Profit on cost (POC)
Profit on cost is the project's profit divided by total development cost. It's the headline ratio used by Australian residential developers to decide whether a deal is worth doing.
Formula
Net realisation = GRV minus selling costs and GST. TDC = total development cost.
Why it matters
Profit on cost is the sniff test. Most Australian developers won't seriously consider a build-to-sell apartment project below 18–20%, and most senior lenders won't fund one below that range either. Below the threshold, the deal doesn't compensate for the risk; above it, the deal at least clears the hurdle.
Worked example
Continuing the Waterloo scheme: net realisation = $26.2M (GRV $28.59M less ~$2.4M selling costs and GST), TDC = $24.1M.
Profit on cost = ($26,200,000 − $24,113,000) / $24,113,000 = 8.7%.
That's well below the typical hurdle. The scheme either needs higher pricing, lower costs, or a different scheme size.
Typical hurdles
- Boutique build-to-sell apartments: 18–22% profit on cost.
- Larger projects with longer programs: 20–25% to compensate for risk.
- Joint-venture or capital-partner deals: thresholds depend on the structure, but 20% is a common floor.
Why profit on cost — and not just margin
Profit on cost answers "did the dollars I tied up in this project earn a worthwhile return?" Margin answers "how much of every revenue dollar did I keep?" Both matter; profit on cost is the one that maps to capital efficiency.
Questions
Frequently asked
What's a good profit on cost for an apartment development?
18–22% is the conventional minimum for a build-to-sell apartment project in Australia. Below that, most lenders and equity partners pass.
Profit on cost vs development margin — which one matters?
Both. Profit on cost tells you about capital efficiency; development margin tells you about pricing power. Most ICs want both above their hurdle.
Does profit on cost include GST?
By convention, the calculation uses net realisation (GRV less selling costs and GST) and TDC (all-in costs). GST is netted out before the ratio is calculated.
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