Gross development value (GDV) is one of the most important performance metrics that all investors and property developers closely monitor and evaluate when building their project assets. The gross development value of a property investment project gives a near accurate figure of what that property or real estate development project may be worth when all development works have been completed. In other words, it will show if a profit has been, or will be made from the development project, and at what level.
How to Calculate Gross Development Value (GDV)
The most common and most basic formula to estimate the Gross Development Value is as follows:
GDV = Land + (Construction + Contingency + Fees + Profit)
GDV = Gross development value
Land = Purchase price of land/property/site acquisition
Construction = Engineering, construction and management costs
Contingency = Contingency and Management Reserve
Fees = Fees and transaction costs
Profit = required Developers profit
How to Use Technology to Monitor and Evaluate Gross Development Value (GDV)?
Using a Project Management Information System (PMIS) platform like PMWeb will provide the investors and property developers with a real-time monitoring and evaluation of the property Gross development value (GDV) that is based on trust worthy data captured using the different project management processes mapped into PMWeb. This will enable using earned value method (EVM) to monitor, evaluate and report on the Gross development value (GDV).
The Earned Value Method (EVM) budget cost will be set to equal the property Gross development value (GDV). This will include the budget cost for the land purchase price, engineering, construction and management cost, contingency and management reserve, fees and transaction cost and the required target developers profit. PMWeb Budget module will be used to capture those details at the level of detail set in the cost breakdown structure (CBS). The assigned budget value for each CBS level can be in the currency associated with the estimated cost. The sum of all those budget line items is what is know as the Budget at Completion (BAC) or the property Gross development value (GDV).
Each budget line item will be linked to project schedule activity the details the planned start and finish dates of spending the funds associated with that specific budget item. PMWeb allows selecting the spending curve pattern associated with each budget line item. This will be the basis for creating the Planned Value (PV) for spending the property Gross development value (GDV).
The project budget baseline could be subject to revisions until the project is formally approved to proceed. PMWeb can maintain all those budget versions to enable the real estate investor to compare and track the changes in the GDV as well as other metrics like the IRR, NPV among others.
When the gross development budget value is frozen to become the approved GDV budget baseline, all revisions to the approved project budget should be carried out using PMWeb budget adjust module. This will provide a formal process for submitting, reviewing, approving and tracking all changes to the approved budget. Those could be changes that could result in increasing or decreasing the budget as well as to transfer funds from one cost center to another including all contingency and management reserve drawdowns. The workflow assigned to the budget adjust module will incorporate the approval levels set by the real estate developer.
Verifying the Gross Development Budget
The gross development budget (GDV) is based on the property sales and lease values that was established on the information that can usually be obtained from leasing agents or specialist firms of valuation surveyors. This will help to establish how much the real estate developer can expect to take in sales and rent on a per annum basis for the building asset when completed.
Although the details of those revenue contract agreements and other sales opportunities could be captured in different applications, nevertheless, it is highly recommended to add their details in PMWeb revenue contracts module. The PMWeb revenue module will be used to capture the summary information of those contracts which could include possible property sales, long term lease agreements, long term usage agreement (healthcare, education) among others. PMWeb allows capturing the revenue earning durations as this will be needed when it comes to calculating the Internal Rate of Return (IRR), Net Present Value (NPV) and any other time-sensitive performance measures.
In addition, having the revenue details captured on the same PMWeb platform enables the real estate developer to track changes to the market trends and demand for the developed assets. This could have massive impact on the initially anticipated gross development value which will require immediate actions to revisit the project budget or gross development value.
Monitoring and Evaluating the Schedule Aspect of the Real Estate Development
One of the key factors in achieving the targeted GDV is to ensure timely completion of the real estate asset to ensure that the planned revenue is materialized. In addition, many of those revenue contracts could have penalty clauses should there be delay in handing over the real estate assets. To evaluate and monitor the on-time completion of the real estate asset, three performance measures will be needed. Those will be the Total Float (TF), Schedule Variance (SV) and Schedule Performance Index (SPI).
To calculate those measures, the Earned Value Method (EVM) will need the progress schedule data to capture the Percent Complete for each activity assigned to the budget line item. This will be used to calculate the Earned Value (EV) which is based on multiplying the approved percent complete for the project schedule activity assigned to the GDV budget line item by the budget value for that line item. For example, if the budget price of the land is USD 20 Million and the land acquisition was completed during that particular month, then the Earned Value for the land acquisition is USD 20 Million.
The schedule performance analysis is not limited to analyzing if the project is on schedule or not, but also to ensure that the allocated budget spending is spent as planned. This is important as otherwise the real estate developer will have funds that were blocked but they are not being used. This indicates lack of efficiency when it comes to budget spending. The Schedule Performance Index (SPI) is the measure that shows the efficiency in spending the project budget.
Monitoring and Evaluating the Cost Aspect of the Real Estate Development
Ensuring that the project budget does not exceed what has been planned and approved is very critical as otherwise the real estate developer will have an asset that has a cost that exceeds the value set by market for similar developments. The real estate developer would usually retain the services of a project management consultant, engineering consultant, contractors, suppliers among others to deliver the project scope of work. PMWeb commitment module will capture all of those contracts as well as changes whether they are potential, under review, approved or disputed.
At the end of each month, a progress invoice will be issued to capture the cost of approved completed scope of work. Usually, the same schedule percent complete will be used to calculate this cost. For actual cost expenses that are not invoiced against a specific commitment contract, PMWeb miscellaneous invoices module will be used to capture those expenses. In addition, for the real estate developer own resources, timesheets will be used to capture the hours spent on the project. PMWeb allows defining different rates for each resource to capture their actual cost incurred on the project.
By comparing the earned value (EV) for completed project scope of work with the actual cost (AC) spent for the scope of work, the real estate developer can immediately determine if there is any cost variance (CV). The cost performance index (CPI) details the cost efficiency in spending the approved project budget. For example, a CPI of 0.80 indicates that for each US$ 1,000 value of works, the real estate developer spent only US$ 800 for achieving this scope of work. In addition, it is important to report on the project contingency and management reserve drawdown as those are funds allocated by the real estate developer to respond to the project’s accepted risks.
Putting All Together
The schedule and cost value measures along with the earned value method at completion measures are used to assess the gross development value (GDV) coupled with the IRR and NPV measures provides the real estate developer with a real-time single version of the truth monitoring and evaluation of the real estate development performance status. This provides the real estate developer leadership team with the insight to trust worthy information to make better and fasted informed decisions.