Many development companies start out using generic spreadsheets to assess the viability of new build projects. This is understandable; when you only have a handful of staff, and a limited number of developments, a spreadsheet can be an effective tool to calculate appraisals. However, as your organisation expands its development catalogue, you’ll need more reliable, auditable, and secure viability tools.
The problem with Appraisal Spreadsheets
We have all experienced that heart-stopping moment when you realise that the spreadsheet you were working tirelessly on has been edited by someone. Suddenly, none of your formulas are working and the data is useless.
This is a frustrating and time-consuming scenario that happens regularly in companies relying on generic spreadsheet programs.
Although there is flexibility in creating bespoke appraisal spreadsheets, you are limited to the expertise present within your organisation, and the margin for error is large.
Often, only a select few actually understand the formulas within the spreadsheet. Have you ever had to wait for the Finance Administrator to return from annual leave to fix a formula?
Another conundrum experienced by organisations is when the person that created the spreadsheet in the first place leaves the organisation entirely. From a business continuity perspective, it is imperative that you build contingency within all your systems and processes. You want to mitigate risk as best you can when economic uncertainty looms large.
Perhaps you outsource the work to a consultant to do. Each time you rely on them for support you receive a hefty invoice and are held hostage to their work schedules. Agility is key during market volatility and the opportunities are few and far between. The cost of waiting could be devastating.
Excel checks that your syntax is correct, but does not know whether you are using the correct functions, or pointing them at the correct cells to retrieve the right data. This means that spreadsheet mistakes are easy to make, and they’re also hard to resolve. Select the wrong column, and suddenly you’ve pulled gross instead of net figures, with no suggestion that you have made an error.
Examples of such mistakes can be found in research conducted by the European Spreadsheets Risks Interest Group (or EuSpRIG). In fact, they have an entire webpage dedicated to spreadsheet horror stories. These horror stories include the State Office of Education in Utah miscalculating its budget by $25 million because of a fault data entry in a spreadsheet; the cost of a presidential recount in Wisconsin being inaccurate by $400,000 because a range being summed missed one important cell; and Kern County California overlooking $1.26 billion of taxable property due to using the wrong version of a spreadsheet.
EuSpRIG also found that over 90% of spreadsheets contain errors, and 24% of spreadsheets that use formulas contain a direct mathematical error in their computations.
Why choose a development appraisal software?
Development software takes the hard parts of appraisals out of your hands. With a system that is easy to populate with data, and that generates auditable and customisable reports automatically, developers can focus on assessing the viability of new housing developments for their clients.
Staff members cannot alter the formulas of a development appraisal software, so both development and finance teams can be confident that any results produced are accurate and reliable. This assurance gives developers the freedom to conduct rigorous sensitivity testing and assess the viability of tenures with ease.
Using appraisal software, the NPV and IRR automatically update with any changes made to an appraisal, and all reports can be easily exported into other formats to present at board meetings.
Benefits of using a development appraisal software include:
|Development Appraisal Software
|Formula can be edited by staff.
|User interface hides all formulas which are hard coded by the software engineers.
|Data could be inaccurate/unreliable.
|Software is rigorously tested and regularly updated by experts in the field.
|Hard to track new changes made.
|You can control who can change what with security permissions.
|Manually produce reports.
|Automatically produce industry standard reports and easily export them to other databases.
|Manually produce audit reports.
|Automatically produce reports suitable for an audit.
|Manually conduct sensitivity testing on appraisals.
|Easily conduct sensitivity testing using in-built scenario planning features.
|Manually calculate the NPV and IRR of potential developments with increased risk of error.
|Forecast NPV, IRR and long-term development appraisal cash flow and produce robust, auditable results.
|Manually research and input data for different dwelling types.
|Easily create mixed tenure appraisals using a tenure library and preset templates.
|Difficult to receive help with the appraisal.
|Quick and responsive support teams included in the service.
|Limited to the expertise of your company.
|Access to expert advice and training from the software provider.
Spreadsheets are a useful tool for developers, and we are certainly not suggesting that you forget about them entirely.
However, it is important to consider the risks associated with using them to assess viability, particularly given the volatile economic landscape we are operating in at the moment. This is especially true if you have multiple, complex development projects, such as multiple tenures and multi-phasing over a long period of time.
Want to learn more about development appraisal software? Check out ProVal: the leading financial viability software for developers of affordable housing.