Top tips for developing a business case during economic uncertainty
Anthony shares his insights into the best approaches for creating a viable business case during the cost of living crisis.
A look at the popular search analytics tool Answer the Public suggests two of the most Googled questions during October regarding interest rates are ‘when will interest rates rise’ and ‘where are interest rates going’. These results are not a surprise given the rapid change in the marketplace over the past twelve months, and it’s not just the housing market that is being affected by the uncertainty, how does a local authority or private sector customer plan for project funding during such uncertainty?
The rapidly changing financial climate brings many challenges to both public and private sector customers when securing finance to fund construction programmes. Merely 12 months ago a public sector client could access finance via the Public Works Loan Board at a rate of 2%. Fast forward to mid-October and this is now more than 5%, significantly increasing the amount of capital repaid and changing the business case completely. Many of the projects we are working on involve borrowing that is paid for via increased operating income or savings. A higher cost of finance could make some projects unviable at first glance.
My message to customers who are facing these sorts of pressures is to get creative and explore all of the options available to you, there might be more help available than you realise. Some of my top tips are shared below:
1 – Look at all sources of funding
In my role I am exposed to many different routes to fund a public sector construction project. We have worked on Levelling Up Funding, Shared Prosperity and Town Deals funding. Whilst many grant schemes are currently closed for applications recent history suggests a new Prime Minister, and new ministers, will lead to revised priorities and corresponding funding. Lots of pots of funding covering housing, arts, transport and science and Innovation do still exist and continue to launch competitions. My advice would be, despite the current retrenchment of government funding, to leave no stone unturned when looking for extra grant support, good projects have a habit of finding funding.
2 – Can your project work harder for you?
With projects that are built for public use, there is often an opportunity to make the building work harder for the customer. For example, when building a leisure centre, library or other publicly accessed building, could further revenues be driven from cafes and restaurants, could the building be rented for functions and meeting space, and could further EV points be installed to generate revenue through charging electric vehicles? These are all factors that should be considered during the planning stage to drive long term sustainable revenue, making the business case more viable.
There may also be opportunities to raise capital from further parts of an estate. For example I am working with a number of NHS trusts to unlock revenue by sourcing third party investment to build car park structures on their estates. This is helping them to maximise their assets and deliver additional income within the health sector.
Furthermore, schemes such as new council offices may involve the replacement of existing facilities, and unless the new building is built in the place of the old one, it is likely the old building will be sold. There are numerous ways of generating a return from this opportunity, from an outright sale to a leaseback on the existing building, again providing a longer-term revenue stream.
3 – Early contractor engagement can identify cost savings
A benefit I cannot stress highly enough is getting a contractor involved at the early stages of your project. The contractor will be able to work with you on your brief, getting a much greater understanding of your needs in comparison to engagement at a later stage. This can help to identify cost savings through adjusting the design and materials, as well as the price points and milestones throughout the programme.
4 – Don’t discount sustainable building
When compiling a business case, it is often the sustainable aspects of a project that can get cut from the scope. While this will provide some short term savings, I urge my customers to take a longer term view on the benefits a sustainable building delivers.
A key example is our work at Spelthorne Leisure Centre (pictured above), where the company is working in tandem with Spelthorne Borough Council to deliver one of the world's most energy efficient leisure facilities, designed to meet stringent Passivhaus criteria. While the Passivhaus requirements make the initial capital costs more expensive, once complete the customer will benefit from a building that uses 60% less energy than standard leisure centres and will have an asset the community can be proud of. It is impossible to know what energy prices will do over the next few years, however it is likely that customers that are investing in net zero in operation schemes will be in a better place to cope with future demands.
Spending this money upfront also safeguards against making expensive retrofitting enhancements at a later date. We would expect government environmental requirements for public buildings to become more stringent as the needs for the climate crisis rise, leaving public sector bodies with bills in the future.
Anthony is Head of Funding solutions in Willmott Dixon’s Development Solutions business, providing a range of services to local authorities including developing business cases and sourcing funding, such as levelling up grants for projects to start building quickly.