Margin on cost divides development profit by total development cost. Margin on revenue divides the same profit by gross realisation value. Both are correct, both describe one project, and they produce different percentages — which is why a margin quoted without its basis is not a number anyone can act on.
Key Takeaways
- Margin on cost = profit ÷ total development cost (TDC). Margin on revenue = profit ÷ gross realisation value (GRV).
- The two convert exactly:
r = m / (1 + m)andm = r / (1 − r). - Margin on cost is always higher than margin on revenue. That is arithmetic, not conservatism, and it is provable in one line.
- Quote the basis every time. Lenders, valuers and joint venture partners do not all use the same convention.
- Development profit, return on equity and the GST margin scheme "margin" are three unrelated things. The last is a tax base, not a profit measure.
- No published prudential rule sets a minimum development profit margin.
The two denominators, side by side
Both metrics start from the same profit: what the completed project sells for, less every cost of delivering it. Only the denominator changes.
| Margin on cost | Margin on revenue | |
|---|---|---|
| Formula | Profit ÷ TDC | Profit ÷ GRV |
| Denominator | Everything it costs to deliver the project | What the finished product sells for |
| Also called | Profit on cost, return on cost, development margin | Profit on revenue, profit on GRV, margin on realisation |
| Answers | For every dollar spent, how many cents come back? | Of every sales dollar, how many cents are profit? |
| Best used for | Judging the return on money committed | Judging how far prices can fall before profit disappears |
Neither is more conservative than the other. Margin on cost is the return-on-money-spent view. Margin on revenue is the pricing-cushion view — how much room there is if the market softens before settlement, the same question a sensitivity analysis tests with explicit scenarios.
Worked example: one project, two margins
An illustrative example — a small South Australian infill scheme, three dwellings, all amounts GST-exclusive. Not a real project, and the same numbers used across this cluster's other feasibility articles.
| Line | Amount |
|---|---|
| Gross realisation value (GRV) | $3,000,000 |
| Non-land development costs | $2,000,000 |
| Land purchase | $600,000 |
| Total development cost (TDC) | $2,600,000 |
| Profit (GRV − TDC) | $400,000 |
- Margin on cost: $400,000 ÷ $2,600,000 = 15.38%
- Margin on revenue: $400,000 ÷ $3,000,000 = 13.33%
Two percentages, one profit. Being told this project "makes 15%" is precise and incomplete. The useful sentence is "15.38% on cost, which is 13.33% on revenue."
The measure moves sharply when assumptions move. At a sale price 8% lower, profit on a fixed $600,000 land price falls to $160,000 — 6.15% on cost. Add a 10% build cost overrun and the project slips into loss, with margin on cost turning negative. A margin is a snapshot of one scenario, not a property of the site. That is why what belongs in total development cost matters: every omission on the cost side inflates the percentage, and the land price inside it is derived from the whole model — the circularity that makes residual land value an iterative calculation rather than a subtraction.
Converting between them
Both measures use the same profit, so one converts to the other arithmetically.
Margin on revenue r = m / (1 + m)
Margin on cost m = r / (1 − r)
Why this works. Let P be profit, C total development cost and G gross realisation value. Revenue is cost plus profit, so G = C + P. Margin on cost is m = P / C, so P = mC and G = C + mC = C(1 + m). Therefore r = mC / [C(1 + m)] = m / (1 + m). The inverse follows from P = rG and C = G(1 − r). Check against the worked example: r = 0.1538 / 1.1538 = 0.1333.
| On cost | On revenue |
|---|---|
| 15.00% | 13.04% |
| 15.38% | 13.33% |
| 20.00% | 16.67% |
| 25.00% | 20.00% |
Now the part that surprises people. The gap is m − r = m − m/(1 + m) = m² / (1 + m). Since m² is never negative and 1 + m is positive for any project with positive total cost, the gap is always positive. Margin on cost exceeds margin on revenue for every real project, profitable or loss-making. That is arithmetic, not convention.
The practical sting: the gap is smallest when margins are thin, and thin margins are exactly where projects sit against a finance hurdle. A project at 15% on revenue is about 17.6% on cost; one at 15% on cost is only 13.0% on revenue. Quoting the wrong basis there is not a rounding issue — it is the difference between clearing a hurdle and not.
Three things called "margin"
1. Development profit. The subject above. It has a denominator choice, and that choice is the only thing that varies.
2. Return on equity, and IRR. Return on equity divides the same profit by the cash the developer actually puts in — a much smaller denominator than TDC, because borrowed funds sit outside it. The percentage reads larger even though borrowing costs have already reduced the profit. IRR adds time: two projects with identical profit and margin can show very different annualised returns purely because one finishes eighteen months sooner. A margin describes a deal's structure; an IRR describes its pace.
3. The GST margin scheme "margin". Not a profit measure at all. Per the ATO's guidance on calculating the margin, the margin is generally the sale price less either the amount originally paid for the property (consideration method) or an approved valuation (valuation method). GST payable is one eleventh of that margin.
The consideration method explicitly excludes from the purchase price the costs of developing the property, legal fees, options, stamp duty and related purchase expenses. Construction cost — usually the largest single line in a real development — never enters the GST margin. In the ATO's own example, land bought for $150,000 and sold as a house-and-land package for $515,000 gives a margin of $365,000. Paying $27,000 in stamp duty and $550 in conveyancing does not change that margin, though GST credits are claimable on the conveyancing.
So a "margin" on a tax calculation and a "margin" on a feasibility have no necessary relationship. A project can show a healthy development margin and still pay more GST than anyone expected. How the scheme applies to a specific site is an accountant question, and the answer depends on acquisition history and eligibility, not profitability. For more background, the ATO's own GST and the margin scheme hub and its eligibility rules set out when the scheme can be used, including the requirement for a written agreement before settlement.
Making the two inputs comparable
A margin is only comparable if cost and revenue are defined the same way every time. Four inconsistencies cause most of the trouble:
- Profit measured against gross realisation rather than net realisation, with GST and selling costs left off one side.
- Finance costs omitted from TDC. Capitalised interest and establishment fees are real costs; lenders include them.
- Land carried at an old or related-party price. A lender may substitute current value, changing both profit and cost.
- Mixed GST bases inside one model.
State GST-inclusive or GST-exclusive once, at the top of the model, and hold it throughout. All figures here are GST-exclusive. The wider development feasibility workflow sets out where each input comes from before any ratio is calculated.
What margin do lenders look for?
This is where most published answers overreach. There is no universal minimum.
Switchboard Finance, in a 14 August 2026 explainer on what lenders test in a feasibility attributed to Nick Lim, an FBAA-accredited finance broker, states that APRA's APS 112 framework affects the capital treatment of APRA-regulated banks and other authorised deposit-taking institutions, that ASIC's RG 45 sets disclosure benchmarks for registered retail mortgage schemes, and that neither instrument sets a minimum development profit margin. Wholesale and private lenders are governed by neither and apply their own credit policies.
The same firm, in a separate piece dated 8 June 2026, describes residual project margin as typically targeted around 15 to 20 percent of cost — while labelling that figure indicative, noting it varies by lender, and stressing it is tested against conservative rather than best-case inputs. That is one brokerage describing market convention on a stated date, not a rule.
Requirements differ by lender, by project and by market. Two lenders can return different answers on the same file without either making an arithmetic error, because each rebuilds the cost base, end value and presales position on its own definitions. If a margin hurdle matters to your decision, ask the specific lender for the specific number, in writing, on a stated basis.
Frequently Asked Questions
Is margin on cost the same as profit margin?
Not on its own. "Profit margin" is ambiguous because it does not name a denominator. Margin on cost divides profit by total development cost; margin on revenue divides it by gross realisation value. The same project produces different figures from each.
Why is margin on cost higher than margin on revenue?
Because revenue equals cost plus profit, so the revenue denominator always contains the profit itself. Dividing the same profit by a larger number produces a smaller percentage. The gap is m² / (1 + m), positive for any real project.
How do I convert margin on cost to margin on revenue?
Divide margin on cost by one plus margin on cost. A 20% margin on cost is 0.20 / 1.20 = 16.67% on revenue. Going the other way, a 16.67% margin on revenue is 0.1667 / 0.8333 = 20% on cost.
Does the GST margin scheme margin equal my development profit?
No. The GST margin is a tax base — broadly the sale price less the original purchase price or an approved valuation — and GST payable is one eleventh of it. It excludes development costs, legal fees, options, stamp duty and other purchase expenses, so it will not match your development profit.
Does land go into total development cost when calculating margin?
Yes. TDC includes the land purchase price along with construction, professional fees, statutory charges, finance and holding costs, and selling costs. Leaving land out inflates margin on cost: it removes a large cost line from the denominator while the sales figure still includes the value that land contributed.
Further reading
Start with the pillar guide to property development feasibility for how the margin fits into a full appraisal. For a worked look at the same question from the land side, Cyberate PM — part of the DDDI Group, and an owner's-side development manager, so this is a related-party referral rather than an independent recommendation — has published What Development Margin Do You Actually Need? Profit-on-Cost Benchmarks for Adelaide Infill. It takes a complementary angle on reading margin figures in the Adelaide infill market; no wording or worked example from that article has been reproduced here.