Profit on cost or profit on value in an appraisal
The same profit reads as 20 per cent of value or 25 per cent of cost. How to pick a measure, justify the return by risk and present it so a council's adviser accepts it.
A developer profit viability appraisal can show the same scheme as viable or unviable depending on which profit measure you pick, and the difference is arithmetic rather than opinion. Profit on cost divides the profit by total development costs. Profit on gross development value divides the same profit by the end value. On a scheme with an £10,000,000 gross development value and £8,000,000 of costs, the £2,000,000 profit is 20 per cent of value and 25 per cent of cost. Both statements are true, and quoting the one that suits your case without saying which you used is the fastest way to lose credibility with a council's adviser.
The two measures and what each captures
Profit on cost answers the question a contractor-minded developer asks: what return am I making on the money I put at risk. It responds directly to construction cost movement, which is where most of the risk sits on a build-heavy scheme with modest land value.
Profit on gross development value answers the question a trader-developer asks: what margin is there in the sale price. It responds to sales value and absorption, which is where the risk sits on a high-value scheme in a thin market.
Planning Practice Guidance on viability works in gross development value terms. It says that for plan making an assumption of 15 to 20 per cent of gross development value may be a suitable return to developers, and that a lower figure, potentially as low as 6 per cent of gross development value, may be appropriate for affordable housing where the revenue is effectively guaranteed. Those figures are for testing plan policies, and the guidance is explicit that alternative figures may be justified by the type, scale and risk profile of the development.
Why the ranges differ by tenure and product
Risk is the whole argument, and it varies by what you are building and who is buying it.
| Product | Usual measure | Why |
|---|---|---|
| Open market housing for sale | Either, commonly 15 to 20 per cent of value | Sales risk sits with the developer across the build period |
| Affordable housing sold to a registered provider | Lower return, often expressed on cost | Revenue is contracted before completion |
| Build to rent | Often tested on yield rather than profit | Value is derived from income, not unit sales |
| Commercial development, pre-let | Lower return | Occupier risk removed at the outset |
| Speculative commercial | Higher return | Letting risk and void cost unknown |
That table is the reasoning councils accept. What they resist is a single blended 20 per cent of value applied across a mixed-tenure scheme where half the units are forward-funded, because the affordable element carries a different risk profile and the guidance says so.
A Viability Assessment that splits the return by tenure and explains each one is harder to attack than a single headline percentage.
Risk and how it justifies a higher return
Arguing for a return above the guidance range needs evidence of the specific risk, not an assertion that development is risky. The arguments that carry weight are concrete: a long build programme on a constrained city centre site, abnormal costs that cannot be fully quantified at appraisal stage, a phased scheme exposed to several market cycles, a first-mover location with no recent comparable sales evidence, or remediation of contaminated ground where the cost range is wide.
Each of those should appear twice in your evidence: once as a narrative justification for the return, and once in the cost or programme inputs. Double counting is the trap. If the abnormals are already priced at the top of the range, claiming a risk premium for the same uncertainty is something an experienced reviewer will notice and discount.
Affordable housing and the profit treatment
Where affordable units are sold to a registered provider under a contract, the developer carries construction risk but little sales risk. PPG's lower figure reflects that. In practice the negotiation is about whether a grant-funded or forward-funded tranche should be treated at the lower return while the market units carry the higher one, and about how the contract price compares with the assumed transfer value.
The document that sets out the tenure split, the transfer arrangements and the policy compliance position is the Affordable Housing Statement, and its numbers need to match the appraisal exactly. Mismatches between the two are a reliable source of officer queries, and they undermine the appraisal more than a contested profit assumption does.
Sensitivity testing the assumption
A viability case built on one appraisal run is weak. Show the scheme at the base case and then flex the inputs that matter, usually sales values, build costs, finance rate and programme, and report the profit under each in both measures.
- Run the base case and state both profit measures.
- Flex gross development value by plus and minus 5 per cent.
- Flex build cost by plus and minus 5 per cent.
- Extend the programme by six months and re-run the finance.
- Report the residual land value alongside the benchmark land value in every run.
The point of the exercise is to show where the scheme tips, which is more persuasive than a single number defended to two decimal places. Where a modest cost increase moves the scheme from policy compliant to deficient, say so plainly. That is the honest reading and officers respect it.
How officers and their advisers test profit
Councils generally instruct an independent reviewer, and that reviewer's instructions are to test the inputs rather than to accept the conclusion. Expect them to check the profit measure and its consistency with the risk narrative, the benchmark land value against existing use value plus a premium, the build cost against published cost data and the scheme's own drawings, sales values against recent local comparables, and the finance assumptions against the actual funding structure.
RICS members preparing this work are bound by the professional statement on financial viability in planning, which requires objectivity and transparency of assumptions regardless of who instructed the report. A viability appraisal presented as advocacy rather than as evidence is worth less to the person paying for it.
Contributions and abnormal items belong in the same conversation. Section 278 highway works, open space commuted sums, nutrient mitigation and infrastructure payments all land in the cost line, and our notes on open space and play space contributions on small schemes and nutrient neutrality mitigation credits and cost cover two of the items that most often appear late. What the council later spends the money on is published, as explained in our piece on infrastructure funding statements.
Presenting the figure with its reasoning
State the measure, state the percentage, state the money, and explain the risk it prices. Three lines. Then keep that figure consistent across the appraisal, the covering statement and any heads of terms discussion.
The presentational habit that costs developers credibility is switching measures mid-document, quoting 17.5 per cent of value in the summary and 22 per cent on cost in the appendix without reconciling them. Pick one as the primary measure, report the other alongside it, and show the conversion. The worked figures above are illustrative. This is general guidance, not legal advice, and viability evidence should be prepared and reviewed by a suitably qualified valuer. A PlanScope draft is a starting point for that professional work rather than a substitute for it.
PlanScope provides AI-assisted draft reports for planning applications. Reports should be reviewed before submission. We do not guarantee planning approval.
Frequently asked questions
Which profit measure should a viability appraisal use?
Planning Practice Guidance frames developer return as a percentage of gross development value, so that measure is the safer primary figure for a planning appraisal. Report profit on cost alongside it and show the conversion. What matters most is consistency, because switching between the two within one document invites the reviewer to discount both.
What return does national guidance suggest?
For plan making, the viability guidance says 15 to 20 per cent of gross development value may be a suitable return, and that a figure as low as 6 per cent may be appropriate for affordable housing where revenue is effectively guaranteed. Alternative figures are allowed where the type, scale and risk profile of the development justify them.
Can I claim a higher return because my site is difficult?
Yes, if the difficulty is evidenced and not already priced elsewhere. A long programme, phased delivery across market cycles, wide remediation cost ranges or a location with no comparable sales all support a higher return. Claiming a premium for risk already captured in the cost plan is double counting and reviewers look for it.
How is affordable housing profit treated differently?
Units contracted to a registered provider carry construction risk but little sales risk, so a lower return is normally accepted on that element. The practical negotiation is over the transfer value and which tranches qualify for the lower figure. The affordable housing statement and the appraisal must use identical numbers.
What do council reviewers check first?
Benchmark land value against existing use value plus a premium, build costs against published cost data and the actual drawings, sales values against recent local comparables, and the finance structure. The profit assumption is tested against the risk narrative rather than in isolation, so an unexplained percentage is the weakest part of most submissions.
Sources and further reading
This article is general guidance about the planning system in England and, where stated, the rest of the UK. It is not legal or professional advice. Check your local planning authority’s validation requirements and take professional advice for your specific site.