 M+13 M+14 M+15 M+16
1. Cost
(1) Land cost 0.50 2.00 2.50 5.00
(2) Land registration cost 0.35 0.35
(3) Design cost 0.11 0.53 0.21 0.21 1.05
(4) Constr. Cost 1.75 1.75 1.75 1.75 1.75 1.75 1.75 1.75 1.75 1.75 1.75 1.75 21.00
(5) Interior 1.50 1.50 3.00
(6) Furniture & Facilities 1.00 1.00

Items
(7) Bldg registration cost 0.84 0.84
(8) O & M cost 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 1.60
Subtotal 0.50 2.00 2.96 2.28 1.75 1.75 1.75 1.96 1.75 1.75 1.75 1.75 1.96 1.75 3.25 3.34 32.24
(9) Contingency (7%) 0.04 0.14 0.21 0.16 0.12 0.12 0.12 0.14 0.12 0.12 0.12 0.12 0.14 0.12 0.23 0.23 2.26
Total Cost 0.54 2.14 3.16 2.43 1.87 1.87 1.87 2.10 1.87 1.87 1.87 1.87 2.10 1.87 3.48 3.57 34.50
2. Income 분양시점
(1) Medical clinic 1.86 3.71 3.71 3.71 5.57 18.56
(2) Pharmacy 0.58 1.16 1.16 1.16 1.74 5.80
(3) Beuti& Massage shop Payback Period

0.81 1.62 1.62 1.62 Break Even
1.62 7.31
Total Income 0.00 0.00 0.00 0.00 0.00 0.00 3.25 0.00 6.50 0.00 6.50 0.00 6.50 0.00 Point 0.00
8.93 31.67
Monthly Sum -0.54 -2.14 -3.16 -2.43 -1.87 -1.87 1.38 -2.10 4.62 -1.87 4.62 -1.87 4.40 -1.87 5.45 -3.57 -2.83
Monthly Cumulative Sum -0.54 -2.68 -5.84 -8.27 -10.14 -12.02 -10.64 -12.74 -8.11 -9.99 -5.36 -7.24 -2.84 -4.71 0.74 -2.83
Financial Cost 0.00 -0.02 -0.05 -0.07 -0.08 maximum

-0.10 size
-0.09 -0.10 -0.06 -0.08 -0.04 -0.06 -0.02 -0.04 0.01 -0.02 -0.83
Monthly Cum. Total Sum -0.54 -2.70 -5.88 -8.34 -10.22 of financing
-12.11 -10.73 -12.84 -8.18 -10.07 -5.41 -7.29 -2.86 -4.75 0.75 -2.85

4.3. Examples of PCFSs
- SOC development projects

- Building development projects
- Buy, rent, or lease construction equipment?
- Decide a construction method
- Recruit construction manpower
- Buy or rent a house? Template

- Buy, rent, or lease a car?

[Template] Buy, Rent, or Lease construction equipment?
𝐹 𝐹
෍ 𝑛
1 + 𝑖𝑚 𝑛 1 + 𝑖𝑚
1. Decide comparison period.

2. Prepare Time Span & Item form.
3. Input different item conditions of all alternatives, normally monthly.
4. Allocate cashes at cells.
5. Make monthly sum of alternatives.
6. Calculate NPV of monthly sum using ‘Single-Payment Present-Worth Factor’.
7. Compare the NPV sum of alternatives.

[Template] Buy or Rent a House?
𝐹 𝐹
1 + 𝑖𝑚 𝑛 ෍ 𝑛
1 + 𝑖𝑚
1. Decide comparison period.

2. Prepare Time Span & Item form.
3. Input different item conditions of all alternatives, normally monthly.
4. Allocate cashes at cells.
5. Make monthly sum of alternatives.
6. Calculate NPV of monthly sum using ‘Single-Payment Present-Worth Factor’.
7. Compare the NPV sum of alternatives.

References
1. Martin Luenendonk. How to Conduct a Feasibility Study the Right Way. Available on
https://www.cleverism.com/conduct-feasibility-study-right-
way/#:~:text=STEPS%20TO%20CONDUCTING%20A%20FEASIBILITY%20STUDY%201%20Condu
ct,proposal%20with%20existing%20products%2Fservices.%20...%20More%20items...%20 (accessed on
27 October 2020).
2. Institute of Civil Engineers, Feasibility studies for construction projects. Available on
https://www.designingbuildings.co.uk/wiki/Feasibility_studies_for_construction_projects (accessed on 27
October 2020).
3. Kwangchae Lee, Seunghyun Son, Doyeong Kim, Sunkuk Kim. A dynamic simulation model for economic
feasibility of apartment development projects, International Journal of Strategic Property Management,
2019, 23(5), 305–316, https://doi.org/10.3846/ijspm.2019.9822
4. Sunkuk Kim. Marketing information system of building development projects, System design material,
1996

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Universitas Indonesia

Feasibility Study of Construction Projects

Sunkuk kim, Prof., PE.

1. Introduction to Feasibility Study

2. Feasibility Study for Construction Projects

3. Formula of Economic Analysis

4. Project Cash Flow

SMART Construction Engineering & Management Lab. -2-

1. Introduction to Feasibility Study

1.2. When should a feasibility study be used?

SMART Construction Engineering & Management Lab. -3-

1.3. Core elements of a feasibility study

(1) Technical feasibility

- What is the proposed product or service?

SMART Construction Engineering & Management Lab. -4-

1.3. Core elements of a feasibility study

(2) Market feasibility

▪ Market feasibility should answer the following questions:

- What market segments are you targeting?

SMART Construction Engineering & Management Lab. -5-

1.3. Core elements of a feasibility study

(3) Commercial feasibility

- What are the strengths and weaknesses of your business?

▪ Furthermore, if you are conducting a feasibility study as part of launching a business,

- How long can your business survive without a sale?

SMART Construction Engineering & Management Lab. -6-

1.3. Core elements of a feasibility study

(4) Overall risk assessment

▪ The overall risk assessment should answer the following questions:

- What are the major risks associated with the operation?

SMART Construction Engineering & Management Lab. -7-

1.3. Core elements of a feasibility study

(5) Feasibility of purchasing an existing business

- Why is the current owner selling the business?

SMART Construction Engineering & Management Lab. -8-

1.4. Steps to conducting a feasibility study

Step 1: Conduct preliminary analysis

Step 2: Outlining the project scope and conducting current analysis

Step 3: Comparing your proposal with existing products/services

Step 4: Examining the market conditions

Step 5: Understanding the financial costs

Step 6: Reviewing and analyzing data

For more information, refer to the following URL.

SMART Construction Engineering & Management Lab. -9-

2. Feasibility Studies for Construction Projects

◆ The purpose of feasibility studies is to [2]:

▪ Establish whether the project is viable.

◆ Various stakeholders, statutory authorities and other third parties may

SMART Construction Engineering & Management Lab. -10-

◆ On large or complex projects, there may be a number of different

SMART Construction Engineering & Management Lab. -11-

Who uses the F.S. technique?

Owners, Clients, Developers

PM, CM, Marketing, Financing, Procurement

Contractors, Subcontractors, Suppliers

SMART Construction Engineering & Management Lab. -12-

2.2. Review items for feasibility study of construction projects