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Quantity Surveyor in obtaing finance!

The role of the Quantity Surveyor in obtaining finance for commercial developments

Lourens van der Merwe
8th May, 2024

Introduction:

In the intricate world of commercial property development, securing financing is often one of the most challenging yet critical aspects of bringing a project to fruition. Amidst the myriad of considerations, the role of a Quantity Surveyor emerges as indispensable. These professionals play a pivotal role in navigating the complexities of construction project finances. The Quantity Surveyor provides crucial insights and specific analysis that underpin success in your development. In this blog post, we explore the multifaceted role of Quantity Surveyors in the commercial property sector.

Understanding the role:

At its core, the role of a Quantity Surveyor revolves around managing the financial aspects of construction projects. Quantity Surveyors participate in every stage of a project's lifecycle, from initial feasibility studies and cost estimation to procurement, contract administration, and final account settlement.

One of the primary responsibilities of Quantity Surveyors is to accurately estimate the costs associated with a development. This involves meticulously assessing direct costs as well as other factors that need to be considered such as land costs, professional fees, interest rate fluctuations, bond raising fees, etc.

By providing initial high level cost estimates, detailed cost estimates, and cashflow forecasts, Quantity Surveyors enable clients and investors to make informed decisions and allocate their resources efficiently.

Obtaining finance:

There are several considerations that form part of the project inception which include market analysis; financial viability; design development; regulatory and legal considerations; marketing and sales; and long-term management. Each of these play a pivotal role in the success of the project. Financial institutions typically require the following to be submitted as part of the application for finance:

  1. Financial viability – Determine the return on investment.
  2. Detailed Bills of Quantities (BOQ) – A list of materials and their prices required to construct a building.
  3. Development cashflow – Monthly cashflow for the duration of the project (Construction cost, interim interest, legal costs, professional fees, bulk contributions, etc.)
  4. List of CVs of the professional team.
  5. Architectural brochures.
  6. Geotechnical report and locality map.
  7. Side development plan (SDP)
  8. Town planning status – confirming zoning rights of the property, etc.

The QS will focus on the detailed bills of quantities, financial viability study, and the development cashflow.

Detailed bills of quantities: This is prepared by accurately taking off the material quantities from Architects and Engineers drawings and compiling a list in their respective trades e.g. earthworks, concrete, formwork, and reinforcement, etc.

Financial viability: The gross lettable area (GLA) is measured and used to calculate the potential income of the building. The income is weighed against the project costs to determine the return on investment (ROI).

Development cashflow: Once the total cost of the project is determined, the cashflow can be compiled. This is done by projecting the monthly payments that will need to be made to all stakeholders of the project, from the monthly construction claims that are certified by the QS for payment to the contractor to the professional fees paid to the project team. The bank requires this to internally structure its own cashflows to be able to facilitate the monthly development drawdowns. This enables the lender to monitor progress of the works and to ensure that funds are being used as intended.

Value engineering and cost optimization:

Rarely the first cost estimates are approved for construction and in an increasingly competitive market, commercial property developers are under pressure to deliver projects that optimize value for money without compromising on the quality of the product. Quantity Surveyors play a crucial role in determining the cost saving opportunities that are available to the client and involving the design team in the implementation to ensure optimal efficiency.

The first step is to divide the project into its main elements and related costs. These elements are as follows:

  1. Land Costs
  2. Construction
  3. Substructure
  4. Structural frame
  5. External façade
  6. Internal finishes
  7. Fittings and furnishings
  8. Services
  9. External works
  10. Professional Fees
  11. Other development costs

When the total cost is broken down in these elements the QS can determine where value engineering needs to take place and to identify savings. For example, the façade of a building is a high-cost item and often leads to consideration of distinct options from unitised systems (glazed or tiled) to regular shopfronts, while maintaining the exterior aesthetics and image that the client wants to display to the public. Another area that is often looked at to the detriment of the Architects, is the finishes. This comes down to making use of local supplies for finishes rather than importing. This also poses a risk on programming of the project as the programme will rely on the lead times of these materials.

With the ever-evolving need for sustainable development, energy modelling leads to making use of materials and systems that are costly to the design of a development and often requires value engineering. Through value engineering workshops with the project team, Quantity Surveyors identify opportunities that can optimize material usage, and eliminate unnecessary expenses.

Conclusion:

South Africa's economy has been experiencing sluggish growth, intensified by factors such as high unemployment, income inequality, and policy uncertainty. Economic challenges can impact property development prospects by reducing investor confidence, slowing demand for residential and commercial properties, and restricting financing options.

In the dynamic landscape of commercial development in South Africa, Quantity Surveyors play a pivotal role in ensuring the success and sustainability of construction projects. Their expertise makes them indispensable partners for developers seeking to maximize the value of their investments. By leveraging the skills and insights of Quantity Surveyors, commercial developers can navigate challenges, optimize resources, and achieve their project deliverables with confidence and efficiency.



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