Measuring the Realised Return Against the Appraisal: A Worked Example

An illustrative SAR comparison between what a development appraisal promised and what it delivered, attributing the gap to cost, revenue and time.

The most valuable document at the end of a project is a comparison between the appraisal and the outcome, with the gap attributed to specific causes. This worked example does that arithmetic for a completed scheme, separating cost overrun from revenue shortfall and showing what the extra six months did to the annualised return. All figures are illustrative assumptions.

The situation

You completed a residential development with a Saudi partner and sold the units. The appraisal assumed a twenty-four month programme, and completion took thirty months. You want to know not just whether you made money but which assumption was most wrong, because that is what you will change on the next project.

Assumptions (illustrative)

• Appraisal assumptions: total development cost SAR 30,000,000, gross sales revenue SAR 36,000,000, profit SAR 6,000,000, programme 24 months.
• Your equity in the project was SAR 12,000,000, with the balance funded by debt.
• Actual total development cost was SAR 32,400,000.
• Actual gross sales revenue was SAR 35,100,000, about 2.5 per cent below appraisal.
• The cost overrun comprised SAR 1,500,000 of construction variations and SAR 900,000 of extended finance and site overheads.
• Prolongation cost is assumed at SAR 150,000 per month for the six months of delay.

Step 1: Restate what the appraisal promised

Revenue of SAR 36,000,000 less cost of SAR 30,000,000 is a profit of SAR 6,000,000, which is 20 per cent on cost over 24 months.

This is the number the investment decision was made on. Keeping it visible at the end is what makes the comparison honest, because memories of the target tend to soften once the outcome is known.

Step 2: Restate what actually happened

Revenue of SAR 35,100,000 less cost of SAR 32,400,000 is a profit of SAR 2,700,000, which is 8.33 per cent on cost over 30 months.

The project made money and missed its target by a wide margin. Both statements are true, and only the second one is useful for the next project.

Step 3: Attribute the gap between the two

The shortfall is SAR 6,000,000 minus SAR 2,700,000, which is SAR 3,300,000. Of that, SAR 2,400,000 came from the cost overrun and SAR 900,000 from lower revenue.

Roughly three quarters of the miss was cost and one quarter was price. That points the next appraisal and the next contract at cost control rather than at sales strategy.

Step 4: Split the cost overrun into causes

Construction variations were SAR 1,500,000 and extended finance and overheads were SAR 900,000, which is six months at the assumed SAR 150,000 per month. Together they make the SAR 2,400,000 overrun.

The delay did not only move dates, it cost SAR 900,000 in money. Time is a cost line, and treating the programme as a scheduling matter rather than a financial one understates the exposure.

Step 5: Annualise both outcomes

On cost, 20 per cent over 24 months is about 10 per cent per year, while 8.33 per cent over 30 months is about 3.33 per cent per year. On equity of SAR 12,000,000, the appraisal profit of SAR 6,000,000 is 50 per cent over two years, or about 25 per cent per year, while the realised SAR 2,700,000 is 22.5 per cent over two and a half years, or about 9 per cent per year.

Annualising shows the real damage. The headline profit fell by 55 per cent, but the annual return on equity fell by nearly two thirds, because the capital was tied up for six extra months.

Step 6: Identify the assumption to change

The programme assumption drove SAR 900,000 of extra cost directly and diluted the return over six additional months. The variations of SAR 1,500,000 are 5 per cent of the original cost, a level that a firmer design freeze and a rate schedule for valuing changes could have reduced.

The lesson is specific and actionable: fix the design before tendering, attach a rate schedule, and treat the programme as a financial covenant rather than a plan. That is worth more than a general resolution to be more careful.

What changes the answer

• If the delay had been three months rather than six, prolongation would have been SAR 450,000 and the annualised return materially higher.
• If revenue had held at appraisal, profit would have been SAR 3,600,000 rather than SAR 2,700,000, still well short of target.
• If the equity share had been lower and debt higher, the annualised equity return would be more sensitive to both cost and time.
• If the last units had been discounted further to close the sale, both revenue and the return fall again.
• If selling costs were understated in the original appraisal, the true target was never 20 per cent on cost to begin with.

What the numbers tell you

• Compare outcome with appraisal on the same basis, including the programme, not just the profit line.
• Attribute the gap to cost, revenue and time separately, because they call for different fixes.
• Annualise the return, since a long project can turn an acceptable profit into a poor investment.
• Price delay as money at a stated monthly rate, so programme decisions are financial decisions.
• Write the review immediately after completion, while the causes are still documented and remembered.

Limits of this example

Every figure above is an illustrative assumption used to show the method, not a quote, valuation or market rate. Costs, rates, fees and regulations change and must be confirmed with the relevant authority, lender or supplier before you commit.

Domira designs, builds and manages projects across Saudi Arabia for owners who are based abroad: land appraisal, feasibility, design, construction, handover and asset management under one accountable contract. Send us the plot or the brief and Domira will put the numbers in front of you before you commit.