Development Feasibility 101: The Numbers Most Canadian Developers Miss
Most early-stage feasibility studies miss at least one major cost category. Here are the four costs that consistently blow up Canadian development budgets, and how to model them correctly.
A development feasibility study is supposed to tell you, before you commit to buying a property or spending a dollar on design, whether a project can generate a reasonable return given its costs and the revenue it will produce. Done well, it's the most important tool in a developer's kit. Done poorly, which describes most preliminary feasibility studies in Canada, it's a false sense of security that leads developers into projects they shouldn't have touched.
This guide focuses on the four costs that consistently appear in preliminary feasibility studies at the wrong number, either missing entirely or dramatically underestimated, and how to get them right from the start.
Cost #1: Development Charges
Development charges are, by far, the most commonly missed or misstated cost in early feasibility work. Developers in fast-growth Ontario cities routinely underestimate DCs in two ways: first, by using last year's rates (DCs can be updated annually in some municipalities); second, by forgetting to include the regional charge on top of the city charge. In the GTA, the combined city + region DC for a 2-bedroom apartment can range from $90,000 to $130,000 per unit. On a 60-unit project, that's $5.4M–$7.8M that must be paid at building permit, before construction even starts.
Cost #2: Carrying Costs During Approvals
Every month between land purchase and building permit costs money. On a $4M land acquisition at 6.5% annual interest, carrying costs run about $22,000 per month. In Toronto, site plan approval averages 18–24 months. That means $400,000–$530,000 in interest on the land loan alone before construction financing even begins. Most early feasibility models either use a flat 12 months for approvals or leave the timing blank, neither is realistic for GTA development.
Cost #3: Soft Costs
Soft costs are the non-construction costs required to design, permit, and manage a project: architectural and engineering fees (typically 8–12% of hard construction cost), permits and municipal fees, legal fees, construction management fees (3–5%), and insurance. In aggregate, soft costs typically run 15–22% of hard construction cost. Many preliminary studies use a flat 10% soft cost assumption, a number that was reasonable 15 years ago but is now dangerously low for complex urban projects, particularly in Ontario where permit and professional fees have risen substantially.
Cost #4: Contingency
Construction projects rarely come in at the initial budget number. Supply chain disruptions, labour shortages, design changes during construction, and unforeseen site conditions all push costs above estimates. A contingency of 10% on hard construction costs is a minimum for any project in the pre-design stage. For projects with significant complexity, contaminated sites, high-rise concrete structure, heritage integration, constrained urban lots, 15% is more appropriate. Under-contingency-ing is one of the most common causes of project distress in Canada.
The Three Ratios That Tell You If a Deal Works
Before doing a detailed pro forma, three quick ratio tests can tell you whether a project is worth pursuing further: (1) Gross Margin, (Revenue minus Total Cost) divided by Revenue; anything below 20% is difficult, 25%+ is healthy for residential for-sale. (2) Return on Equity, Profit divided by Equity Invested; developers typically target 18–25% ROE on a 3–5 year project. (3) Equity Multiple. Total Cash Out divided by Total Cash In; a 1.5x multiple over 3 years is a common threshold. If a project fails two of these three tests on realistic numbers, it's a signal to walk away or renegotiate the land price.
How to Build a Better Preliminary Estimate
A better preliminary feasibility model includes: BCPI-adjusted hard construction costs for your city and building type, the actual current DC rate for your specific municipality (including regional charges), a soft cost estimate of 18–22% of hard costs, permit carrying costs based on realistic approval timelines, and a 10–15% contingency on hard costs. LandVault's Project Cost Estimator combines all of these inputs into a single Class 3 estimate (±15%) that you can run in under 60 seconds.