How developers set flat prices before construction is complete

Developers often announce flat prices and start taking bookings before construction is complete, sometimes even before foundation work begins. 

They do so by estimating the total project cost, calculating the saleable area and adding an expected profit margin. However, changes in construction costs, loan interest rates and project timelines can affect the final calculation.

This raises an important question: how can developers fix the price of a flat when the building has yet to be constructed and the actual costs are still uncertain?

Cost accounting plays a key role in the process. Developers first estimate the total project cost, including land, construction, government approvals, utility connections and other expenses.

Land is usually one of the biggest costs. Depending on the agreement with the landowner, the developer may pay for the land in cash or provide the landowner with an agreed share of the completed flats.

The next step is to estimate construction costs. Based on the architectural and engineering designs and the Bill of Quantities (BOQ), developers calculate the required amounts of steel rods, cement, sand, bricks, stone, tiles, doors, windows, electrical equipment and sanitary fittings.

Labour costs, contractor payments, equipment expenses and site management costs are also included. These estimates are generally based on prevailing market prices of construction materials.

Developers then add the costs of architectural and engineering consultancy, regulatory approvals, including those from RAJUK, utility connections and other government fees.

Financing costs are another important part of the calculation. If a developer takes bank loans for land acquisition or construction, interest payments, bank charges and other financial expenses are added to the project cost.

The longer a project takes to complete, the higher these costs may become. Developers also have to account for project management, office operations, marketing, sales commissions and unexpected expenses.

After estimating the total cost, developers calculate the saleable area of the building. This is important because the total built-up area is not the same as the area available for sale. Staircases, lifts, corridors and other common spaces reduce the saleable area over which the project cost can be recovered.

For example, consider a project with 20,000 square feet of saleable space and an estimated total cost of Tk 12 crore, including land. The average cost would be Tk 6,000 per square foot.

If the developer targets a 20 per cent profit on the total cost, the initial selling price would be Tk 7,200 per square foot. This is a simplified calculation and does not represent the actual price of any specific project.

Prices may also vary among flats in the same building. Floor level, location, direction, natural light, ventilation, balconies, parking and other facilities can affect the value of individual units.

However, the initial selling price is based on estimates, not the final cost. Prices of construction materials may rise, the value of the taka may fall, interest rates may change, and delays in approvals or construction may increase expenses.

For this reason, cost accountants need to regularly compare estimated expenses with actual spending, identify differences and help developers control costs throughout the project.

Incorrect costing can create problems for developers. Overpricing may discourage buyers, while underpricing may leave the company unable to achieve its expected profit when the project is completed.

Accurate cost estimates, market analysis and regular financial reviews are therefore essential for setting flat prices before construction is complete.