Insight

Development margin explained: profit on cost vs margin on revenue

September 25, 2026
Development profit on cost and margin on revenue being compared

Ask two developers what margin a project makes and you can get two different answers for the same numbers. One quotes profit on cost, the other margin on revenue, and neither says which. The gap between the two measures is several percentage points on a typical project, which is enough to make a marginal deal look comfortable or a sound one look thin.

This guide sets out what each measure means, how to convert between them, what a reasonable target looks like in Australia, and why margin on its own is not the whole answer.

Two ways to express the same profit

Development profit is net realisation less total development cost. Net realisation is what you receive from sales after GST and selling costs. Total development cost is everything it takes to get there: land, duty, construction, contingency, fees, statutory charges, holding costs and finance. Once you have the profit, there are two common ways to express it.

  • Profit on cost, also called margin on cost or development margin on cost: profit divided by total development cost.
  • Margin on revenue, also called profit on revenue or margin on realisation: profit divided by revenue.

Take an illustrative project with net realisation of $9,022,727 and total development cost of $7,000,000. Profit is $2,022,727. On cost, that is $2,022,727 ÷ $7,000,000 = 28.9%. On revenue, it is $2,022,727 ÷ $9,022,727 = 22.4%. Same project, same profit, a difference of 6.5 percentage points.

Neither measure is wrong. Profit on cost describes the return on the money spent. Margin on revenue describes how much of each sale dollar is profit, which is the more direct read on how far prices can fall before the profit is gone. Construction lenders in Australia commonly frame their hurdle as a margin on cost, but the only safe practice is to state the basis every time a margin is quoted.

Converting between the two

Because both measures use the same profit, one converts to the other with simple arithmetic:

  • Margin on revenue = margin on cost ÷ (1 + margin on cost)
  • Margin on cost = margin on revenue ÷ (1 − margin on revenue)

Some common equivalents:

  • 15% on cost is about 13.0% on revenue.
  • 18% on cost is about 15.3% on revenue.
  • 20% on cost is about 16.7% on revenue.
  • 25% on cost is 20.0% on revenue.

The higher the margin, the wider the gap. At thin margins the gap is smaller, but that is where a project sits closest to a lender's hurdle, so confusing the two does the most damage there: a project reported at 15% on revenue is about 17.6% on cost, while one reported at 15% on cost is only 13.0% on revenue.

Getting the inputs consistent

A margin is only comparable if cost and revenue are defined the same way each time. The common inconsistencies are:

  1. Revenue before GST and selling costs. Measuring profit against gross realisation rather than net realisation understates margin on revenue and, if the costs are also left out of profit, overstates both measures.
  2. Cost without finance. Leaving capitalised interest and fees out of total development cost flatters profit on cost. Lenders include them.
  3. Land at an old or related-party price. If land was bought years ago or from a related party, a lender may adopt its current value, not the contract price, which changes both profit and cost.
  4. Mixed GST bases. Revenue under the margin scheme and costs under another basis. Whether the margin scheme applies is a question for your accountant, but the model has to use one basis throughout.

The full cost build-up is covered in how to do a development feasibility, step by step.

What is a good profit margin for property development in Australia

There is no single right number, because the margin needed depends on the risk being taken. A cost and feasibility report published by the NSW Government assumes developers need a margin of around 18%, with a typical range of 17 to 20%. The report does not specify whether that is on cost or on revenue, which is itself a reminder of how often the basis goes unstated.

Within any range, the margin a project needs usually rises with:

  • Length. A longer program has more time for costs and prices to move.
  • Scale and complexity. Larger or taller buildings carry more construction and approval risk.
  • Presale position. A project with no presales carries full market risk at completion.
  • Market direction. A softening market narrows the gap between your end value and the valuer's.
  • Builder and contract. A cost-plus contract leaves more cost risk with you than a fixed-price one.

Lenders commonly set a minimum margin that the project must still show after their valuer and quantity surveyor have revised your numbers. That hurdle varies by lender, project and market, and a project that clears it on your figures may not clear it on theirs. Siare's calculator uses an 18% margin on cost as its default target, flags a result within 85% of the target as marginal, and its finance assessment uses a 15% margin covenant as a benchmark. None of those is a lender's policy; they are reference points.

Why lenders care about margin

To a lender, margin is a buffer. It measures how much can go wrong before the loan is at risk. If end value falls or costs rise, the margin absorbs it first.

In the illustrative project above, a 10% fall in end value takes the margin on cost from 28.9% to 16.3%. A 10% rise in construction cost takes it to 22.6%. Both together take it to 10.6%. A project that starts at a thin margin has less room for any of these, which is why lenders test downside cases rather than accept the base case. What that does to pricing is covered in what moves construction finance pricing, and how a credit team reads the rest of the feasibility is in how to prepare a development feasibility for lender scrutiny.

Margin versus IRR

Margin measures how much profit a project makes. It says nothing about how long the money is tied up. That is what the internal rate of return, or IRR, adds: it is the annualised return on the cash invested, taking into account when each dollar goes in and comes out.

A simple way to see the effect of time is to annualise the same result over different programs. A 20% return on cost earned over 18 months is equivalent to about 12.9% a year. The same 20% over 30 months is about 7.6% a year. That is not an IRR, which depends on the timing of your equity and the debt, but it shows why a delay that barely moves margin can cut the annualised return sharply.

Leverage adds a second effect. Because debt funds most of the cost, the return on your own equity can be far higher than the margin on cost, and far more sensitive. The same leverage that lifts IRR in the base case deepens the fall in a downside case.

So the two measures answer different questions:

  • Margin on cost tells you whether the project has enough buffer, and it is what lenders test.
  • IRR and equity multiple tell you whether the project is a good use of your capital compared with the alternatives, and how much time costs you.

A project should clear both: enough margin to be fundable, and enough return on equity, over its realistic program, to be worth your time and capital.

Margin on a project you keep

A build-to-rent or hold project has no sale, so there is no sale margin in the usual sense. The equivalent test is how the value on completion compares with what the project cost, and how the rent compares with the cost. Yield on cost, net rent divided by total development cost, is set against the capitalisation rate the market applies to similar completed property. If yield on cost is comfortably above the cap rate, the project creates value on completion; if it is at or below, it does not. A lender refinancing the completed asset will then look at debt service cover, whether the rent pays the interest with room to spare, rather than at margin.

How to report margin to a lender

A few habits make the margin in your feasibility easier to rely on:

  1. Show profit on cost and margin on revenue together, with the formula for each.
  2. Define revenue as net realisation, after GST and selling costs, and say which GST basis is used.
  3. Include all finance costs, including capitalised interest and fees, in total development cost.
  4. Show the break-even price alongside the margin, so the buffer is visible in dollars.
  5. Put a downside case next to the base case rather than in an appendix.

Related measures worth knowing

  • Return on equity: profit divided by the equity you contributed.
  • Equity multiple: total cash returned to you divided by the cash you put in.
  • Break-even: how far sale prices can fall before profit reaches zero.
  • Residual land value: the most you can pay for the site and still reach a target margin, covered in residual land value explained.

Common mistakes

  1. Quoting a margin without saying whether it is on cost or on revenue.
  2. Comparing your margin on revenue with a lender's hurdle expressed on cost.
  3. Leaving finance costs out of total development cost.
  4. Judging a project on margin alone and ignoring a long program.
  5. Treating a base-case margin as the margin, without a downside case alongside it.

See both measures on your own project

The Siare development margin calculator shows margin on cost and margin on revenue side by side, along with return on equity, IRR, equity multiple and break-even, so the basis is never in doubt. It is free and covers every Australian state and territory.

This article is general information about business and investment-purpose finance only. It is not financial, credit, legal, accounting or tax advice, and you should obtain your own professional advice before acting.

If you want to know whether your margin will hold up once a lender has revised it, start with the free development feasibility calculator, then test the downside before you apply.