Feasibility Studies in Construction Projects in Iceland PDF

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Feasibility studies in construction projects in Iceland

by
Ásta Ósk Stefánsdóttir
Thesis of 30 ECTS credits

Master of Science in Engineering Management
January 2015
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Thesis of 30 ECTS credits submitted to the

School of Science and Engineering
at Reykjavík University in partial fulﬁllment
of the requirements for the degree of
January 2015
Supervisor:
Þórður Víkingur Friðgeirsson, Supervisor
Assistant Professor, Reykjavík University, Iceland
Examiner:
Halldór Zoёga, Examiner
Engineer and Administrator, Icelandic Transport Authority
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Feasibility!studies!in!construction!projects!in!Iceland! !
Abstract
The research of this thesis will build on a recently published study on feasibility studies in
public construction projects in Iceland. The previous study was conducted based on the
fact that investment decisions for public projects in Iceland have often been controversial
and it is not always clear how prioritization and selection of projects is evaluated. The
Icelandic law on public project procurement (no. 84/2001) requires that different solutions
to achieve the defined need must be examined and compared internally before applying
for funding by feasibility analysis. However, the law is believed to be limited and the
results of the previous study show that there is a gap between feasibility study procedures
in public construction projects in Iceland and best practices. The research of this thesis is
based on this conclusion with a new angle focusing on feasibility studies in private
construction projects in Iceland. The literature review determines which procedures can
be classified as best practices when performing feasibility studies in the inception of
projects. Then an interview-based qualitative research is conducted including eight
randomly selected private construction projects in Iceland where current feasibility study
practices are benchmarked against theoretical best practices.
The aim of the research is to expand the knowledge about of the last decade´s and current
feasibility study practices in Iceland by comparing the results of the two studies on public
construction projects and private construction projects respectively. The results show that
there is a difference between feasibility study practices in private projects and public
projects where the private projects perform significantly better. But, the procedures are
lacking more than half of the processes to be considered best practices in both cases.
Keywords: Project management; Feasibility study; Cost-benefit analysis.

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Úrdráttur
Þessi ritgerð felur í sér rannsókn sem byggir á annarri nýbirtri rannsókn um
hagkvæmnisathuganir í opinberum framkvæmdum á Íslandi. Fyrri rannsóknin byggði á
þeirri staðreynd að fjárfestingarákvarðanir í tengslum við opinberar framkvæmdir á
Íslandi hafa oft á tíðum verið umdeildar og ekki hefur verið ljóst hvernig forgangsröðun
og val á verkefnum hefur farið fram. Lög um skipan opinberra framkvæmda (no. 84/2001)
gera kröfur um könnun og samanburð á þeim valkostum sem til greina koma við lausn
þeirra þarfa sem framkvæmdinni er ætlað að fullnægja áður en sótt er um fjárveitingu.
Þrátt fyrir það eru lögin talin ábótavön og niðurstöður fyrri rannsóknar gefa til kynna að
munur sé á núverandi starfsháttum í opinberum verkefnum á Íslandi og þeim aðferðum
sem teljast fræðilega bestar í dag á sviði hagkvæmnisathugana. Rannsókn þessarar
ritgerðar byggir á þessari niðurstöðu og felur í sér nýjan vinkil á viðfangsefnið með því að
taka fyrir hagkvæmnisathuganir í einkaframkvæmdum á Íslandi. Fræðilegi kafli
ritgerðarinnar ákvarðar þá vinnuferla sem teljast fræðilega bestir á sviði
hagkvæmnisathugana á frumathugunarstigi framkvæmda. Eigindleg rannsókn byggð á
viðtölum er gerð þar sem átta einkaframkvæmdir eru skoðaðar og niðurstöður þeirra
bornar saman við þær aðferðir sem teljast fræðilega bestar í dag.
Markmið rannsóknarinnar er að auka þekkingu á því hvernig staðið er að
hagkvæmnisathugunum á Íslandi í dag með því að bera saman niðurstöður þessar
rannsóknar og niðurstöður fyrri rannsóknar fyrir opinberu verkefnin. Niðurstöður sýna að
marktækur munur er á því hvernig staðið er að hagkvæmnisathugunum í
einkaframkvæmdum og opinberum framkvæmdum en einkaframkvæmdirnar samræmast
fræðilega bestu aðferðum betur. Þrátt fyrir það þá vantar meira en helming vinnuferla upp
á í báðum tilfellum til þess að hægt sér að flokka aðferðirnar sem fræðilega bestu
starfshætti á sviði hagkvæmnisathugana.
Lykilorð: Verkefnastjórnun; hagkvæmniathugun; kostnaðar-/ábatagreining.

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30 ECTS thesis submitted to the School of Science and Engineering

at Reykjavík University in partial fulﬁllment
of the requirements for the degree of
January 2015
Student:
___________________________________________
Supervisor:
___________________________________________
Þórður Víkingur Friðgeirsson
Examiner:
___________________________________________
Halldór Zoёga
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Feasibility*studies*in*construction*projects*in*Iceland* *
Table of contents
Abstract ............................................................................................................................... i
Úrdráttur .............................................................................................................................. ii
List of figures ..................................................................................................................... vi
List of tables ...................................................................................................................... vii
1. Introduction ........................................................................................................... 1
1.1 Introduction of the project “Improvement of the public project life cycle” .......... 1
1.2 Statement of the problem ....................................................................................... 1
1.3 Research aim and objectives .................................................................................. 2
1.4 Research questions and hypothesis ........................................................................ 2
1.5 Limitations ............................................................................................................. 3
1.6 Structure of the thesis ............................................................................................ 4
2 Research background ............................................................................................ 5
2.1 Introduction............................................................................................................ 5
2.2 An overview of international public project governance....................................... 5
2.2.1 Norway ............................................................................................................ 5
2.2.2 United Kingdom .............................................................................................. 6
2.2.3 Canada ............................................................................................................. 7
2.3 Feasibility studies in public projects in Iceland ..................................................... 7
2.4 Conclusion ............................................................................................................. 9
3 Literature review ................................................................................................... 9
3.1 Introduction.......................................................................................................... 10
3.2 Project feasibility studies ..................................................................................... 11
3.2.1 Introduction into project feasibility studies ................................................... 11
3.2.2 Validity of feasibility studies for construction projects................................. 12
3.2.3 Project feasibility studies and sustainability .................................................. 14
3.3 Cost-Benefit Analysis .......................................................................................... 16
3.3.1 The major steps in cost-benefit analysis ........................................................ 17
3.4 Framing of feasibility study theoretical best practices ........................................ 22
3.5 Conclusion ........................................................................................................... 26
4 Research methodology ........................................................................................ 26
4.1 Introduction.......................................................................................................... 27
4.2 Research design ................................................................................................... 27
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4.2.1 Qualitative research ....................................................................................... 27

4.2.2 Standardized open-ended interview............................................................... 27
4.2.3 Interview questionnaire ................................................................................. 29
4.3 Data gathering ...................................................................................................... 29
4.3.1 Data classification.......................................................................................... 32
4.4 Data analysis ........................................................................................................ 33
4.4.1 Current feasibility study practices in private construction projects
in Iceland .................................................................................................................... 33
4.4.2 Current feasibility study practices in construction projects in
Iceland ...................................................................................................................... 34
4.5 Conclusion ........................................................................................................... 37
5 Results ................................................................................................................. 38
5.1 Introduction.......................................................................................................... 38
5.2 Framing of feasibility study theoretical best practices ........................................ 38
5.3 Current feasibility study practices in private construction projects in
Iceland ........................................................................................................................... 39
5.4 Current feasibility study practices in construction projects in Iceland ................ 39
6 Discussion ........................................................................................................... 41
6.1 Introduction.......................................................................................................... 41
6.2 Feasibility study practices in construction projects in Iceland ............................ 41
6.3 Limitations ........................................................................................................... 43
6.4 Further research ................................................................................................... 44
6.5 Conclusion ........................................................................................................... 44
7 Conclusion .......................................................................................................... 45
7.1 Feasibility analysis............................................................................................... 46
7.2 Feasibility study practices in construction projects in Iceland ............................ 46
7.3 Recommendation ................................................................................................. 47
References ......................................................................................................................... 47
Appendix I: Overview of public project governance ....................................................... 50
Appendix II: Questionnaire form ...................................................................................... 52
Appendix III: Evaluation form .......................................................................................... 55
Appendix IV: Completed evaluation forms ...................................................................... 59
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List of figures
Figure 1: The structure of the literature review and its connection with the previous
chapter as well as the following chapter. .................................................................. 11
Figure 2: Flowchart showing the flow of the six major phases of a feasibility study with
gateways after each phase. ........................................................................................ 25
Figure 3: Average consistency with best practice for all projects with regard to the amount
of occurrences in each category, for private projects and public projects respectively.
................................................................................................................................... 35
Figure 4: ROAMEF CYCLE. Appraisal and evaluation often form stages of broad policy
cycle that some departments and agencies formalize in the acronym ROAMEF
(Rationale, Objectives, Appraisal, Monitoring, Evaluation and Feedback) (HM
Treasury, 2003). ........................................................................................................ 50
Figure 5: The business case model sees the development of the business case progressing
through three phases and within those phases are key steps that will collectively
make up a solid business case (Treasury Board of Canada Secretariat, 2009). ........ 51
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List of tables
Table 1: Consistency with best practice for six selected public projects (Fridgeirsson,
2014). .......................................................................................................................... 8
Table 2: Consistency of approach towards feasibility analysis for six selected public
projects (Fridgeirsson, 2014). ..................................................................................... 8
Table 3: The eight selected private projects, the companies responsible and types of
companies.................................................................................................................. 30
Table 4: Estimated total cost of the eight selected private projects. ................................. 32
Table 5: Consistency with best practice for the eight selected private projects. .............. 33
Table 6: Consistency of approach towards feasibility analysis for the eight private projects
(occurrences and weighted percentages taken into the account of the number of
activities in each category). ....................................................................................... 34
Table 7: Average consistency with best practice for all projects, for private projects and
public projects respectively. ...................................................................................... 35
Table 8: Average consistency with best practice for all projects with regard to the amount
................................................................................................................................... 35
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1. Introduction
1.1 Introduction of the project “Improvement of the public project life

cycle”
This thesis is a part of a bigger project, which has the work title “Improvement of the
public project life cycle” (IPP). The project is based on the fact that a majority of public
funded projects suffer from cost overruns (Fridgeirsson, 2010) and in Iceland the weakest
link in the public financial management is believed to be unprofessional decision making
(Fridgeirsson quoted The Icelandic National Audit Office, 2010).
The project is aimed at investigating the present situation and determine if there is a gap
between current procedures and best practices. The goal is to provide important
information on current flaws and what has to be done for improvement.
This thesis focuses on project feasibility and is related to the following work packages
(WP) of the project:
• Project scope
• Options
• Appraisal
1.2 Statement of the problem

The research of this thesis will build on a recently published study on feasibility studies in
public construction projects in Iceland with a new angle focusing on feasibility studies in
private construction projects in Iceland. After the recession, the private industry was hard
hit and the need for cost-effective solutions became greater than ever before. Private
funded projects are different from public projects in some aspects. Private funded projects
are usually composed to maximize shareholders profit, while a public project may incur
other purposes. For example, serving strategic objectives, creating jobs and public non-
profit services. In the public sector, the decision makers do not have personal
responsibility for the success of the proposed project and the costs are borne by taxpayers.
However, in the private sector the company follows its project from the beginning to the
end and assumes all responsibility for itself.
The results of the previous study for the public projects show that there is a lack of
systematic procedures in the feasibility phase of projects: when the viability of projects is
determined and projects are selected for funding. To ensure efficient allocation of
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society´s resources and stakeholders´ money, it is important that only the most promising
projects get accepted for funding. The procedures of project management contribute to
this objective, that is, if they are applied at the right time, in the right way and
consistently. The early development of strategies, philosophies and methodologies of
project implementation have been stressed as the most important factor in achieving
success in projects (Munns & Bjeirmi, 1996) where the success is defined as completion
to budget, satisfying the project schedule and meeting the project goal. Project feasibility
studies have these objectives when they are conducted to justify investments in
infrastructure projects and have a vital importance in supporting decisions related to
spending on infrastructure projects. The situation in the feasibility phase of public projects
in Iceland and the importance of feasibility procedures lays the foundation for the need
for further investigation in the field of projects´ inception and feasibility.
1.3 Research aim and objectives

In this thesis, recently published peer-reviewed articles and academic books on feasibility
studies will be reviewed with the aim of framing current best practices of feasibility
studies. Then a research will be conducted, giving insight into feasibility study practices
in private construction projects in Iceland. By examining feasibility study practices in
private projects and comparing the results of the two studies, this research and the
aforementioned study for the public projects respectively, aims to expand knowledge and
give insight into the last decade´s and current feasibility study practices in Iceland. The
objective is to lay the foundation for further improvement in the feasibility phase of
projects, which can benefit all stakeholders in either public or private projects.
1.4 Research questions and hypothesis

The research of this thesis will build on the aforementioned research for public
construction projects with a new angle focusing on feasibility studies in private
construction projects in Iceland. The research will seek to expand the knowledge about
the last decade´s and current feasibility study practices in Iceland and will seek to answer
the questions:
• How are feasibility study practices in private construction projects in Iceland
compared to theoretical best practices?
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• How are feasibility study practices in private construction projects compared to

feasibility practices in public construction projects in Iceland?
The research hypothesis suggests that the same applies for feasibility studies in private
construction projects as in public construction projects. The findings of the previous
research, for public construction projects, show that there is a disparity between current
feasibility study practices and best practices in public projects in Iceland.
1.5 Limitations
This thesis is limited to the methodology of project management and focuses on the
feasibility phase in the project life cycle, more specifically the project feasibility study.
The preparation and foundation of this thesis research is then limited to the literature
review on the subject. The research of this thesis is limited to the examination of the
feasibility study practices in private construction projects. Then the results will be
compared to the results of the previous research for the public projects sourced from
document analysis. However, when collecting data from the private companies for this
thesis´ research the documents available for analysis were limited because private
companies were reluctant to give up important information about their financial practices
and the data was classified. For that reason, another research method had to be chosen and
interviews were the only possibility. It should be kept in mind that possible bias can exist
which does limit the comparability and credibility of the overall results where two
different research methods have been used and the results of the two researches are being
compared. Thus the results only give some indications about the overall feasibility
practices in Iceland.
Where the research involves comparison of feasibility study practices in two different
sectors of the construction business, public sector and private sector, the comparability
and evaluation can be affected. The criteria for private and public projects sometimes is
not the same, where private projects focus more on maximizing financial profitability but
the public projects focus on meeting the needs of the society. Also, impacts of private
construction projects tend to be less environmental and social than public construction
projects. There is also a possibility that the economic crisis might have affected the initial
study practices in private companies where the procedures of funders, for example banks,
might have changed and the requirements for borrowers made higher. That could limit the
comparison between projects implemented before and after the crisis.
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1.6 Structure of the thesis

This thesis contains seven main chapters. Each chapter is summarized briefly below:
The first chapter is the introduction to the thesis where the research is framed and the
background of the thesis is presented. The aim and objective of the research is defined
and the research questions and its hypothesis are presented. The limitations of the
research are explained as well.
The second chapter contains the research background, which the research of this thesis is
built on. At first, the legal framework for public construction projects in Iceland and three
other countries: Norway, Canada and United Kingdom is briefly reviewed and then the
results from a previous study, “The feasibility of public projects in Iceland”, are
presented.
The third chapter includes discussions and reviews of peer-reviewed articles and
academic books in the field of feasibility studies. This chapter focuses on explaining what
feasibility studies entail and its importance in practice. The development of feasibility
studies will be investigated and theoretical best practices framed, which lays the
foundations for this thesis research.
In chapter four, the research of the thesis is introduced and its methodology presented.
The research design is explained, including the research type, research method and data
gathering in addition to presenting data classification and data analysis. The private
projects under investigation are introduced as well. The data from this thesis´ research as
well as the previous research for the public construction projects are analyzed and
compared.
In chapter five, the results of the research are presented where the research questions are
answered and the research hypothesis is tested.
Chapter six includes a discussion on feasibility study practices in construction projects in
Iceland based on the results of the research of this thesis as well as the previous research
for the public projects. In addition, there is a discussion about the limitations of this
research as well as the limitations of a cost-benefit analysis. Then further research on the
subject is suggested.
In chapter seven, the conclusion of the thesis is presented and suggestions for
improvements in the feasibility phase in construction projects in Iceland are made.
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2 Research background
2.1 Introduction
In this chapter, the background of the research will be reviewed and screened, with the
aim of providing a better understanding of the foundation that is laid for feasibility studies
in Iceland. For public projects this foundation is based on legal requirements and in
Iceland the Icelandic law on public project procurement (no. 84/2001) sets those
requirements. This thesis’ research will build on a recently published article, “The
feasibility of public projects in Iceland” (Fridgeirsson, 2014), whose results will be
reviewed later in this chapter. Fridgeirsson (2014) states that “limited transparency was
found in the management of the initial study reports for the public projects and the
findings show that the current process of feasibility analysis during the inception phase is
inconsistent and there seem to be few practices that align with current best practices.”
Fridgeirsson (2014) suggests in order to improve the situation, it is important the Minister
of Finance issues detailed guidelines for conducting feasibility analysis in accordance
with current best practices.
In this chapter, legal requirements, guides and standards on feasibility studies in three
other developed countries: Norway, Canada and United Kingdom, will be reviewed
briefly. The objective of this screening is to provide a better insight into current feasibility
study procedures in the world for comparison to the current Icelandic practice. The reason
for this comparison with other countries is that governmental requests often set a standard
for the industry.
2.2 An overview of international public project governance
2.2.1 Norway
In Norway, The Ministry of Finance issues quality assurance, QA1 and QA2, which all
investment projects with an expected budget exceeding NOK 750 million shall undergo.
The QA1 is the quality assurance of the choice of concept, or the preliminary study. In the
QA1, it´s purpose is described:
“To ensure that the choice of concept has been subjected to a political process of fair and
rational choice. The ultimate aim is that the chosen concept is the one with the highest
economic returns and the best use of public funds. The choice of concept is a political
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decision to be made by the Cabinet, while the consultant’s role is restricted to assert the
quality of the documents supporting the decision” (NTNU, 2014).
According to QA1 (NTNU, 2014), the responsible ministry/agency is required to prepare
a detailed concept evaluation. The evaluation process is described in detail in the QA1.
The QA1 is to be performed sufficiently early, at a time when the choice between
alternative concepts is still open. The requirements for the work procedures for the
consultant are also defined in detail.
The Ministry of Finance in Norway also publishes an up-to date guide to cost-benefit
analysis and in order to further improve user friendliness, the Norwegian Government
Agency for Financial Management publishes a cost-benefit analysis handbook (Ministry
of Finance, 2012).
2.2.2 United Kingdom
In the UK, The HM Treasury provides guidance to other public sector bodies on how
proposals should be appraised, before significant funds are committed, and how past and
present activities should be evaluated. The guide is called The Green Book – Appraisal
and Evaluation in Central Government. The Green Book states that all new policies,
program (group of related projects) and projects, whether revenue, capital or regulatory,
should be subject to comprehensive but proportionate assessment, wherever it is
practicable, as so best to promote the public interest.
The purpose of the Green Book is to ensure that no policy, programs or project are
adopted without first having the answer to these questions (HM Treasury, 2003):
• Are there better ways to achieve this objective?

• Are there better uses for these resources?
This is achieved through (HM Treasury, 2003):
• Identifying other possible approaches that may achieve similar results.

• Where ever feasible, attributing monetary values to all impacts of any proposed
policy, project and program.
• Performing an assessment of the costs and benefits for relevant options.
The process of appraisal and evaluation is described in detail in the Green book and is
shown graphically in figure 4 in Appendix I.
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2.2.3 Canada
The Treasury Board of Canada Secretariat published the Business Case Guide in 2009
after many consolidated efforts were undertaken to improve how investment decisions are
made and supported and business results are measured by the Government of Canada
(Treasury Board of Canada Secretariat, 2009). The purpose of the Business Case Guide is
to support the development of a strong business case that links investments with program
results and, ultimately, with the strategic outcomes of the organization. The primary
audience for the reference tool is Government of Canada program managers seeking
approval for an activity, initiative, or project. The guide should be used throughout the
entire life cycle of the investment, including the approval stage, to ensure meaningful
dialogue between managers and the approval or funding authority from the earliest
possible time (Treasury Board of Canada Secretariat, 2009). In addition, the Business
Case Guide states that regardless of the complexity and risk of the proposed investment,
and whether or not Treasury Board project approval is being sought, the document should
be used to guide the development of the investment´s business case.
The Business Case Guide has been constructed around two policies, Policy on Investment
Planning and Policy on the Management of Projects. The Business Case Guide is a
detailed guide to creating a business case. The business case model is shown in figure 5 in
Appendix I.
2.3 Feasibility studies in public projects in Iceland

In the aforementioned study, “The feasibility of public projects in Iceland” (Fridgeirsson,
2014), six Icelandic public projects were screened from the perspective of how the initial
feasibility is determined in relation to best practice. The research was qualitative and the
methodological approach was based upon document analysis, or more specifically,
content analysis. The projects screened were a diverse set chosen to represent different
project types: tunnel, harbor, concert hall, avalanche barrier, school and tourists service
center (Fridgeirsson, 2014). Descriptive materials, in the form of initial study reports for
the six projects, were analyzed and scored on a numerical scale against the requirements
of best practices. Consistency with best practice was assessed and classified into the
following three categories: full consistency, partial consistency and no consistency.
The findings of the study are shown in table 1 and table 2.
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Full! Partial! Full! Partial!

No!consistency! No!consistency!
consistency! consistency! consistency! consistency!
Project(name:(
Vadlaheidi!tunnel! 5! 3! 9! 29%! 18%! 53%!
Landeyjar!harbour! 6! 8! 3! 35%! 47%! 18%!
Harpa!concert!hall! 10! 2! 5! 59%! 12%! 29%!
School!in!Mosfell!town! 2! 7! 8! 12%! 41%! 47%!
Avalance!protection! 4! 5! 8! 24%! 29%! 47%!
Snaefells!stofa! 3! 3! 11! 18%! 18%! 65%!
!! !! !! Average:! 29%! 27%! 43%!

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Table 1: Consistency with best practice for six selected public projects (Fridgeirsson,
2014).
Weighted! Weighted! Weighted!

Normalized! Full! Partial! No!
Full! Partial! No!
weight! consistency! consistency! consistency!
consistency! consistency! consistency!
Category!
Project!overview! 0,24! 15! 1! 8! 63%! 4%! 33%!
Alternatives! 0,12! 3! 2! 7! 25%! 17%! 58%!
Benefits!and!cost! 0,29! 7! 16! 7! 23%! 53%! 23%!
Net!present!value!(NPV)! 0,12! 1! 2! 9! 8%! 17%! 75%!
Sensitivity!analysis! 0,06! 0! 2! 4! 0%! 33%! 67%!
Make!a!recommendation! 0,12! 2! 5! 5! 17%! 42%! 42%!
Independent!consultants! 0,06! 2! 0! 4! 33%! 0%! 67%!
!! !! !! !! Average:! 24%! 24%! 52%!

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Table 2: Consistency of approach towards feasibility analysis for six selected public
projects (Fridgeirsson, 2014).
Table 1 shows consistency with best practice for the six selected projects and table 2
shows the consistency of approach towards feasibility analysis for the six selected
projects. The category “project overview” is most consistent with best practice. The
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findings show that there is a disparity between best practice and current feasibility study
practices in public projects in Iceland, where 76% of the categories are only partially
consistent with best practice.
2.4 Conclusion
The review of the governmental requirements on feasibility studies in Norway, United
Kingdom and Canada show that the emphasis is laid on the thoroughness and
transparency of the requirements and the focus is on the follow-up by the government.
The foreign requirements indicate strict and detailed rules on feasibility study procedures
as well as great monitoring on behalf of the government. The requirements in the other
countries are also accessible and user-friendly.
The significant gap between theoretical best practices and current feasibility study
practices in public projects in Iceland, revealed in Fridgeirsson´s study, can be derived
from limitations in Icelandic legislation. Where governmental requests often set a
standard for the industry, feasibility procedures in the private sector are also at risk.
The conclusion on the situation in Icelandic legislation on feasibility studies and
feasibility studies practices in public projects in Iceland, lays the foundation for the
research of this thesis, where further investigation in the field of feasibility studies in
Iceland will be conducted focusing on the private sector.
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3 Literature review
3.1 Introduction
The previous chapter included a review of governmental requirements in three other
countries as well as the results of an investigation on feasibility studies in public
construction projects in Iceland. Since governmental requests often set a standard for
industry, the content of the previous chapter lays the foundation for the literature review
of this thesis where the field of feasibility studies will be examined. The chapter will start
with an introduction of feasibility studies and their position within the field of project
management and project life cycle. The aim of the literature review is to determine what
feasibility studies entail as well as an understanding of their importance in practice and
role in the implementation of construction projects. The development of feasibility studies
from the last decade will be investigated, as well as the focus and the current situation.
The content of peer-reviewed articles on the subject will be investigated as well as
academic books explaining the innovative tools and techniques used when conducting
feasibility studies. The review will focus on framing feasibility study theoretical best
practices, which will lay the foundation for the research of this thesis. The structure of the
literature review as well as its connection with the previous chapter and following chapter
is shown graphically in figure 1.
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Figure 1: The structure of the literature review and its connection with the previous
chapter as well as the following chapter.
3.2 Project feasibility studies
3.2.1 Introduction into project feasibility studies
The project feasibility study phase involves the making of a project feasibility study that
comprises an evaluation and analysis of the potential of a proposed project and is based
on extensive investigation and research to support the process of decision-making. Munns
and Bjeirmi (1996) state that “the project definition and early decision making is critical
to overall success and suggest that the broader decisions in selecting a suitable project in
the first place are more likely to influence the overall success of the project.” The project
feasibility phase is the second phase in the lifecycle of a project but the first one is the
conceptualization phase (Kerzner, 2006). According to Kerzner (2006) the
conceptualization phase involves two critical factors: (1) Identify and define the problem,
and (2) identify and define the potential solutions.
Kerzner (2006) gives the following explanation of the feasibility study phase: “The
feasibility study phase considers the technical aspects of the conceptual alternatives and
provides a firmer basis on which to decide whether to undertake the project.”
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In other words, the feasibility study includes an analysis of the project´s viability and
focuses on helping answer the essential question of “should we proceed with the proposed
project idea?” The end result of a feasibility study is therefore the go/no-go decision.
Kerzner (2006) gives a more detailed purpose of the feasibility phase:
• Plan the project development and implementation activities
• Estimate the probable elapsed time, staffing, and equipment requirements
• Identify the probable costs and consequences of investing in the new project
Feasibility studies are typically carried out before the project initiation in support of the
proposed business case and provide an accurate assessment of the factors that might affect
the project. A feasibility study enables a realistic evaluation of a project, incorporating
both the positive and negative aspects of the opportunity (Gardiner, 2005).
3.2.2 Validity of feasibility studies for construction projects
According to Flyvbjerg et al. (2002) in public transportation infrastructure projects, costs

are underestimated in almost 9 out of 10 projects and actual costs are on average 28%
higher than estimated costs. This problem leads to inefficient use of stakeholder´s money
where a project may be started despite the fact that is it not economically viable and/or it
may be started instead of another project that would have yielded higher returns. Cost-
underestimation is also the case in other types of infrastructure projects and the reason is
assumed to be the incentive to make a project look better and profitable in order to get the
project started (Flyvbjerg et al., 2002). This procedure is known to affect decision making
in the beginning of projects, and is called “strategic misrepresentation”, in addition to
“optimism bias” which includes excessive optimism on the project’s outcome.
Fridgeirsson (2012) states that “the consequences of these two phenomena are unrealistic
expectations of projects’ benefits, costs and duration, which distort the real financial
needs and benefits, stirs up controversy and unnecessary difficulties in the duration of the
project.” Fridgeirsson (2012) mentions a problem in the decision making process in public
projects, that is the people who make the project’s go/no-go decision are not financially
responsible for the project. Where the decision makers are not risking their own funds,
they might not act in the best interest of taxpayers.
Public projects are funded by the countries’ taxpayers and generally require huge and
immediate investments while private projects can be financed by the company´s own
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!
capital or the company can seek external funding. While the financial responsibility of the
public projects is distributed among taxpayers, the private companies carry all financial
responsibility themselves. In order to prevent the use of the abovementioned procedures
and to promote the efficient use of stakeholders´ money, feasibility studies should be
conducted, whether the proposed construction project is within the public sector or the
private sector. Owners, decision makers and financial institutions build their decisions to
proceed with and/or finance any project based on the results of the feasibility study of that
project (Hyari and Kandil, 2009).
Hyari and Kandil (2009) state that ensuring the validity of economic feasibility studies of
construction projects is a vital step in ascertaining that decisions related to the
construction of facilities are based on consistent and standard procedures that avoid the
use of misleading or inadequate information. They also emphasize that decision makers
exert every possible effort to ascertain that analyses presented in a feasibility study report
are based on reasonable forecasts and reliable information. To develop a successful
project, its promoters should ascertain that the project be politically, socially, legally,
environmentally, economically and financially viable and the project viability may only
be determined following a detailed and accurate feasibility study (Salman et.al 2007).
The conduct of a comprehensive feasibility analysis plays an important role regarding
implementation and prioritization in the decision-making phase in the beginning of a
project life cycle, which applies to public and private projects respectively. Yun and
Caldas (2009) argue that this process leads decision makers to make a go/no-go decision,
to determine investment priority between capital projects, and to provide optimal
alternatives and investment timing. They state that preliminary feasibility studies are the
basis for the go/no-go decision, which determines whether the capital project is to be
recommended or not. Many funding agencies in the private sector also require satisfactory
feasibility study reports before committing significant funds to projects seeking external
finance (Gardiner, 2005).
Hyari and Kandil (2009) emphasize the importance of weighing massive expenditures on
construction projects against the expected benefits resulting from the projects to
stakeholders and therefore conducting feasibility studies prior to the construction of the
facilities. The economic feasibility of a project is an estimate of the potential profitability
of a project and a study that measures the expected benefits from a certain project relative
to its cost (Hyari and Kandil, 2009). A study conducted by Yun and Caldas (2009) came
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!
to similar conclusion, which supports the further investigation in the following

subsections of the literature review on feasibility studies. In that study data mining was
conducted to discover knowledge from preliminary feasibility studies of large-scale
projects in Korea using classification and prediction. Their conclusion was that the
dominant decision variables in determining the implementation of the project were the
benefit - cost ratio, the economic feasibility and the financial feasibility, but these
decision variables have in common that they are closely related to the financial aspects of
a project (Yun and Caldas, 2009). Yun and Caldas (2009) state that in this case the benefit
- cost ratio was the most important decision variable for determining the project
implementation. In the next subsections, the processes of feasibility studies will be
examined in more detail as well as the recommended tools and techniques for conducting
successful feasibility studies, that is cost-benefit analysis.
3.2.3 Project feasibility studies and sustainability
According to Yun and Caldas (2009) the preliminary feasibility studies include four
processes that are used to analyze a capital project: project overview; economic
feasibility; political viability; and total viability.
• Project overview examines the project’s basic information such as its

background, objectives, and procedure and planned content.
• Economic feasibility estimates demand and calculates economic and financial

indices such as benefit-cost ratio (B/C), net present value (NPV) and internal rate
of return (IRR) based on cost-benefit analysis to determine national economic
impact and investment suitability.
• Political viability evaluates non-economic impact, attitudes toward the project,

financial feasibility, and compliance with relevant governmental policies,
environmental impact, as well as project-specific factors.
• Total viability leads decision makers to make a Go/No Go decision, determine

investment priority between capital projects and provide optimal alternatives and
investment timing.
Yun and Caldas’s (2009) results from analyzing decision variables that influence
preliminary feasibility studies reveal that practitioners emphasize financial aspects in the
project’s planning phase. While economic performance is given the most attention, less
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attention is given to the social and environmental performance. They still have the
opinion that there is a need to reinforce the evaluation criteria for the non-economic
factors. Although economic feasibility has the biggest influence on the Go decision it
does not mean that other factors aren´t important in the decision making process as well.
Public capital projects should be considered not only in economic perspectives. This
applies to some types of projects within the private sector a well.
Yun and Caldas (2009) quote MOPB (1999): “For successful implementation and
operation, infrastructure projects need clear objectives and goals, which include the
following: achieving greater social justice, developing the economy and sustainable
employment, developing financially responsible programs, and protecting the
environment.” A research similar to Yun and Caldas’ was conducted in China where
China´s construction industry was the research field, but according to the authors, Shen et
al. (2010), implementing construction projects has been a driving force to the economic
growth in China over previous two decades. They state that the effects of the construction
industry on the degrading environment are huge and one of the major reasons for this is
the lack of consideration given to the environmental protection in the project feasibility
study. Their results reveal the insufficiency of examining the performance of
implementing a construction project from the perspective of sustainable development. The
results also suggest the need for shifting the traditional approach of project feasibility
study to a new approach that embraces the principles of sustainable development (Shen et
al., 2010).
In sustainable construction practices, sustainability promotes the balance of
environmental protection, economic development and social development. It refers to
various methods in the process of implementing construction projects that involve less
harm to the environment (Shen et al., 2010). Performance attributes are used for assessing
performance of construction projects, but what factors/or or attributes are considered for
each project can differ depending on the project´s type. Shen et al. (2010) categorize all
available performance attributes into environmental, economic and social where some
attributes are common to all projects where other apply only to individual projects.
For public sector projects in China, the study’s results show interesting evidence where
limited concern is given on market competition (economical), safety standards (social),
and eco-environmental sensitivity of the project location and land consumption
(environmental). Shen et al. (2010) argue that the reason for the development is limitation
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in practice of sustainable construction methods. They state that this limitation is partly
due to the profit-driven culture in the industry where cost, quality and schedule have been
the determinants ensuring maximum benefits to the construction business. They argue that
in order to improve the existing practice of construction implementation towards
contributing to sustainable development, all the three dimensions, including economical,
social and environmental issues, need to be fully concerned in conducting project
feasibility studies (Shen et al., 2010). According to Shen et al. (2010) the responsibility of
implementing sustainable construction practices is on the project’s participants. The
government´s role is important in promoting sustainability of construction project at the
stage of the project feasibility study. The government should guide with policies, laws
and regulations and balance the interests among economic, social and environmental
stakeholders (Shen et al., 2010). That sort of guidance would benefit all construction
projects, whether they are within the public sector or the private sector.
3.3 Cost-Benefit Analysis

The review of peer-reviewed articles in the previous subsections emphasizes the
importance of evaluating the costs and benefits of construction projects in order to
increase their efficiency. The broad purpose of cost-benefit analysis is to help decision-
making and to make it more rational. More specifically, the objective is to have more
efficient allocation of stakeholders´ resources. Cost-benefit analysis was initially used in
the U.S. in the 1930’s, but now cost-benefit analysis is used in many different contexts for
many different purposes (Boardman et al., 2014). The Project Management Institute
(PMI) recommends using cost-benefit analysis as a tool and technique in project quality
management, where the primary benefits of meeting quality requirements can include less
re-work, higher productivity, lower costs, and increased stakeholder satisfaction (PMI,
2008).
In order to demonstrate the superior efficiency of a particular intervention relative to the
alternatives, including the status quo, analysts use a cost-benefit analysis. The analysis
includes a systematic cataloguing of impacts as benefits (pros) and costs (cons), valuing
in dollars (assigning weights), and then determining the net benefits of the proposal
relative to the status quo. All of the costs and benefits are considered to society as a
whole, that is, social costs and social benefits (Boardman et al., 2014). Although
originally a cost-benefit analysis was designed for the public sector it is also applicable in
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the private sector. The standard cost-benefit analysis is conducted while a project or
policy is under consideration, independent of its type, before it is started or implemented.
The cost-benefit analysis assists in the decision about whether resources should be
allocated by government or the company to a specific project or policy or not. In
situations in which analysts care only about efficiency, cost-benefit analysis provides a
method for making direct comparisons among alternative policies (Boardman et al.,
2014). Cost-benefit analysis is based on the Kaldor-Hicks criterion and when all relevant
projects are independent, the cost-benefit analysis decision rule is simple: adopt all
policies that have positive net benefits. A more general version of the rule applies in
situations involving multiple policies that may enhance or interfere with each other:
choose the combination of policies that maximizes net benefits (Boardman et al., 2014).
Boardman et al. (2014) recommend using net present value rule (NPV) as a decision rule
instead of cost-benefit ratio or internal rate of return. According to them it is the
appropriate criterion to use where other rules can give incorrect answers. While applying
the rule, an analyst should still be aware where it applies only to the actual alternatives
specified and other alternatives might conceivably be better. While the net present value
criterion results in a more efficient allocation of resources, it does not necessarily
recommend the most efficient allocation of resources.
It is also important for analysts to realize the limitations of a cost-benefit analysis.
According to Boardman et al. (2014) two types of circumstances make the net benefits
criterion an inappropriate decision rule for public policy. First, technical limitations may
make it impossible to quantify and then monetize all relevant impacts as costs and
benefits. Second, goals other than efficiency are relevant to the policy.
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3.3.1 The major steps in cost-benefit analysis
Boardman et al. (2014) recommend breaking the process of a cost-benefit analysis down
into nine basic steps:
1. Specify the set of alternative projects.
2. Decide whose benefits and costs count (standing).
3. Identify the impacts (benefits and costs) categories, catalogue them, and select
measurement indicators.
4. Predict the impacts (benefits and costs) quantitatively over the life of the project.
5. Monetize (attach dollar values to) all impacts (benefits and costs).
6. Discount benefits and costs to obtain present value.
7. Compute the net present value of each alternative.
8. Perform sensitivity analysis.
9. Make a recommendation.
Below is each step described and illustrated.
1. Specify the set of alternative projects.

Step 1 requires the analyst to specify the set of alternative projects. For many projects the
number of potential alternatives can be so large that neither decision makers nor analysts
can cognitively handle comparisons among them. Resource and cognitive constraints
mean that analysts typically analyze only a few (less than six) alternatives (Boardman et
al., 2014).
Cost-benefit analysis compares the net benefits of investing resources in one or more
particular potential projects with the net benefits of a project that would be displaced if
the project(s) under evaluation were to proceed. The displaced project is the status quo,
which means there is no change in government policy (Boardman et al., 2014), that is, no
change in the existing state of affairs.
2. Decide whose benefits and costs count (standing).

In step 2, the analyst must decide whose benefits and costs should be included.
In the public sector the provincial perspective, for example, measures only the benefits
and costs that affect the residents within a certain area, but a global perspective includes
the benefits and costs that affect everyone (Boardman et al., 2014). Boardman et al.
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(2014) note that the issue of standing can sometimes be contentious and point out that
some environmental issues should be analyzed from a global perspective and local
governments typically want to consider only benefits and costs to local residents and to
ignore costs and benefits that occur in adjacent municipalities or are borne by higher
levels of government.
3. Identify the impacts (costs and benefits) categories, catalogue them, and select
measurement indicators.
Step 3 requires the analyst to identify the physical impact categories of the proposed
alternatives, catalogue them as benefits and costs, and specify the measurement indicator
of each impact category. Impacts include both input, that is resources required, and
outputs (Boardman et al., 2014). In a highway construction project the benefit impact
categories can for example include “time and operating cost savings”, “safety benefits”
and “toll revenues” and the cost impact categories can include for example
“maintenance”, “toll collection” and “toll booth construction”.
Boardman et al. (2014) emphasize that analysts identify explicitly the ways in which the
project would make some individuals better off, for example through improved skills,
better education, or higher incomes and identify as well the negative environmental and
congestion impacts of the growth.
In order to treat something as an impact, we have to know there is a cause-and-effect

relationship between some physical outcome of the project and the utility of human
beings with standing. Impacts that do not have any value to human beings are not
counted. Demonstrating such cause-and-effect relationships often requires an extensive
review of scientific and social science research (Boardman et al., 2014).
The choice of measurement indicator depends on data availability and ease of
monetization (Boardman et al., 2014).
4. Predict the impacts (costs and benefits) quantitatively over the life of the
project.
Almost all projects have impacts (costs and benefits) that extend over time. In step 4 the
task is to quantify all costs and benefits in each time period. The analyst must make
predictions for each alternative in each time period. For example, a production company
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has to predict ahead of time the type A product sale price and the cost of type A raw
material each year for a specified period of time and do the same for type B product.
In practice, predicting impacts is very important and very difficult. Prediction is
especially difficult where projects are unique, have long time period, or relationships
among variables are complex (Boardman et al., 2014).
5. Monetize (attach dollar values to) all impacts (benefits and costs).
In step 5, the analyst has to monetize each of the impacts or value in dollars each of the
impacts. Boardman et al. (2014) note that sometimes the most intuitively important
impacts are difficult to value in monetary terms, for example valuing environmental
impact. In cost-benefit analysis the value of an output is typically measured in terms of
“willingness to pay”, that is the maximum amount an individual is willing to sacrifice to
procure a good or avoid something undesirable. Where markets exist and work well, a
willingness to pay can be determined from the appropriate market demand curve
(Boardman et al., 2014). Where markets do not exist or do not work well, analysts can
draw upon previous research and use “plug in” values whenever possible. If analysts are
unwilling to attach a monetary value to some impact, they are forced to use an alternative
method of analysis.
6. Discount benefits and costs to obtain present value.
For a project that has impacts that occur over years, we need to aggregate the benefits and
costs that arise in different years. In cost-benefit analysis, future benefits and costs are
discounted relative to present benefits and costs in order to obtain their present values
(PV) (Boardman et al., 2014).
Boardman et al. (2014) note that the need to discount arises for two main reasons. First,
there is an opportunity cost to the resources used in a project. Second, most people prefer
to consume now rather than later. Inflation must be taken into account.
A cost (Ct) or benefit (Bt) that occurs in year t is converted to its present value by dividing
it by (1+s)t, where s is the social discount rate. Real inflation-adjusted social discount rate
should be used. Suppose a project has a life of n years.
The present value of the benefits, PV(B), and the present value of the costs, PV(C), of the
project are, respectively:
4!20!4!
!
!
!!
!" ! = !
(1 + !)!
!!!
!
!!
!" ! = !
(1 + !)!
!!!
!
The discount rate is the opportunity cost of investing in the project rather than in the
capital market, that is, instead of accepting a project, the firm can always return the cash
to the shareholders and let them invest in financial assets (Brealey et al., 2011). For
government analysts, the discount rate is usually mandated by a government agency with
authority. For most projects that do not have impacts beyond 50 years (intragenerational),
real social discount rate of 3.5 percent is recommended. If the project is intergenerational
then time-declining discount rates are recommended (Boardman et al., 2014).
7. Compute the net present value of each alternative.

The net present value (NPV) of an alternative equals the difference between the PV of the
benefits and the PV of the costs:
!"# = !" ! − !"(!)
The basic decision rule for a single alternative project (relative to the status quo) is
simple: adopt the project if its NPV is positive.
The analyst should recommend the proceeding with the proposed project if its
!"# = !" ! − !" ! > 0
That is, if its benefits exceed its costs:
!" ! > !" !
When there is more than one alternative to the status quo and all the alternatives are
mutually exclusive, then the rule is slightly more complicated: select the project with the
largest NPV. If no NPV is positive, then none of the specified alternatives are superior to
the status quo, which should remain in place (Boardman et al., 2014).
Boardman et al. (2014) emphasize the importance of remembering that NPVs are
estimates and that sensitivity analysis (step 8) should be conducted before making a final
recommendation.
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8. Perform sensitivity analysis.

There may be considerable uncertainty about both the predicted impacts and the
appropriate monetary valuation of each unit of the impact. Boardman et al. (2014)
recommend using sensitivity analysis to deal with such uncertainties. Sensitivity analysis
helps to determine which risks have the most potential impact on the project. It examines
the extent to which the uncertainty of each project element affects the objective being
examined when all other uncertain elements are held at their baseline value (PMI, 2008).
When net present value has been calculated and if the project appears worth going ahead,
a sensitivity analysis is performed. According to Brealey et al. (2011), before the go-
decision is made, it is important to delve into the impact forecasts and identify the key
variables that determine whether the project succeeds or fails, for example, unit sales,
revenue, variable cost per unit and initial cost. It is also important to look out for
unidentified variables. A sensitivity analysis is conducted where analysts are asked to give
optimistic and pessimistic estimates for the underlying variables. For each estimate the net
present value is recalculated as the variables are set one at a time to their optimistic and
pessimistic value (Brealey et al., 2011).
Boardman et al. (2014) mention three other approaches to doing sensitivity analysis:
partial sensitivity analysis, worst- and best-case analysis and Monte Carlo sensitivity
analysis.
9. Make a recommendation.
Analysts should make recommendations based on NPVs and sensitivity analysis.
It is important to realize that cost-benefit analysis is only one input to this political
decision-making process, one that attempts to push it toward a more efficient resource
allocation and in practice, correct cost-benefit analysis is no more than a voice for rational
decision-making (Boardman et al., 2014). It is also important to bear in mind that
independent, unbiased assessments are needed if the cost-benefit analysis is to work
correctly and produce believable results, i.e. to avoid “judge and jury” characteristics
(Shtub et al., 2005).
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3.4 Framing of feasibility study theoretical best practices

When the primary contents of subsections 3.2.3 Project feasibility studies and
sustainability, including the four major processes of a feasibility study and the three
recommended performance attributes, and 3.3.1 The major steps in cost-benefit analysis
are reviewed in relation to each other and combined, the six major phases of a feasibility
study can be concluded as well as their major activities. These phases and their activities
create a basis for feasibility theoretical best practices which the research of this thesis will
build on, but a research questionnaire will be designed based on these contents:
1. Project overview
2. Alternatives
3. Benefits and costs
4. Net present value (NPV)
5. Sensitivity analysis
6. Make a recommendation
Phase 1 includes establishing the frame of the project, it´s basis and the needs for the
project. The analyst has to define the objectives of the project and there has to be a mutual
understanding between all stakeholders on the project´s objectives.
Phase 2 is the definition of the project´s alternatives where the options can vary on many
dimensions. At least two alternatives and less than six alternatives have to be defined. The
zero-option has to be defined as well.
Phase 3 is the definition of benefits and costs that should be included. Economical, social
and environmental factors and/or attributes should be considered but the analyst should
have in mind that there might be some attributes that do not apply to the individual
projects.
This phase should include the following activities:
• Decide whose benefits and cost count

• Catalogue the impacts and select measurement indicators (units)
• Predict the impacts quantitatively over the life of the project
• Monetize (put price on) all impacts.
Phase 4 involves discounting benefits and costs of each alternative to obtain present value
(PV) and then calculate the net present value (NPV) for each alternative by finding the
difference between the present value of the benefits and present value of the costs. The
basic decision rule is that the analyst should recommend proceeding with the proposed
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project if the present value of benefits exceeds the present value of costs and should select
the alternative with the largest net present value. Sensitivity analysis should be conducted
(phase 5) before making the final recommendation.
Phase 5 involves performing sensitivity analysis to deal with uncertainties about both the
predicted impacts and the appropriate pricing valuation of each unit of the impact.
Phase 6 involves the evaluation of all alternatives and making recommendation based on
the net present value (NPV) and sensitivity analysis.
The following list contains the summary of the major activities for a feasibility study:
1. Project overview
• Explain the origin of the project
• Project background
• Project objectives
• Needs analysis
2. Alternatives
• Development of alternatives. Limit to at least two and less than six
alternatives in addition to the zero alternative.
3. Benefits and costs
• Decide whose benefits and cost count. Economic, social and environmental
factors and/or attributes.
• Catalogue the impacts quantitatively over the life of the project.
• Monetize (put price on) all impacts.
4. Net present value (NPV)
• Discount benefits and cost to obtain present values.
• Compute the net present value (NPV) of each alternative.
5. Sensitivity analysis
• Perform sensitivity analysis of each alternative.
6. Recommendations
• Evaluation of alternatives.
• Selection of the “most promising” alternative.
Figure 2 shows the flow of the six major phases with gateways after each phase. If after
each phase the project is considered viable based on the activities in each phase, the
project should proceed. However, if after any phase of the six major phases the project
does not fulfill the activities, it should end and not be considered viable.
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!
!
Start!
Project!overview!
NO! End!
YES!
Alternatives!
NO! End!
YES!
Benefits!and!costs!
NO! End!
YES!
Net!present!value!(NPV)!
NO! End!
YES!
Sensitivity!analysis!
NO! End!
YES!
Make!a!recommendation!
NO! End!
YES!
Proceed!
!
Figure 2: Flowchart showing the flow of the six major phases of a feasibility study with
gateways after each phase.
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3.5 Conclusion
The aim of the literature review was to determine what feasibility studies entail,
understand their importance in practice and role in implementation of construction
projects, as well as investigate their development in the last decades, their focus and the
current situation. The results of the above-mentioned peer-reviewed articles show the
urgent need for governments to have strict laws and regulations in the decision-making
process in public construction projects, which could also benefit the private construction
projects. In order to prevent a conflict of interest within the government and inefficiencies
in the decision-making process of proposed projects, so that the stakeholders’ money and
resources are spent in the most efficient way, a detailed project feasibility study is
necessary when selecting construction projects, independent of their type.
When gathering the results from the articles on project feasibility studies, they clearly
show the importance of the economical issues in the conduct of a project feasibility study:
A project will not proceed if it is not financially viable. Simultaneously the results show
that not enough emphasis is laid on the project´s sustainability in the project feasibility
phase, which has proven to have negative consequences on the society and environment,
regarding the project. The feasibility study in the conception of projects is the foundation
for a comprehensive and transparent determination of the viability of investment
proposals, focusing on minimizing uncertainty throughout the lifetime of the project. The
recommended processes and performance attributes of feasibility studies as well as the
recommended tools and technique examined in this chapter lay the foundation for the
research of this thesis, but a research questionnaire will be designed in the following
chapter, based on section 3.4 Framing of feasibility study theoretical best practices.
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4 Research methodology
4.1 Introduction
Qualitative research was conducted in order to expand the knowledge about the last
decade´s and current feasibility study practices in private construction projects in Iceland.
The researcher interviewed employees from eight different private companies, which had
recently participated in the preparation of a construction. The analysis of the data gathered
from the interviews gave an understanding of what factors and/or attributes have been
used in the conception of projects and insights into the quality of the prerequisite used
when deciding on projects. A comparison of the data gathered from this study as well as
the data gathered from the previous study for the public projects, presented in section 2.3,
gives an indication about current feasibility study practices in Iceland.
4.2 Research design
4.2.1 Qualitative research
The aim of the research is to benchmark current feasibility study practices in private
construction projects in Iceland against theoretical best practices, as well as compare
current feasibility study practices in private construction projects to current feasibility
study practices in public construction projects, where the results for the public projects are
already available. The research can therefore be classified as applied research, and is
based on qualitative methods where exploration of feasibility studies is carried out to gain
more insights on the subject and to develop a theory on current feasibility study practices
in Iceland. Qualitative methods are ideal for this particular research where they facilitate
the study of issues in depth and detail; increase the depth of understanding of the cases
studied and typically produce a wealth of detailed information about a small number of
cases (Patton, 2002).
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4.2.2 Standardized open-ended interview
According to Patton (2002) qualitative findings grow out of three kinds of data collection:
(1) in-depth, open-ended interviews; (2) direct observation; and (3) written documents. In
this research, direct observation is not a suitable data collection method, were feasibility
study procedures can be a long process and this research examines feasibility study
procedures already applied within the businesses. When contacting the private companies
and asking for information about their feasibility study procedures most of them were not
willing to give away documents on the subject nor was the researcher allowed to review
them, where they were recorded as classified. The data gathering was therefore based on
interviews.
The approach taken to the design of the interview was fully structured in advance of the
interviews and is called the standardized open-ended interview. The interview consists of
a set of questions carefully worded and arranged with the intention of taking each
respondent through the same questions with essentially the same words (Patton, 2002).
The standardized open-ended interview is used when it is important to minimize variation
in the questions posed to interviewees (Patton, 2002), which is the case in this particular
research where answers will be evaluated on the same scale and compared.
Before starting the interviews it is important to realize the advantages and disadvantages
of using interviews as a data collection method. Robson (2011) identifies the pros of
interviews as a flexible and adaptable way of finding things out as well as being quicker
than observation, but still incorporating aspects of it. In addition they can reap unexpected
awards where things about the interview other than the actual answers to the questions
may be interesting to the researcher (Robson, 2011). When designing the interview it is
important to have the cons of interviews in mind but according to Robson (2011)
interviews require careful preparation as well as being time-consuming. In addition, the
researcher needs skill and experience to handle the results of such a flexible approach and
the reliability is challenged by the lack of standardization. However, the standardized
open-ended interview is less flexible than other types of interviews where questions are
written out in advance exactly the way they are asked during the interview, making the
interview highly focused and time is used efficiently (Patton, 2002).
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4.2.3 Interview questionnaire
The interviews were based on a questionnaire where the task for the researcher is to
provide a framework within which people can respond in a way that represents accurately
and thoroughly their experience with the particular program being evaluated (Patton,
2002). When designing the questions it is important that it is clear to the interviewee what
is being asked and to use words that make sense to the interviewee (Patton, 2002). Asking
singular, unambiguous and non-leading questions improves the quality of data obtained
during the interview (Patton, 2002).
The interview questionnaire includes 17 open questions, based on this thesis literature
review´s theoretical best practices, with focus on the unit of analysis: methods, processes
and procedures, factors and/or attributes. That is, the data collection from the eight private
businesses is based on what methods, processes and procedures for conducting feasibility
analysis were applied and what factors and/or attributes were used. The unit of analysis is
based on the following questions and are in accordance with the previous study for public
projects:
• What was done? (feasibility analysis method)
• How was it done? (processes and procedures)
• What sort of prerequisites was used? (factors and/or attributes)
The 17 questions asked were in accordance with the previous study for public projects
with the aim of enabling comparison between the results of the two studies for public
projects and private projects respectively.
4.3 Data gathering

The approach of data gathering aims at collecting information about specific methods,
processes and procedures, and prerequisites for conducting a feasibility analysis for
private construction projects in Iceland from the perspective of private businesses in
Iceland. The data gathering is limited to private projects established in the period from
2001 to the present day, where the Icelandic law no. 84/2001 was passed by the
parliament in 2001.
When selecting projects for the research, different private companies were contacted, but
the companies had in common having been involved in a preparation of a construction
project sometime the last 13 years, as well as being responsible for the construction
4!29!4!
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project. The selection of construction projects was random and was aimed at selecting
projects based on their variety and with regard to selecting projects from several different
businesses.
The eight construction projects selected are presented in table 3, detailing the concerned
company responsible for the construction project as well as the type of the concerned
company.
Project name: Concerned company: Type of company:
Advania Data Center Advania Information technology
Egilsholl Cinema Hall Sambioin Cinema
Harpa Hotel and Apartments Mannvit Engineering consultancy
Hofdatorg Down Town and

Eykt Constructor
Service Center
Holaberg Senior Citizen

SS Verktaki Constructor
Apartments
Proposed Aluminum Smelter

Klappir Development Development and investment
Skagabyggd
Vindakor Apartments Upphaf Real estate
X Data Center X Data center
Table 3: The eight selected private projects, the companies responsible and types of
companies.
The gathering of data was based on interviews. The eight different companies were
visited and an employee responsible for the preparation of the construction project and
participated in the initial study was interviewed. The design of the interview was based on
studying what methods, processes and procedures for conducting feasibility analysis were
applied and what factor and/or attributes were used. A total of 17 questions were asked
based on the list of major activities for the conduct of a feasibility study framed as
theoretical best practices in section 3.4:
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Project overview
Q1. Has the origin of the project been explained?
Q2. Has the background of the project been described?
Q3. Have the project objectives been defined?
Q4. Has a needs analysis been carried out?
Alternatives
Q5. How many alternative schemes/projects were considered?
Q6. Was the zero-alternative included?
Cost-benefit
Q7. Were benefits and beneficiaries identified?
Q8. Were costs identified?
Q9. Have the impacts been recorded as performance indicators? (units)
Q10. Have the impacts been predicted quantitatively over the life of the project?
Q11. Have all impacts been monetized?
Net present value (NPV)
Q12. Have the benefits and costs been discounted to obtain present value?
Q13. Has the net present value (NPV) been computed and compared for each
alternative?
Sensitivity analysis
Q14. Has sensitivity analysis been performed for each alternative?
Make recommendation
Q15. Has evaluation of alternatives been performed?
Q16. Has the selection of the most promising alternative been made?
Additionally, it was checked whether an outside evaluation from independent consultant
had been performed.
For each feasibility conduction activity it was sought to find answers to the following
questions:
• What was done? (feasibility analysis method)
• How was it done? (processes and procedures)
• What sort of prerequisites was used? (factors and/or attributes)
In addition to these questions, information about the total cost of each construction project
was gathered for better realization of the size of the projects and for further comparison of
the projects. Table 4 shows the estimated total cost of each of the eight projects in billions
of ISK.
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Project name Estimated total

cost of project
(bilion ISK)
Advania Data Center 0.7
Egilsholl Cinema Hall 0.6
Harpa Hotel and Apartments 14
Hofdatorg Down Town & Service Center 6
Holaberg Senior Citizen Apartments 1
Proposed Aluminium Smelter Skagabyggd 70
Vindakor Apartments 1.6
X Data Center 11
Table 4: Estimated total cost of the eight selected private projects.
The questionnaire presented to the eight employees is available for review in the
Appendix II. In each interview the questions were asked in the right order and comments
registered in the abovementioned form for each question where appropriate.
4.3.1 Data classification
For each interview the questionnaire form was filled out and consistency with best
practice for each question was also evaluated and registered. The consistency with best
practice was assessed and classified into the following three categories:
• Full consistency with best practice
• Partial consistency with best practice
• No consistency with best practice
In assessing the consistency with best practice, the answer to each question was evaluated
as how consistent it was to the summary of theoretical best practices in section 3.4.
The unfilled evaluation form is available for review in Appendix III.
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4.4 Data analysis
4.4.1 Current feasibility study practices in private construction projects in

Iceland
For each of the eight interviews, comments and an evaluation of consistency with best
practice were reported in the defined form and are available for review in Appendix IV.
For the 17 questions and 8 projects a total of 136 occurrences (17 x 8) are recorded, where
67 of them are evaluated as fully consistent with best practice, 31 partially consistent with
best practice and 38 have no consistency with best practice. Table 5 shows how the 17
occurrences for each project split between the three classes of consistency with best
practice as well as the percentage of each class for each project. Full consistency varies
from 35% to 65% with a mean of 49%, partial consistency varies from 12% to 35% with a
mean of 23% and no consistency varies from 18% to 47% with a mean of 28%.
Table 5: Consistency with best practice for the eight selected private projects.
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Table 6 demonstrates the distribution of the scores and the normalized results due to
different number of questions within each category. The consistency percentages are
based on the number of questions within each category and the consistency strength
within each category.
Table 6: Consistency of approach towards feasibility analysis for the eight private
projects (occurrences and weighted percentages taken into the account of the number of
activities in each category).
The category “project overview” is the most consistent with best practice and thereafter
the category “alternatives”. The categories “net present value” and “independent
consultants” have the highest rate of no consistency with best practice. The general
conclusion is a gap of 60% of the categories where there is only partial consistency with
best practice, where 40% of the categories are fully consistent with best practice.
4.4.2 Current feasibility study practices in construction projects in Iceland
The data analysis of the research “The feasibility of public projects in Iceland” carried out
in 2014 is presented in section 2.3. The average consistency with best practice evaluation
for the two studies is shown in table 7 and table 8. Table 7 shows the average consistency
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with best practice for all projects, private projects and public projects respectively. Table
8 shows the average consistency with best practice for all projects with regard to the
amount of occurrence in each category, for private and projects and public projects
respectively. The weighted consistency with best practice is shown graphically in figure
3.
Table 7: Average consistency with best practice for all projects, for private projects and
public projects respectively.
Table 8: Average consistency with best practice for all projects with regard to the amount
52%!
Weighted No consistency
36%!
24%!
Weighted Partial consistency
24%!
24%!
Weighted Full consistency
40%!
0% 10% 20% 30% 40% 50% 60%
Public!construction!projects! Private!construction!projects!
Figure 3: Average consistency with best practice for all projects with regard to the
amount of occurrences in each category, for private projects and public projects
respectively.
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!
For the private projects the general conclusion is a gap of 60% of the categories where
there is only partial consistency with best practice, but for the public projects the gap is
76%.
In order to determine whether the difference between the consistency with best practices
for the private projects and the public projects is significant, a two-sample t-test is
performed on the full consistency rates. The rates for the public projects are shown in
table 1 in section 2.3 and for the private projects in table 5 in section 4.4.1. The null
hypothesis states that there is no difference between the means of the two cases; !! stands
for the hypothesized mean of the full consistency rates for the private projects and !! for
the public projects.
Null hypothesis: H0: !! = ! !!

Alternative hypothesis: Ha: !! ≠ ! !!
The two-sample t-test determines whether the difference between the two means is
significantly different from the hypothesized difference between means.
Degrees of freedom, DF, are computed:
!!! !!! !
(+ )
!! !!
!" = ! !
! !!
( ! )! ( ! )!
!! !!
+
!! − 1 !! − 1
Then test statistic is computed, which is a t-score, t, defined by the following equation:
!! − ! !! − !
! =!
!!! !!!
!! + !!
where !! is the standard deviation and !! !is the mean of the full consistency rates for the
private projects and !! is the standard deviation !! !is the mean of the full consistency
rates for the public projects, !! is the number of private projects and !! is the number of
public projects, and d is the hypothesized difference between the means.
!!! = 9.59 !!! = 16.55 !! = 8 !! = 6 !! = 49.25 !! = 29.50

d = 0 DF = 11,46 t = 2,81
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The critical value of t is 2.20 if 95% confidence interval is assumed. If the standardized
difference between the two sample means, t, is larger than 2.20 it can be concluded that
there is a significant difference between the two means. Where t = 2,81 > 2.20 there is a
significant difference between the two means and the null hypothesis is rejected.
4.5 Conclusion
The research included evaluation of data obtained through interviews in eight private
companies that had in recent years prepared, and most of them established as well, a
construction project. The types of businesses responsible for the construction are different
and the total cost of projects varies from 0.6 billion ISK to 70 billion ISK. The projects
were all started after the year 2007, in the shadow of the economical crisis. The following
eight private construction projects were examined:
• Advania Data Center
• Egilsholl Cinema Hall
• Harpa Hotel and Apartments
• Hofdatorg Down Town and Service Center
• Holaberg Senior Citizen Apartments
• Proposed Aluminum Smelter Skagabyggd
• Vindakor Apartments
• X Data Center
The interviews were based on 17 questions obtained from the conclusion of the literature
review on feasibility study best practices. For each question, information about the
underlying methods, processes and procedures, factors and/or attributes was collected.
Evaluation of the data was based on benchmarking the current feasibility study practices
and procedures against the best practices. The conclusion of the research shows that there
is a considerable discrepancy between current feasibility practices in private projects and
best practices and the conduct of feasibility studies in private projects is lacking processes
to be considered best practice. The data collected from the research was compared to the
data collected from the previous study for the public projects, presented in section 2.3.
The data analysis shows a significant difference between feasibility study practices in
private construction projects and public construction projects respectively, where the
private projects are performing better, although in both cases the feasibility study
procedures are lacking more than half of their processes to be considered best practice.
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5 Results
5.1 Introduction
In this chapter the results of the thesis are presented. The results of the literature review
are presented first with the literature review aimed at framing the feasibility study best
practices. The research of this thesis sought to answer the aforementioned research
questions:
• How are feasibility study practices in private construction projects in Iceland
compared to theoretical best practices?
• How are feasibility study practices in private construction projects compared to
feasibility practices in public construction projects in Iceland?
The research questions are answered and the research hypothesis was tested, by
interpreting the data analysis in chapter 4, but the research hypothesis suggested that the
same applies for feasibility studies practices in private construction projects as in public
construction projects. The findings of the research for the public construction projects
showed that there is a disparity between current feasibility study practices in public
projects in Iceland and best practices. The results give an understanding of current
feasibility study practices in private construction projects in Iceland and an indication of
current feasibility study practices in construction projects in Iceland, including private and
public construction projects. It should be kept in mind that two different research methods
were used for the two research studies compared, which might have biased the results to
some extent and should be taken into account when results are interpreted.
5.2 Framing of feasibility study theoretical best practices

The literature review aimed at framing the best practices of feasibility studies which laid
the foundation for the research. The conclusion of the review involved 6 major processes
of the feasibility study: project overview, alternatives, benefits and costs, net present
value (NPV), sensitivity analysis and making recommendation. Each process is described
in more detail in section 3.4.
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5.3 Current feasibility study practices in private construction projects

in Iceland
The research of this thesis was a qualitative study based on interviews and involved
investigation and evaluation of feasibility study practices in eight private construction
projects. The following eight private projects were examined:
• Advania Data Center
• Egilsholl Cinema Hall
• Harpa Hotel and Apartments
• Hofdatorg Down Town and Service Center
• Holaberg Senior Citizen Apartments
• Proposed Aluminum Smelter Skagabyggd
• Vindakor Apartments
• X Data Center
Evaluation of data was based on benchmarking current practices and procedures against
best practices for conducting feasibility analysis which includes the following six
processes: project overview, alternatives, benefits and costs, net present value (NPV),
sensitivity analysis and making a recommendation. In addition, it was checked whether an
outside evaluation from independent consultants had taken place.
The overall conclusion of the study shows that there is a considerable gap between current
practices and procedures in conducting feasibility studies in private construction projects
and theoretical best practices, where 60% of the processes are only partially consistent
with best practices.
5.4 Current feasibility study practices in construction projects in

Iceland
To give an indication of current feasibility study practices in construction projects in
Iceland the conduct of feasibility studies in private and public projects is examined and
compared. The two research studies were both qualitative studies based on the same 17
questions and classification of evaluation. The research of the private projects was
interview-based and the research of the public projects was based on content analysis. The
data analysis and results of the research “The feasibility of public projects in Iceland”
carried out in 2014 is presented in section 2.3 and the comparison between the two
research studies is presented in section 4.4.2. Based on the data analysis in section 4.4.2,
the research hypothesis stating that there is no difference between feasibility studies
practices in private construction projects and public construction projects, is rejected, i.e.
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!
there is a significant difference between feasibility studies practices in private

construction projects and public construction projects. In other words, the private projects
perform significantly better in conducting feasibility analysis than the public projects.
Despite this conclusion, in both cases, the data analysis shows that there is a discrepancy
of applied methodology and best practices when conducting feasibility analysis, where the
private projects only fulfill 40% of the best practice processes and the public projects
24%. In both cases the projects are lacking more than half of the feasibility study
procedures to be considered best practices.
4!40!4!
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6 Discussion
6.1 Introduction
This chapter includes a discussion on the feasibility study practices in construction
projects in Iceland based on the results of the research of this thesis. In addition, there is a
discussion about the limitations of this research as well as the limitations of cost-benefit
analysis. Then further research in the field of feasibility studies is suggested in order to
expand knowledge on the subject and improve feasibility study practices in Iceland.
6.2 Feasibility study practices in construction projects in Iceland

This research has aimed at expanding knowledge about the last decade´s and the current
feasibility study practices in Iceland. The results indicate that the private construction
projects perform significantly better in conducting feasibility analysis than the public
construction projects, but in both cases the projects are lacking more than half of the
feasibility study procedures to be considered best practices. For the public projects, legal
requirements structure a framework of feasibility study procedures that they are required
to follow, but the conclusion of Fridgeirsson´s investigation on feasibility studies in
public projects indicates that the there is a lack of transparency in the management of
initial study reports in addition to the lack of feasibility study procedures. He suggests in
order to improve the situation, it is important the Minister of Finance issues detailed
guidelines for conducting feasibility analysis in accordance with current best practice
(2014). The review of the international requirements on feasibility study procedures in
section 2.2 showed clearly the limitations of the Icelandic law on public project
procurement in comparison to the international requirements. The foreign requirements
indicate stricter rules on feasibility study procedures as well as greater monitoring on
behalf of the government.
For the private construction projects, the company itself is responsible for its own
feasibility study, but in those cases where the project is restricted to the Law on
Environmental Impact Assessment, the EIA entails a part of the feasibility study, for
example, by identifying environmental and social impacts and evaluation of alternatives.
The companies responsible for the private construction projects under investigation in this
thesis´ research were of different types and the projects were financed in different ways,
but their intention with the projects was the same: benefit financially. In those cases
4!41!4!
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where external financing was sought to finance the projects the interviewees talked about
the requirements set by the financing agencies. The companies asking for financing were
required to sell the concept of the project and convince and reassure the lender of the
viability of the project as well as its profitability. In those cases, the company was
required to submit a feasibility study. It can be assumed that the work procedures of
financing agencies are stricter and borrowers are expected to meet stricter requirements
after the recession. Nowadays the construction business is tough and it is probably more
important now than ever that the right projects are selected and proceed with construction
based on the right factors.
Based on this thesis´ research, it can be reasoned that the more responsibility the private
project implies and the more expensive and extensive the project, the more the company
is compelled to lay emphasis on feasibility studies. This conclusion can be drawn from
the fact that the 4 most expensive private projects of this thesis´ research, seen in table 4,
are also the 4 most consistent with best practice, seen in table 5. The cost estimates and
the ranking of consistency go hand in hand except for the most expensive project,
Proposed Aluminum Smelter Skagabyggd, which places 4th, that could be explained by
the fact that EIA has not been conducted yet for that project. For the cheaper projects, less
emphasis was laid on feasibility studies and the practice seems to be based on rushing into
the projects without sufficient preparation and analysis. The results show that current
methodology of performing feasibility analysis varies greatly and the overall conclusion
shows limited consistency with best practices. The significant difference between
feasibility study practices in private and public projects could be explained based on the
literature review and the information drawn from this thesis research. The pressure that
the financing agencies lay on the private companies seeking external financing requires
reassurance about the viability of the project, the situation in the economy where
construction cost is high and the housing market is tough and the fact that the private
companies are risking their own money when they decide on establishing a construction
project, should give the companies enough reason to prepare and evaluate their proposed
project thoroughly before deciding to proceed with the project. Despite that difference,
feasibility study practices in private and public construction projects are lacking
procedures to be considered best practices and there is space for major improvement of
procedures in both cases.
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For the public projects, issuing detailed guidelines for conducting feasibility analysis in
accordance with current best practices is suggested in order to improve the situation
(Fridgeirsson, 2014). Such publishing of exemplary practices by the government could
also benefit and have positive impact on feasibility study practices in the private sector
where governmental requirements often set the industry standard. The laws and
regulations create a specific model of ideal procedures that organizations work by and the
private sector can use in its own favor. When issuing such guidelines transparency,
accessibility and user-friendliness should be kept in mind.
6.3 Limitations
This research was limited to the examination of conduct of feasibility studies in eight
private construction projects. The presented theoretically best practices for conducting
feasibility studies for construction projects were limited to the literature review and the
conclusion is therefore limited to the extent of that review. There are also some
limitations to the research that could have affected the research findings. As mentioned
earlier, two different research methods were used for the two research studies compared
for the private projects and public projects respectively, which could have biased the
results and should be kept in mind when results are interpreted.
When selecting private projects for the investigation, the aim was to collect feasibility
study data from projects initiated in the period 2001-2014, i.e. after the law on public
project procurement (no. 84/2001) was passed by the government in 2001 to the present
day. The research included a comparison between feasibility study practices in the private
projects and public projects, but the results for the public projects were already available.
Half of the public projects were prepared before the financial crisis in 2008, but when
collecting data for the private projects limited data was available for projects initiated
before that time. The explanations given for this limitation were different: staff turnover,
lack of storing data, changes in ownership and changes in work procedures. It can be
assumed that preparation of private projects has improved in some ways after the
recession where the construction business is tougher which could have exaggerated the
significant difference between feasibility study practices in public and private projects.
The fact that public and private projects are different in nature where the impacts of
private construction projects tend to be less environmental and social than public
construction projects, could have affected the evaluation and comparison but none of the
4!43!4!
!
private projects considered environmental and social impacts in their feasibility study. For
the private projects, all of the focus was on financial benefits and costs. In addition, it is
important to realize that the cost-benefit analysis has some limitations, but two
circumstances make the net benefit criterion an inappropriate decision rule: technical
limitations and goals other than efficiency (Boardman et al., 2014). Limitations in theory,
data or analytical resources may make it impossible for the analyst to measure and value
all impacts of a policy as commensurate costs and benefits. Usually efficiency underlies
cost-benefit analysis, but sometimes goals other than efficiency are relevant, especially in
the public sector (Boardman et al., 2014).
6.4 Further research

The research of this thesis did not include examination of how well the private projects
passed the budget or how they performed during and after implementation, where some of
the projects have not been established yet. For the public projects, all of them apart from
one ran into problems (Fridgeirsson, 2014). It would be interesting to follow the eight
private projects, and investigate whether they achieved their defined needs and how well
they met expectations. In order to determine how Icelandic feasibility study practices are
consistent with best practice in comparison to international practices, it would be
interesting to repeat this thesis´ research as well as the research for the public projects in
the three countries reviewed in section 2.2. Further research, based on these perspectives
could benefit and improve feasibility study practices in Iceland by expanding new
knowledge on the subject.
6.5 Conclusion
Considering the advantage and success that conducting feasibility analysis can give in the
development, preparation and implementation of construction projects the results of the
research are disappointing to some degree. The results show significant difference
between feasibility study practices in private construction projects and public construction
projects in Iceland, where the private projects perform better. The performance of the
private projects can possibly be explained by the pressure that the financing agencies lay
on the private companies seeking external finance by requiring reassurance about the
viability of the project. In addition, the situation in the economy where construction cost
is high and the housing market is tough and the fact that the private companies are risking
4!44!4!
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their own money when they decide on establishing a construction project. Simultaneously,
there is limited transparency in the management of initial study reports for the public
projects and poor or no methodology is present for feasibility analysis to evaluate various
options in public projects. But despite the significantly better performance of the private
projects, feasibility study practices in both private and public projects are lacking more
than half of the processes to be considered best practices.
To improve the situation and current methodology in the public sector it has been
recommended to improve the procedures entailing new detailed guidelines for performing
feasibility analysis in accordance with best practices. This improvement could also benefit
the private sector, especially if the guidelines are transparent, accessible and user-friendly.
Private businesses that are considering launching new projects are then encouraged to
adopt the principal methodology of feasibility analysis in the inception of the project with
the aim of increasing the chances of success in the whole life cycle of the project.
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7 Conclusion
7.1 Feasibility analysis

The importance of conducting feasibility studies in construction projects is clear, entailing
professional methodology to evaluate the viability of the proposed project before an
investment decision is made. The procedures of feasibility analysis develop a
comprehensive study and a series of examinations that contribute to the project´s success
where the success of the project includes for example, completion to budget, satisfying
the project schedule and meeting the project goal. Feasibility studies should be applied in
any development of new projects where efficiency is the goal, independent of the
project´s type.
According to the literature review, theoretical best practices of a feasibility study include
six processes; project overview, alternatives, benefits and costs, net present value (NPV),
sensitivity analysis and making recommendation. Each process is described in detail in
section 3.4 Framing of feasibility study theoretical best practices.
7.2 Feasibility study practices in construction projects in Iceland

Based on the abovementioned results, a questionnaire was designed to lay the foundation
for the data gathering of the research. The research entailed an interview-based qualitative
study on the feasibility study practices in eight different private construction projects in
Iceland. Answers were evaluated based on studying what methods, processes and
procedures were applied and what factors and/or attributes were used in the conduction of
the feasibility studies. The results of the evaluation were benchmarked against theoretical
best practices, showing the current feasibility study practices in private projects in
Iceland. Current feasibility study practices in private projects in Iceland were then
compared to current feasibility study practices in public projects in Iceland, giving an
indication about feasibility study practices in construction projects in Iceland.
The results indicated a significant difference between feasibility studies practices in
private construction projects and public construction projects where the private projects
perform better in conducting feasibility analysis than the public projects. However, in
both cases, the data analysis showed a discrepancy between applied methodology and best
practices when conducting feasibility analysis where the projects are lacking more than
half of the feasibility study procedures to be considered theoretical best practices.
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7.3 Recommendation
To improve the situation and current methodology in the public sector it has been
recommended to improve the procedures by entailing new detailed guidelines for
performing feasibility analysis in accordance with best practices. Where governmental
requests often set standard for industry this improvement could benefit the private sector
as well. The importance of feasibility analysis is again highlighted and private businesses
that are considering launching new projects are encouraged to adopt the principal
methodology of feasibility analysis in the inception of the project with the aim of
increasing the chances of success in the whole life cycle of the project.
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4!49!4!
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Appendix I: Overview of public project governance
Figure 4: ROAMEF CYCLE. Appraisal and evaluation often form stages of broad policy
cycle that some departments and agencies formalize in the acronym ROAMEF (Rationale,
Objectives, Appraisal, Monitoring, Evaluation and Feedback) (HM Treasury, 2003).
4!50!4!
!
Figure 5: The business case model sees the development of the business case progressing
through three phases and within those phases are key steps that will collectively make up
a solid business case (Treasury Board of Canada Secretariat, 2009).
4!51!4!
!
Project name: Date of interview:
Year of project: Interviewee:
Total cost of project: Company responsible:
Major activities for feasibility What was done? How was it done? What sort of prerequisites were used?
analysis (Feasibility analysis method) (Processes and procedures) (Factors and/or attributes)
Project overview
Q1. Has the origin of the project

been explained?
Q2. Has the background of the

project been described?
Q3. Have the project objectives

been defined?
!
Q4. Has a needs analysis been
Appendix II: Questionnaire form
4!52!4!
carried out?
Alternatives
Q5. How many alternative
Feasibility!studies!in!construction!projects!in!Iceland!
schemes/projects were
considered?
Q6. Was the zero alternative

included?
Cost-benefit
Q7. Were benefits and

beneficiaries identified?

!
Q9. Have the impacts been

recorded as performance
indicators? (units)

predicted quantitatively over the
life of the project?
Q11. Have all impacts been

monetized?
Present value
!
4!53!4!
Q12. Have the benefits and costs
been discounted to obtain
present value?
Q13. Has the net present value

(NPV) been computed and
compared for each alternative?
Q14. Has sensitivity analysis

been performed for each
alternative?
Make recommendation
Q15. Has evaluation of

alternatives been performed?
!
Q16. Has the selection of the

most promising alternative been
made?
Independent consultants
Q17. Has an outside evaluation

from independent consultants
been performed?
!
4!54!4!
!
Appendix III: Evaluation form
4!55!4!
!
Major activities for feasibility What was done? How was it done? What sort of prerequisites were used? Full Partial No consistency
analysis (Feasibility analysis method) (Processes and procedures) (Factors and/or attributes) consistency consistency with best
with best with best practice
practice practice
Project overview

been explained?

Q3. Have the project objectives

been defined?
!
4!56!4!
carried out?
Alternatives

schemes/projects were
considered?

included?
Cost-benefit
Q7. Were benefits and


!
practice practice

recorded as performance
indicators? (units)

predicted quantitatively over the

monetized?
!
Present value
4!57!4!
been discounted to obtain
present value?

(NPV) been computed and

been performed for each
alternative?
!
practice practice
Make recommendation


most promising alternative been
made?

from independent consultants
!
been performed?
4!58!4!
!
Appendix IV: Completed evaluation forms
4!59!4!
!
Project name: Advania Data Center Date of interview: November 13th 2014
Year of project: 2014 Interviewee: Jóhann Þór Jónsson, office of the director
Total cost of project: 700 million ISK Company responsible: Advania
practice practice
Project overview
The origin has not been recorded. - - 0 0 1
been explained?
In the agreement process with the customer,

the background of the project was recorded in - Technical information for data centers. 0 1 0
minutes.
Financial benefits were defined. Other

objectives were defined including to transfer
Q3. Have the project objectives Financial benefits were defined based on
and sell power in the form of information and Profitability calculations in dollars. 1 0 0
been defined? profitability calculations.
build up the data center industry that can
provide more jobs.
!
4!60!4!
The customer had been for trial in THOR,
Advania´s older data center, and wanted
The customer provided the needs analysis. more space. Advania met their needs by Floor area, power supplies, air conditioning, 1 0 0
carried out?
building a bigger data center in Fitjar,
Reykjanes.
Alternatives
When comparing locations, the price and

3 different locations were considered, amount of energy available in easch
schemes/projects were Cost estimation. 1 0 0
Blönduós, Höfn in Hornafjörður and Fitjar location was considered as well as the price
considered?
of transporting supplies.
!
practice practice
Whether or not the project would proceed

depended on the product price. Advania is
Q6. Was the zero alternative The option of not proceeding the project was still considering their cooperation with the
Product price. 1 0 0
included? considered. customer and whether or not to continue
with it, where the agreement is only valid
for 9 months.
Cost-benefit
Economic ( x )yes ( )no

Financial benefits were identified. As well as Social ( )yes ( x )no
Q7. Were benefits and transferring and selling power in the form of Financial benefits were based on Environmental ( )yes ( x )no
!
0 1 0
4!61!4!
beneficiaries identified? information and build up the data center profitability calculations. !
industry that can provide more jobs.
Factors and/or attributes: Profitability
calculations.

All costs was estimated with the help of an Social ( )yes ( x )no
Q8. Were costs identified? All financial costs was identified. engineering consultancy firm that carried Environmental ( )yes ( x )no 0 1 0
out a cost analysis. !
Factors and/or attributes: Cost of property,
initial cost, operating cost, financing cost.

recorded as performance Costs and revenues were recorded in dollars. - Alls costs and revenues in dollars. 1 0 0
indicators? (units)
!
practice practice
The customer makes agreements that last for a

The impacts were not predicted quantitatively short period time, 9 months, and the
predicted quantitatively over the - 0 0 1
over the life of the project. infrastructure is written off early in the life of
the project.

All costs and revenues have been monetized. - All costs and revenues in dollars/kw. 1 0 0
monetized?
Present value
!
4!62!4!
been discounted to obtain No present value calculations were made. - - 0 0 1
present value?

(NPV) been computed and No present value calculations were made. - - 0 0 1


Sensitivity analysis was performed for one Sensitivity analysis was carried out based
been performed for each Price elasticity. 0 1 0
alternative. on price elasticity.
alternative?
Make recommendation
Q15. Has evaluation of Different locations were evaluated as well as

Cost estimation. Initial cost. 1 0 0
alternatives been performed? the type of housing, steel vs. laminated.
!
practice practice
Based on cost estimation. If the possibility

Q16. Has the selection of the of expanding the business comes up, the
Reykjanes was selected based on cost
most promising alternative been housing will be more simpler and cheaper Cost estimation. 1 0 0
estimation.
made? next time, to lower construction costs and
provide better prices for the product.

Cost analysis was performed by an The work of the consultants did not involve
from independent consultants - 0 0 1
engineering consultancy firm. second opinion desk study.
been performed?
!
4!63!4!
!
8 4 5
!
Project name: Egilsholl Cinema Hall Date of interview: November 14th 2014
Year of project: 2008-2010 Interviewee: Björn Á. Árnason, manager
Total cost of project: 600 million ISK Company responsible: Sambio
practice practice
Project overview
Q1. Has the origin of the project The origin of the project has not been
- - 0 0 1
been explained? recorded.
Q2. Has the background of the The background of the project has not been
- - 0 0 1
project been described? recorded.
The objectives were 3: To increase the

overall attendance, build up competition The suburb was lacking a cinema hall and next
Q3. Have the project objectives with other rivals on the market and provide cinema was rather far away. The project
3 objectives were defined. 1 0 0
been defined? new customers by adding a cinema hall in a owner´s guessed as large part of the residents
new and growing suburb with rather young did not attend movies because of the distances.
!
population.
4!64!4!
Needs analysis of the location based on the age
of population, traffic load and demand. In the
beginning of the project the cinema hall was
Q4. Has a needs analysis been Needs analysis was carried out by an
Needs analysis was carried out. designed as a luxury cinema with higher ticket 1 0 0
carried out? engineering consultancy firm.
prices but after the recession the project was put
on hold and the focus changed.The ticket prices
were kept average.
Alternatives
The two locations considered were Spöngin
and Egilshöll with regard to traffic load but
schemes/projects were Two location options were examined. Traffic load. 1 0 0
the location of Spöngin turned out to be
considered?
inconvenient.

Cancelling the project was never an option. - - 0 0 1
included?
!
practice practice
Cost-benefit

Social ( )yes ( x )no
Q7. Were benefits and Financial benefits were identified by Environmental ( )yes ( x )no
Financial benefits were identified. 0 1 0
beneficiaries identified? profitability calculations !

calculations.

Q8. Were costs identified? All financial costs were considered. Cost analysis was carried out. Environmental ( )yes ( x )no 0 1 0
!
Factors and/or attributes: Initial cost, operating
!
4!65!4!
cost, rental cost, cost of capital.

All costs and revenues were recorded as Costs and revenues were recorded in Icelandic
recorded as performance - 1 0 0
performance indicators. kronas.
indicators? (units)

The cost and revenues were predicted The cost and revenues were calculated 33 Operating cost, inital cost, rental cost and
predicted quantitatively over the 1 0 0
quantiatively over the life of the project. years ahead, the length of the lease. revenues.
Q11. Have all impacts been All financial costs and revenues in Icelandic
The cost and revenues. - 1 0 0
monetized? kronas.
Present value

Even though the lease was for 33 years,
been discounted to obtain - - 0 0 1
present value was not calculated.
present value?
!
practice practice

(NPV) been computed and NPV was not calculated. - - 0 0 1

been performed for each Sensitivity analysis was not performed. - - 0 0 1
alternative?
Make recommendation
Q15. Has evaluation of The two locations were evaluated but not in
- - 0 0 1
alternatives been performed? detail.
!
4!66!4!
most promising alternative been Only one alternative. - - 0 0 1
made?
Q17. Has an outside evaluation Examination of two different locations was The consultants adviced on choosing
from independent consultants performed by an engineering consultancy Egilsholl because of better transportation in Traffic load. 1 0 0
been performed? firm. that area.
!
7 2 8
!
!
Project name: Harpa Hotel and Apartments Date of interview: November 11th 2014
Year of project: 2014 Interviewee: Karl Reymond Birgisson, engineer
Total cost of project: 14 billion ISK Company responsible: Mannvit
practice practice
Project overview
Mannvit owns a part in the project along with
Q1. Has the origin of the project Information about the stakeholders in the
other owerns and it´s origin has been - 1 0 0
been explained? project and their responsibility.
recorded.
Q2. Has the background of the Mannvit owns a part in the project so it´s Information about the development of the
- 1 0 0
project been described? background has been recorded. project have been recorded.
Estimate the costs of the project as accurate

Q3. Have the project objectives The objective was defined as financial as possible and define the project in detail
- 1 0 0
been defined? benefits. with the aim of better outcome of the
project.
Analysis of the market for the specific
Q4. Has a needs analysis been product, that is, demand for apartments in Analysis of quality, size of hotel rooms and
Need analysis was carried out. 1 0 0
!
carried out? this location and demand for a hotel in this price per night.
4!67!4!
quality class.
Alternatives
The greater options where architectural, for
3-4 greater options where considered and The costs and technical aspects of the example number of floors, but the minor
schemes/projects were 1 0 0
then many minor options as well. alternatives was compared. options considered for example the structure of
considered?
rooms.
Q6. Was the zero alternative In the conceptual study the zero alternative
The base case defined. - 1 0 0
included? was included.
Cost-benefit

Q7. Were benefits and Financial benefits of the project were Calculations made with the help of the Environmental ( )yes ( x )no
0 1 0
beneficiaries identified? identified. bank.
calculation, revenue estimation and then profit
proven.
!
practice practice

A detailed cost estimation was carried out. Social ( )yes ( x )no
Risk analysis during construction was Environmental ( )yes ( x )no
Alls financial costs were identified as well as carried out where health and security of !
Q8. Were costs identified? 0 1 0
risk analysis. workers were identified as well as social,
legal and environmental impacts of the Factors and/or attributes: Initial costs, cost of
project and the schedule of the project. capital, investment cost, operating costs. The
probability of every risk class of impact was
evaluted and it´s consequences recorded.
The financial impacts where recorded as
recorded as performance - Revenues and all costs. 1 0 0
performance indicators.
indicators? (units)
!
4!68!4!
Financial impacts were predicted
predicted quantitatively over the - Revenues and all costs. 1 0 0
quantitatively over the life of the project.
Q11. Have all impacts been Financial impacts, costs and revenues were
- All costs and revenues in Icelandic kronas 1 0 0

monetized? monetized.
Present value

Cost and revenues are estimated without
been discounted to obtain Present value was not calculated. - 0 0 1
indexation.
present value?

(NPV) been computed and Present value was not calculated. - - 0 0 1
!
practice practice

Sensitivity analysis was performed for one The sensitivity analysis focuses on changes
been performed for each Initial costs. 0 1 0
alternative. in cost.
alternative?
Make recommendation

Evaluation was based on initial cost. - Initial cost. 1 0 0
When selecting the most promising

Q16. Has the selection of the alternative, strong emphasis is laid on
most promising alternative been Selection was based on initial cost. security issues, which can sometimes be Initial cost. 1 0 0
!
made? the determining factor, dominant over the
4!69!4!
profitability of the project.

Profiability calculations were performed by a The work of the consultants did not involve

bank. second opinion desk study.
been performed?
!
11 3 3
!
Project name: Hofdatorg Down Town & Service Center Date of interview: November 18th 2014
Year of project: 2009 Interviewee: Gunnar Valur Gíslason, project manager
Total cost of project: 6 billion ISK Company responsible: Eykt
practice practice
Project overview
The building history of the old houses and
Q1. Has the origin of the project A report on the project´s origin and property is told in the report. Developing of Transportation development and need for city
1 0 0
been explained? background. transportation and need for a new city center.
center examined.
Developing of the life and culture is
described and proposed future
developmentas well. The planning of the
Development of culture in the down town area.
Q2. Has the background of the A report on the project´s origin and location is described as well as the
Planning of the building area, in the past and 1 0 0
project been described? background. development of the planning in the past.
future. Idea about the down town center model.
Development of the down town area is
described and the idea about a down town
and service center is described.
!
The financial objectives were defined in
4!70!4!
detail by profitability calculations. The
conceptual objectives inlcuded a new
Q3. Have the project objectives Both financial and conceptual objectives were vision for the city center, with a modern Profiatbility calculations. New vision for the
1 0 0
been defined? defined in a clear goal setting. and new design of housing, new vision for city center.
culture where all kinds of services can be

found in the same building as well as a
hotel, apartments and restaurants.
The need for office building was identified,

locations and structure of potential office
buildings was analysed as well as the rental
rates. The internal of the housing was
Q4. Has a needs analysis been Need for office space. Location. Rental rates.
A need analysis was carried out analysed as well, size per office, technical 1 0 0
carried out? Internal facility. Transportation.
needs, number of windows, number of
parking lots needed. Transportation
agreements with employees were analysed
as well.
!
practice practice
Alternatives
The two options were office building and a
Q5. How many alternative hotel. After deciding on the office building
schemes/projects were 2 alternatives were considered. internal alternatives were considered: Cost estimation and need analysis. 1 0 0
considered? windows, fittings, covering, square meter
per employee
The alternative to wait with proceeding with

The zero alternative was not included. - part of the construction was included, that is not 0 0 1
included?
tearing down all of the old hauses immediately.
Cost-benefit
!
Social ( x )yes ( x )no
4!71!4!
Environmental ( )yes ( x )no
The financial benefits were identified in
Q7. Were benefits and Profitability calculations and operating
detail. Benefits for the culture and service in 0 1 0
beneficiaries identified? estimates. Factors and/or attributes: Profitablity. All kind
the down town area were identified as well.
of service found in the same building. Create a
city center with creative culture. Shorter

distances have positive influence on traffic
load.

Q8. Were costs identified? All financial costs were estimated. Detailed cost analysis was carried out. 0 1 0
Factors and/or attributes: Cost of property,
initial cost, cost of capital, operating cost,
investment cost.
Revenues and costs were recorded as Revenues, cost of property, initial cost, cost of
performance indicators. capital, operating cost, investment cost.
indicators? (units)
!
practice practice
The costs and revenues were predicted Cost and revenues were predicted 30 years Initial cost, cost of capital, operating cost,
predicted quantitatively over the 1 0 0
quantitatively over the life of the project. ahead. revenues.
Q11. Have all impacts been Financial benefits, revenues and costs were Revenues and all costs were monetized in
- 1 0 0
monetized? monetized. Icelandic kronas.
Present value

Present value for revenues and costs was Revenues, cost of property, initial cost, cost of
been discounted to obtain And FCFF was calculated. 1 0 0
calculated. capital, operating cost, investment cost.
present value?
!
4!72!4!
The NPV was computed for the alternative The NPV of the costs and revenues was Revenues, cost of property, initial cost, cost of
(NPV) been computed and 0 1 0
that was chosen. calculated for the life time of the building. capital, operating cost, investment cost.
Q14. Has sensitivity analysis Sensitivity analysis was performed with

Sensitivity analysis for the alternative that
been performed for each respect to investment costs. As well as Investment costs. 0 1 0
was chosen was performed.
alternative? credit terms vs loan rate.
Make recommendation

Only one alternative. - - 0 0 1

most promising alternative been Only one alternative. - - 0 0 1
made?
!
practice practice

An outside evaluation from independent
from independent consultants - - 0 0 1
consultants was not performed.
been performed?
9 4 4
!
!
4!73!4!
!
!
Project name: Holaberg Senior Citizen Apartments Date of interview: November 6th 2014
Year of project: 2009-2012 Interviewee: Ármann Óskar Sigurðsson, manager
Total cost of project: 1 billion ISK Company responsible: SS Verktaki
practice practice
Project overview
The origin was not explained. No initial report was carried out. - 0 0 1
been explained?
The background has not been described. No initial report was carried out. - 0 0 1
The only objective of this project was to
Q3. Have the project objectives The project was started in 2008, the year of the
create jobs and let the wheels of the company The objective was not recorded. 1 0 0
been defined? recession and many projects were put on hold.
spin.
Needs analysis consisted mainly of the size of
No report was made comprising the needs
Needs analysis had been carried out by the the apartments.
Q4. Has a needs analysis been analysis. 54 preparatory meetings were
Association of senior citizens in Reykjavik 1 0 0
carried out? held where the Association informed the
and vicinity.
constructor of it´s needs and requests.
Alternatives
!
4!74!4!
Different options about the implementation of
schemes/projects were The options were not recorded. Cost estimation. 0 1 0
the building were considered.
considered?
The situation in the economy made the

Q6. Was the zero alternative The zero alternative was always an option
The zero alternative was not reported. Association and the constructor doubt the 1 0 0
included? before the construction started.
possibility of the project.
Cost-benefit

Q7. Were benefits and Environmental ( )yes ( x )no
Financial benefits were identified. Revenue plan carried out. 0 1 0
Factors and/or attributes: The income of the
project was estimated to decide on the sale
price of the building.
!
practice practice

Q8. Were costs identified? A detailed cost analysis was carried out. All costs of the project was estimated. Environmental ( )yes ( x )no 0 1 0
Factors and/or attributes: Cost of property.

Construction cost. Cost of capital.
All financial impacts were recorded as
recorded as performance - Revenues and costs. 1 0 0
performance indicators.
indicators? (units)

For the construction from the beginning to the Cost of property. Construction cost. Cost of
predicted quantitatively over the - 1 0 0
finish. capital, profit.
!
4!75!4!
Q11. Have all impacts been Revenues and costs were redorded in Icelandic
Costs and revenues were monetized. - 1 0 0
monetized? kronas.
Present value

Benefits and costs were not discounted to Only financial interests and cost of capital
been discounted to obtain - 0 0 1
obtain present value. were discounted to obtain present value.
present value?

(NPV) been computed and The NPV was not computed. - - 0 0 1

been performed for each Sensitivity analysis was not performed. - - 0 0 1
alternative?
!
practice practice
Make recommendation

Evaluation of alternatives was not performed. - - 0 0 1

Only one alternative, not with regard to
most promising alternative been - - 0 0 1
systematic evaluation of options.
made?

An outside evaluation from independent
from independent consultants - - 0 0 1
!
consultants was not performed.
been performed?
4!76!4!
6 3 8
!
!
Project name: Proposed Aluminium Smelter Skagabyggd Date of interview: November 6th 2014
Year of project: In process 2014 Interviewee: Jóhann Friðrik Haraldsson, manager
Total cost of project: 70 billion ISK Company responsible: Klappir Development
practice practice
Project overview
Import of wire rods to Europe exceeds the

Q1. Has the origin of the project The pre-feasibility study explains the origin A description about the need for wire rods
prodcution in Europe. Analysis of the price of 1 0 0
been explained? of the project. is given.
the product and price forecasts for aluminium.
Q2. Has the background of the The pre-feasibility study explains the A detailed description of the technique Technical information about aluminium smelter
1 0 0
project been described? backgraound of the project. behind the production is given. and wire rod production.
Q3. Have the project objectives The objectives are financial benefits as well
The objectives have been roughly defined. Financial benefits. 0 1 0
been defined? as creating employment for the managers.
!
The needs analysis comprises studying the
Q4. Has a needs analysis been A marketing report was made with focus on
4!77!4!
A needs analysis was carried out. market for the product. Import of the product to 1 0 0
carried out? the Europian market.
Europe exceeds the production in Europe
Alternatives
Locations had to have access to a port and

Different locations for the smelter have been
Q5. How many alternative enough energy. 120 thousand tons were
explored. Original location was Húsavík. Two
schemes/projects were decided for the production size, with the Locations and production size. 1 0 0
production size options were considered, 240
considered? possibility of expansions of the smelter of
thousand tons and 120 thousand tons.
another 120 thousand tons in the future.

The zero alternative was not included. - - 0 0 1
included?
!
practice practice
Cost-benefit

Q7. Were benefits and The financial benefits were analysed with
Financial benefits were identified. Environmental ( )yes ( x )no 0 1 0
beneficiaries identified? the help of a revenue model.
Factors and/or attributes: Financial benefits in

dollars

All financial costs directly linked to the Social ( )yes ( x )no
Q8. Were costs identified? construction of the smelter and its operation Cost analysis was carried out. 0 1 0
were identified.
!
Factors and/or attributes: Initial cost, operation
4!78!4!
cost, property cost, cost of capital.
Financial impacts were recorded as Initial cost, operation cost, property cost, cost
performance indicators. of capital, revenues.
indicators? (units)
A revenue estimate has been made to the

Costs and revenues were predicted year 2030 with focus on the product. The
predicted quantitatively over the Revenues and operating costs. 1 0 0
quantitatively over the life of the project. production cost has been estimated from
the development of aluminium prices.

The financial impacts were monetized. - Costs and revenues were redcorded in dollars. 1 0 0
monetized?
Present value

Only the cash flow was obtained as present The PV() in Excel was used to obtain the
been discounted to obtain Cash flow. 0 1 0
value. present value of the cash flow.
present value?
!
practice practice

The NPV of the project´s profit was
(NPV) been computed and - NPV of profitability. 0 1 0
computed for one alternative.
The sensitivity analysis included changes in
Q14. Has sensitivity analysis rates, development of the aluminium world
Sensitivity analysis was only performed for
been performed for each market price, the market price of the Rates, market price, initial cost. 0 1 0
the most promising option.
alternative? product, and the total construction cost of
the project.
Make recommendation
Q15. Has evaluation of No systematic evaluation of alternatives was
!
- - 0 0 1
alternatives been performed? performed.
4!79!4!
Only one alternative. 120 thousand tons
most promising alternative been - - 0 0 1
production in Skagabyggð.
made?

A foreign consultant performed a pre- Foreign consultant adviced on different
from independent consultants Production size, location. 1 0 0
feasibility analysis. locations as well as size of production.
been performed?
!
8 6 3
!
Project name: Vindakor Apartments Date of interview: November 5th 2014
Year of project: 2014 Interviewee: Pétur Hannesson, project manager
Total cost of project: 1,6 billion ISK Company responsible: Upphaf
practice practice
Project overview
Q1. Has the origin of the project The origin of the project is based on analysis
Analysis of the hausing market. Need for apartments. 1 0 0
been explained? of the hausing market.
The building was bought weatherproof and
The background of the project was recorded. available data about the property and Drawings, size of building, property data. 1 0 0
housing recorded.
Q3. Have the project objectives The financial profit objectives from the The objectives were financial in Icelandic
Revenue calculations. 1 0 0
been defined? construction were defined in detail. kronas.
Number of dwellings available. Price per

A detailed analysis on the status of the
square meter. Changes of population. Number
housing market in Iceland and where it´s
of purchase agreements.
aiming was carried out. The reporting,
"Upp úr öldudalnum" was written by GAM
!
A needs analysis was carried out. Management hf. in 2011. Economics 1 0 0
4!80!4!
carried out?
forecasts from Statistics Iceland on the
development of population, rental market,
real estate price and real estate supply were
analysed in detail.
Alternatives
Q5. How many alternative First the quality of the interior was decided
Interior alternatives were considered as well Quality and structure of the interior. Based on
schemes/projects were and then different alternatives of the 1 0 0
as different funding alternatives. cost estimation. Investment costs.
considered? interior were considered.

The zero alternative was not included. - - 0 0 1
included?
Cost-benefit

Financial benefit of the project was identified. Analysis of the impact of adding 54
Q7. Were benefits and Social ( )yes ( x )no
Benefits for the hausing market by adding 54 apartments on the market. Profitability 0 1 0
beneficiaries identified? Environmental ( )yes ( x )no
apartments. calculations.
Factors and/or attributes: Profitability.

!
practice practice

A detailed cost analysis was carried out by Environmental ( )yes ( x )no
Q8. Were costs identified? All financial costs were identified. 0 1 0
Ferill, engineering consultancy firm.
Construction cost, cost of capital, interest

expenses, investment cost.
Costs and revenues were recorded as Construction cost, cost of capital, interest
performance units. expenses, investment cost, revenues.
indicators? (units)

The impacts were not predicted quantitatively
predicted quantitatively over the - - 0 0 1
over the life of the project.
!
4!81!4!
Q11. Have all impacts been All costs and revenues were monetized in
All costs and revenues were moneticed. - 1 0 0
monetized? Icelandic kronas.
Present value

Present value was calculated for the costs and
been discounted to obtain Present values calculations. Costs and revenues. 1 0 0
revenues.
present value?

(NPV) been computed and Only for the most promising alternative. - - 0 1 0

Sensitivity analysis was carried out for one Sensitivity analysis of interest expenses of
been performed for each Interest expenses. 0 1 0
alternative. loans vs. how early the apartments are sold.
alternative?
!
practice practice
Make recommendation
Q15. Has evaluation of Evaluation of different funding alternatives

Costs for each alternative calculated. Investment costs. 0 1 0
alternatives been performed? was performed.

Selection between different funding
most promising alternative been - Based on the optimal investment strategy. 0 1 0
alternatvies.
made?
Cost analysis was carried out by an The work of the consultants did not involve
!
engineering consultancy firm. second opinion desk study.
been performed?
4!82!4!
8 6 3
!
!
Project name: X Data Center Date of interview: November 11th 2014
Year of project: 2014 Interviewee: X
Total cost of project: 11 billion ISK Company responsible: X
practice practice
Project overview
The origin of the project is not explained but
everything within the construction area is - - 0 0 1
been explained?
defined.
The background and information about the

Q2. Has the background of the project is described by the buyer, which x These information are recorded in the
Technical information. 1 0 0
project been described? uses and makes changes on in the conceptual conceptual study.
process.
Estimate the costs of the project as accurate

Q3. Have the project objectives The objective was defined as financial as possible and define the project in detail
Cost estimation. 1 0 0
been defined? benefits. with the aim of better outcome of the
project.
!
4!83!4!
The buyer asked for a specific quality class In this case the buyer had certain ideas about
Need analysis was not carried out. for the data center and x gave advice on the implementation of the project and x based 0 0 1
carried out?
different classes. it´s feasibility study on that.
Alternatives
The prices of different quality classes of
schemes/projects were Different quality classes were considered. Cost estimation. 1 0 0
data centers were compared.
considered?
Q6. Was the zero alternative The zero alternative was included in the
Base case defined. - 1 0 0
included? conceptual study.
Cost-benefit

With the use of profitability calculations
Q7. Were benefits and but x had limited access to these
Financial benefit of the project was identified. Environmental ( )yes ( x )no 0 1 0
beneficiaries identified? information where they were classidied
because of competitors.
!
Factors and/or attributes: Profitability.

practice practice
A detailed cost estimation was carried
out.Then risk analysis for the cost Economic ( x )yes ( )no
estimation was carried out with Monte
Q8. Were costs identified? All financial costs were identified. Carlo simulation and risk analysis during 0 1 0
construction was carried out where
technical performance of the project was
evaluated. Factors and/or attributes: Initial cost, operating
cost, cost of property, cost of capital.
The financial impacts and technical
recorded as performance - Costs and revenues. 1 0 0
performance where recorded as indicators.
indicators? (units)
Q10. Have the impacts been The financial impacts and technical
!
predicted quantitatively over the performance were predicted quantitatively Unforseen cost is taken into account. Costs, revenues and technical performance. 1 0 0
4!84!4!
life of the project? over the life of the project.
Q11. Have all impacts been Costs and revenues were recorded in Icelandic
Financial impacts were monetized. - 1 0 0
monetized? kronas.
Present value

been discounted to obtain Present value was not calculated. - - 0 0 1
present value?

(NPV) been computed and Present value was not calculated. - - 0 0 1
!
practice practice

Sensitivity analysis was carried out for one Sensitivity analysis was carried out for the
been performed for each Profitability calculations. 0 1 0
alternative. profitability calculations.
alternative?
Make recommendation
Q15. Has evaluation of Evaluation of different quality classes was

Evaluation of alternatives was performed. Cost estmation. 1 0 0
alternatives been performed? performed and costs compared.

Different quality classes were evaluated and Selection of the most promising alternative
most promising alternative been Cost estmation. 1 0 0
the most promising was selected. was based on the cost analysis.
!
made?
4!85!4!
Q17. Has an outside evaluation The engineering consultancy firm adviced

Feasbility study was performed by an
from independent consultants on the optimal quality class, based on Quality class of data center. 1 0 0
engineering consultancy firm.

been performed? profitability calculations and cost analysis
!
10 3 4
!

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Feasibility studies in construction projects in Iceland

Thesis of 30 ECTS credits

Feasibility studies in construction projects in Iceland

Ásta Ósk Stefánsdóttir

Thesis of 30 ECTS credits submitted to the

Keywords: Project management; Feasibility study; Cost-benefit analysis.

Lykilorð: Verkefnastjórnun; hagkvæmniathugun; kostnaðar-/ábatagreining.

Feasibility studies in construction projects in Iceland

Ásta Ósk Stefánsdóttir

30 ECTS thesis submitted to the School of Science and Engineering

Ásta Ósk Stefánsdóttir

Þórður Víkingur Friðgeirsson

4.2.1 Qualitative research ....................................................................................... 27

1.1 Introduction of the project “Improvement of the public project life

1.2 Statement of the problem

1.3 Research aim and objectives

1.4 Research questions and hypothesis

• How are feasibility study practices in private construction projects compared to

1.6 Structure of the thesis

2.2 An overview of international public project governance

2.2.2 United Kingdom

• Are there better ways to achieve this objective?

This is achieved through (HM Treasury, 2003):

• Identifying other possible approaches that may achieve similar results.

2.3 Feasibility studies in public projects in Iceland

Full! Partial! Full! Partial!

Vadlaheidi!tunnel! 5! 3! 9! 29%! 18%! 53%!

Landeyjar!harbour! 6! 8! 3! 35%! 47%! 18%!

Harpa!concert!hall! 10! 2! 5! 59%! 12%! 29%!

School!in!Mosfell!town! 2! 7! 8! 12%! 41%! 47%!

Avalance!protection! 4! 5! 8! 24%! 29%! 47%!

Snaefells!stofa! 3! 3! 11! 18%! 18%! 65%!

!! !! !! Average:! 29%! 27%! 43%!

Weighted! Weighted! Weighted!

Project!overview! 0,24! 15! 1! 8! 63%! 4%! 33%!

Alternatives! 0,12! 3! 2! 7! 25%! 17%! 58%!

Benefits!and!cost! 0,29! 7! 16! 7! 23%! 53%! 23%!

Net!present!value!(NPV)! 0,12! 1! 2! 9! 8%! 17%! 75%!

Sensitivity!analysis! 0,06! 0! 2! 4! 0%! 33%! 67%!

Make!a!recommendation! 0,12! 2! 5! 5! 17%! 42%! 42%!

Independent!consultants! 0,06! 2! 0! 4! 33%! 0%! 67%!

!! !! !! !! Average:! 24%! 24%! 52%!

3.2 Project feasibility studies

3.2.1 Introduction into project feasibility studies

3.2.2 Validity of feasibility studies for construction projects

According to Flyvbjerg et al. (2002) in public transportation infrastructure projects, costs

to similar conclusion, which supports the further investigation in the following

3.2.3 Project feasibility studies and sustainability

• Project overview examines the project’s basic information such as its

• Economic feasibility estimates demand and calculates economic and financial

• Political viability evaluates non-economic impact, attitudes toward the project,

• Total viability leads decision makers to make a Go/No Go decision, determine

3.3 Cost-Benefit Analysis

3.3.1 The major steps in cost-benefit analysis

Below is each step described and illustrated.

1. Specify the set of alternative projects.

2. Decide whose benefits and costs count (standing).

In order to treat something as an impact, we have to know there is a cause-and-effect

6. Discount benefits and costs to obtain present value.

7. Compute the net present value of each alternative.

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!"# = !" ! − !" ! > 0