The dangers of optimism bias in development

If you ask 99% of developers how full half a glass of waters is, they’ll tell you it’s half full. You can’t really be a developer without optimism.

It has so many positive aspects in our business, like: being able to see potential on a difficult site, finding confidence when committing significant sums of money before there’s any certainty of return, demonstrating resilience to keep projects moving through planning delays and seeing through viability challenges in shifting market conditions.

Without optimism, very little would ever get built.

But like all things, you need balance. Left unchecked, optimism can become one of the most dangerous things in a project. Alongside it, you need realism, scrutiny and due diligence.  

In development, there’s a fine line between backing a scheme and convincing yourself that problems will somehow sort themselves out later. That’s why we need to make a distinction between blind optimism and grounded optimism. We want you to take a positive view, but we also want you to be rigorous, to stress test everything, to plan for delays, to build contingencies into budgets and programmes, and most importantly, to be honest with yourself about risk.

Because eventually, every scheme encounters friction somewhere.

Let’s get into the details.

Build costs rarely stay where you left them

One of the most common areas where optimism bias creeps in is build cost planning.

At the appraisal stage, it’s easy to work with a neat set of numbers that make the scheme stack comfortably. We all know how quickly that can change though. There’s 101 things that can rear their ugly heads to add cost and risk.  

• Ground conditions turn out to be more complicated than expected

• Utility upgrades become necessary

• Contractor pricing comes back higher than anticipated

• Materials increase halfway through the programme.

Suddenly the comfortable margin starts looking much tighter.

Over the last few years in particular, developers have had to become far more realistic about how quickly costs can move. A scheme that looked viable six months ago can become marginal surprisingly quickly if assumptions aren’t regularly revisited.

This isn’t a reason to become paralysed by caution, but it does mean schemes need proper contingency planning and honest conversations about where cost pressures are most likely to emerge.

The projects that tend to weather difficult periods best are usually the ones where the developer acknowledged the risks early rather than assuming they’d somehow disappear later.

Timescales have a habit of slipping

We’ve all been in a situation where we look at a project timeline and think, “If everything lines up properly, we should be on site by spring.”

Programme optimism is all well and good, but the best laid plans of mice and men often go awry, as they say. It’s actually not that often that things line up perfectly.

The list of things that can delay plans is endless.  

• Planning conditions take longer than expected to discharge

• Statutory providers move slowly

• Legal issues emerge during acquisition

• Network Rail approvals drag on for months  

• Utility companies discover capacity constraints that nobody anticipated at the outset.

Individually, none of these issues necessarily kills a scheme. But together they can completely reshape a project timeline and place serious pressure on finance costs and delivery expectations.

You’ll find this to be especially important on more complex sites where infrastructure, access arrangements or neighbouring landowners are involved. It can initially appear to be a relatively straightforward scheme, but can quickly become highly technical once the detail is explored properly.

All of this is a strong reason to engage in realistic programming, erring on the side of caution rather than embracing blind optimism.

Exit assumptions can quickly become outdated

And now we come to exit strategy optimism.

You might even have exited lots of schemes in the past using a particular model. But there’s no guarantee it’s all going to work the same way again.

Values, demand and market appetite are constantly shifting and moving. There are all kinds of things that can affect the market:

• Residential markets soften

• Investor demand changes

• Interest rates adversely affect affordability

• Tenant requirements evolve.

It’s not all that rare to see developers revisit schemes entirely because the original plan no longer delivers the returns it once promised. You might see them pivot from residential into commercial or mixed-use approaches. Others might shift from immediate sales strategies towards long-term income generation and refinancing. In the same vein, some sites that once looked perfect for apartments are now performing better as storage, trade counter or light industrial space.

Having the flexibility and willingness to pivot is an important asset when the market shifts underneath you.

The danger comes when you become emotionally attached to the original idea and continue pushing forward despite clear warning signs.

Good development is about preparation, not perfection

When you take a realistic view and properly stress test your assumptions, you’d be wrong to take the view that your approach is negative. You’re simply doing proper due diligence and being prepared.

At VM Finance, it’s one of the earliest conversations we have with a developer. What happens if things don’t go exactly to plan? What if planning takes six months longer? What if costs rise again? What if sales values soften? What’s the fallback if the original exit no longer stacks up?

Those discussions are valuable because they force everyone to look at the scheme honestly before problems become expensive.

These conversations are also a great example of why relationship-led lending is such a powerful approach in development financing. We understand that projects rarely move in straight lines and work with you to put contingency plans in place. If circumstance arise that require a rethink, we can be there to support you make the scheme a success. We want you to demonstrate flexibility and we’re willing to do so with the support packages we offer.  

The bottom line

The most successful developers aren’t successful because they assume everything will be fine. They’re successful before they prepare properly when things don’t go to plan.  

You can never eliminate risk entirely in development. That’s impossible. But by taking a pragmatic approach that’s still optimistic and forward looking, you can minimise risk and maximise your chances of delivering a scheme that creates financial wellbeing for everyone involved.  

If you’re looking for a development funder to work with you flexibly on your next scheme, contact a VM Finance relationship manager today.

‍