When a development finance lender looks at your project, they check one number first: profit on cost. If it is not high enough, they will not lend.
Profit on cost divides your net profit by your total development cost. The answer tells you how much profit you are making for every pound you spend.
The industry benchmark for UK development is 15% to 20% minimum. Below 15%, most lenders consider the project marginal. Above 25%, you have a strong deal that will attract finance easily.
You convert a commercial unit in Southampton into two flats. Total development cost: £350,000. Expected net profit after all costs: £70,000. Profit on cost: 20%. That is at the bottom end of what lenders want to see.
If costs overrun by 10% and your total hits £385,000 while profit drops to £35,000, your profit on cost falls to 9.1%. The project goes from viable to marginal. That is why development has a reputation for risk.
For developments on the South Coast, where build costs are high and sale prices are sensitive to market conditions, a profit on cost of at least 20% is sensible. Below that, the risk does not justify the return.
The formula
Profit on Cost (%) = (Net Profit / Total Development Cost) × 100
Why this matters
Profit on cost is the first number a development lender asks for. If it is below 15%, most lenders will pass. Above 25%, they will compete to fund your project.
Property maths is not optional. If you want someone to run the numbers with you, Xelox Properties can help. We cover Portsmouth, Hampshire, and the South Coast.