ECONOMIC EFFECT OF EARLY BUILDING COMMISSIONING
A building, as an investment project, has its own economic life cycle. At the preparatory stage, the investor incurs costs for the purchase or lease of a land plot. Then (or in parallel) it incurs costs for pre-design and design works, and then — costs for construction and installation works. Then the operation period comes, which is accompanied by operating costs and revenues, forming the profit. At the last stage of the life cycle, there are revenues and costs associated with the liquidation of the facility.
The calculation of the life cycle cost of a permanent structure can be performed both with consideration of the time factor (which gives the opportunity to develop a more accurate investment model) and without it. The importance of taking into account the time factor and earlier commissioning of the building is shown below.
As civil construction and erection works are the main items of capital costs in the structure of initial costs of the investor, it is obvious that the time they take, the longer the investment is "frozen" and the later it will yield profit, receiving less profit than expected due to the late commissioning of the facility.
Such "lost opportunities" cannot be taken into account without the time factor. Despite this, most investors do not take it into account when making decisions but compare the initial costs with the average annual income, which is very different from the real model of the investment cycle, and sometimes leads to incorrect investment decisions.
Strictly speaking, the expected profit from a construction project always greatly depends on the strategy chosen by the investor and the positioning of the product in the market. However, it should be recognized at the same time that the economic effect obtained due to the faster completion of construction works is a positive factor in any investment strategy.
The economic effects of early commissioning are considered in more detail below.
Reduction of the cost of borrowed funds
In the event of debt funds raising, the financial costs of the project can increase significantly. Financial costs are affected by the interest rate and the loan period, which, in turn, is determined by the speed of construction. This amount decreases in proportion to the reduction of the construction period as compared to the longest period. But even when the construction is funded without borrowed funds, longer construction periods lead to the so-called "lost opportunity costs" associated with the impossibility of further investment.
An example of the comparison of the cost of a building taking into account the borrowed funds savings is given in section 7.9 of the publication Comparative Analysis of the Cost of Multi-Storey Commercial Buildings
Shorter payback period
Owing to high demand for real estate, early completion of the construction makes it possible to get an additional return on investment due to earlier leasing out of commercial spaces or sale of the building, and thus, in addition to the reduction of the cost of borrowed funds, they can be compensated faster.
A longer construction period often results in an outflow of potential lessees or buyers who cannot or do not want to wait that long, which can lead to low profitability in the initial period after commissioning of the building.
For example, with a steel frame, the estimated reduction in the construction period is 6 months for a shopping and entertainment center with an area of 100,000 m2 with a gross leasable area of 60,000 m2 (i.e. GLA = 60%). If an average lease rate is UAH 270 m2 ($ 10 as of July 2020), the economic effect of early commissioning will make 270,600,006 = UAH 97,200,000.
Administrative costs reduction
While the cost of major preparatory work is calculated as a percentage of the total construction cost, the customer's costs of both the management team as a whole and directly the project management team related to the construction stage, are directly proportional to the construction period. Reduction of the construction period will result in a proportional reduction in customer's costs for project management and maintenance of the customer's service.