Financial Models Tips and Tricks: Cost as a Percentage of Total Costs

This is the first in a series of short articles looking at how to simply solve common problems found Real Estate development appraisals models.

Whilst the Excel Goal Seek can usually come the rescue there are often simpler ways to get the answer.

The problem in calculating a cost agreed as a percentage of total cost is that the total costs includes the cost you are solving for.

This issue may arise in the calculation of developers profit, or construction related professional fees. For example the developers profit may have been agreed at 8% of total costs.

A common mistake is to multiply the total costs excluding profit and then multiply by 8% and then add together. The problem of course is that this gives a profit of 7.4%.

To calculate correctly take the total costs excluding profit and divide by 1 minus the profit percentage. E.g. if costs excluding profit are £1,000,000 then the formula is 1,000,000 / ( 1 - 0.08 ) = £1,086,957. Profit is therefore 86,957 which is 8% of £1,086,957.

Disclaimer:
Information in this post is illustrative only and Longmorn Project Finance Limited is not responsible for any losses including consequential losses as a result of using this information.