Construction Feasibility: Residual Value, Budget & Returns

Most construction projects don’t fail on the architecture. They fail on the economics — and that usually surfaces far too late, once the site has been bought, the consultants are on the job, and the first real budget lands on the table. By then your freedom to act is gone. A structured feasibility early in the process reverses the order: it decides whether a site is even worth pursuing before you tie up capital and consultant fees in it.

A feasibility on a construction project is not a detailed cost estimate. It’s a fast, honest calculation model that answers two questions: Does the project add up at the prices the market is paying today? And what can you realistically pay for the site if it is to do so? The rest of this article walks step by step through the four building blocks — exit value, build budget, return requirement and residual value — and combines them into a decision you can trust.

What a feasibility actually has to answer

The difference between a good and a bad feasibility is rarely the refinement of the spreadsheet. It’s whether it asks the right question. A construction budget calculates forwards: site plus building plus costs gives a total price. That’s useful once the project is decided — but it doesn’t tell you whether you should buy the site.

A feasibility calculates backwards. It starts at the finished project’s value on the market and subtracts everything needed to build it, including the profit you require for taking on the risk. What’s left is what the site is allowed to cost. That logic — the residual method — is the pivot of all project economics, and we’ll return to it at the end.

Rule of thumb: If you can’t work your way back to a land price from the exit value, you don’t have a feasibility — you have a wish.

The point of doing this early is freedom to act. Most of the figures you need can be estimated from public registers and known benchmarks in a few hours: the building rights from the local plan in Plandata.dk (the national planning database), the cadastral plot area from matriklen (the cadastre), and areas and use codes from BBR (the Buildings & Dwellings Register). It’s cheap to say no on that basis — and expensive to discover the problem after signing.

Step 1: Building rights set the frame

Everything in a feasibility scales with how many square metres you’re allowed to build. That’s why it begins with the building rights, not with the price.

The actual building rights are stated in the local plan: use, plot ratio, building zones, number of storeys and height. If there is no local plan, the municipal plan framework sets the ceiling for what a future plan can permit. The indicative plot ratios — around 30 for detached low-rise, 40 for dense low-rise and 60 for multi-storey — are good reference points, but the local plan takes precedence and can both tighten and loosen them. Always verify in Plandata.dk rather than relying on a rule of thumb.

Two things are worth holding on to at this step:

• The plot ratio is calculated from the cadastral plot area — not from what the seller states. Check matriklen.
• Gross floor area is not the same as saleable area. Stairs, technical rooms, common and access areas count towards the building rights but aren’t sold. That efficiency — the ratio of saleable to built area — is one of the biggest single drivers in the whole calculation.

If you want to dig deeper into how a local plan translates into actual building rights, we’ve covered it in how to read a local plan step by step. And because building rights are typically calculated from BBR areas, it’s worth knowing the most common pitfalls in BBR data before you rely on them.

Step 2: The exit value — what it’s worth finished

Once you know what you’re allowed to build, you need to put a value on the finished project. That’s the top line of the feasibility, and everything else hangs on it.

The principle is simple and deliberately conservative: What is the project worth if it stood finished today, on the existing market? No projections, no expectation that prices will rise while you build. That discipline protects you from the classic mistake — justifying too high a land price with a market that doesn’t yet exist.

The value is set differently depending on the exit strategy:

• Sale (owner-occupied homes). A realistic sale price per m² for the specific location, standard and dwelling type, based on comparable sales in the immediate area within a limited timeframe and a narrow radius.
• Letting (investment property). The market rent per m² capitalised at a required yield. Here it’s the rent level and the yield, not a price per m², that carry the value.

Both approaches require you to find genuine comparables — not an average for the entire municipality. We’ve described the method separately in exit value: what is the project worth if it stood finished today, because that’s the point at which most feasibilities become too optimistic.

Step 3: Build budget per m2 and the contingency

The next line is the cost of putting up the building. In an early feasibility you rarely calculate item by item — you use a build budget per m² based on benchmarks for the building type and the quality level.

A build budget per m² covers far more than the construction work itself. For the calculation to hold, it has to accommodate:

• The contract sum — shell, building envelope, installations, internal fit-out.
• Site works and groundworks — foundations, earthworks, utilities, roads and outdoor areas. Foundations are the item that most often blows the budget if bearing capacity and groundwater haven’t been checked.
• Soft costs — consultants, design, connection fees, building permit, insurance.
• Financing during the construction period — interest on the construction loan until the project is sold or let.

And then the contingency. An early budget is built on benchmarks and assumptions, not on engineered quantities, and that uncertainty has to be priced in with a realistic reserve rather than pretending it doesn’t exist. Which benchmarks and which contingency are reasonable for different building types, we’ve gathered in build budget per m²: benchmarks and the contingency you can count on. Construction and trade prices move, so the current benchmarks should always be verified against fresh tenders or indices rather than a figure from last year.

Step 4: The return requirement — your payment for risk

A development project isn’t free to carry out, and it isn’t risk-free. That’s why the feasibility has to include your profit before you work back to the land price — not as a residue you hope is left over.

The return requirement on a development project is typically expressed as a developer’s profit: a target for profit measured against either total project costs or total sale value. The level depends on how much risk the project carries — uncertainty over building rights and authority matters, sales risk, the length of the construction period and capital tie-up. A well-defined multi-storey project on a development-ready site with a clear local plan carries less risk than a conversion with unresolved planning status, and the requirement should reflect that.

It’s important to distinguish two figures:

• Developer’s profit — the profit on the development process itself, payment for risk and effort.
• Required yield on letting — the return an investor requires from the finished, let property, used to capitalise the rent into an exit value.

In an investment project both appear: the yield sets the exit value in step 2, and the developer’s profit is set aside in step 4. Conflating them is one of the most common mistakes in amateur calculations.

Step 5: The residual value — what the site is allowed to cost

Now the four steps come together. The residual value is the maximum land price the project can bear, and it emerges by subtracting everything from the exit value:

Exit value − build budget (incl. contingency and soft costs) − financing − developer’s profit = residual value of the site.

That figure is the feasibility’s conclusion. If the seller’s expectation sits below the residual value, there’s headroom — and you know exactly how far you can stretch. If it sits above, the project doesn’t add up at today’s prices, no matter how good the site looks. We’ve described the full method, including the typical pitfalls in the calculation itself, in the residual method: what the site is really allowed to cost.

The residual value is sensitive to small changes in the assumptions — that’s its nature, because it’s a difference between two large numbers. A sale price 5% lower or a build budget 5% higher can halve what you can bid. That’s why a feasibility always comes with a simple sensitivity check: run the residual through a sober and a cautious scenario, and see how robust it is. A project that only adds up in the best case isn’t a project, it’s a bet.

From feasibility to go/no-go

The whole exercise leads to one of three conclusions, and that’s the point of doing it early:

• Go — the residual value sits comfortably above the seller’s expectation, even in the cautious scenario. Move on to real due diligence and consultants.
• Maybe — the project adds up, but marginally. It depends on matters that need to be resolved: a dispensation, a foundation risk, a rent level. Prioritise precisely those clarifications before you spend more.
• No-go — the residual value sits below the price. Stop now, while it has only cost a couple of hours of calculation.

The quick sorting itself — what it takes to say no before you spend consultant fees — we’ve covered separately in go/no-go: screen a construction project before you spend consultant fees. A feasibility is the calculation model that makes that decision a qualified one instead of a gut feeling.

This is also where a feasibility differs from a full construction budget: it’s deliberately fast and approximate, because its job is to filter out, not to engineer. The thorough calculations belong on the few projects that have passed the screening — not on the many that should never have got that far.

When the calculation is run automatically

Each step above can be done by hand in a spreadsheet — and anyone who develops should be able to. But it’s the same calculation every time, and most of the input sits in public registers: the building rights in Plandata.dk, the areas in BBR, the plot area in matriklen, and transaction data from the current market to set the exit value.

That’s exactly the exercise Arcili automates. The Projektvurdering (Project valuation) module starts from what may be built on a specific cadastral parcel, sets an exit value from comparable sales in the immediate area, calculates a build budget per m² with a contingency and a return requirement, and gives you the residual value — what the site is realistically allowed to cost — calculated on the existing market, without projections. It doesn’t replace the valuer or the client’s advisor who has to qualify the winning project. It removes the hours spent on the many sites that should never have reached that calculation.

Want to see a specific site run through a feasibility from building rights to residual value? Book a walkthrough.