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FINANCIAL MANAGEMENT IN
CONSTRUCTION PROJECT
COURSE
ACCOUNTING & FINANCIAL MANAGEMENT
EM-502
PREPARED BY:
COURSE INSTRUCTOR
DR. RAZA ALI KHAN
ABSTRACT..2
CHAPTER 1: INTRODUCTION
1.1 Background........3
1.2 Significance4
1.3 Study Scope4
1.4 Objective5
1.5 Methodology .5
CHAPTER 3: METHODOLOGY
3.1 Research Design..10
CHAPTER 6: CONCLUSION.21
REFERENES.22
1
ABSTRACT
The scope of this paper is to discuss the financial management of a construction project. This
paper attempts to approach this subject in a logical and systematic way. It communicates the
importance of financial analysis and planning along with cash planning. This report is not
intended to be an all-inclusive discussion of financial management in construction. The
research is undertaken to discuss; how much effective financial management is necessary for
the construction project and overall which factor mostly affect the financial status of the
project and where we have to be more alert to maintain the financial status in the industry.
Whereas to evaluate the study different expertise present in construction industry locally are
interviewed.
The discoveries of this study can be utilized for enhancing general money related
administration practices of customers in neighborhood development division through
mindfulness crusades, preparing workshops and ability advancement programs.
2
CHAPTER 1
INTRODUCTION
The construction activity includes gathering and assembling materials which are produced by
maintenance and decommissioning of various structures and buildings. Their scale and
complexity usually varies on the basis of the work undertaken, whether they are small
jobbing builders or internationally renowned companies undertaking high cost and complex
projects.
Moreover, every construction project requires financial management, and to arrange for
finance various factors are needed to be studied, whether the project is a public, private or a
public-private venture.
The companys financial resources include cash and assets of the firm and this is deriving
from the term financial management. Decisions that are made on the basis of financial
management affect a companys financial future and therefore the decision made by the
personnel is very important regarding the companys benefits and industries image in future.
The decision to bid on a large project has great impact on the finances of a company.
Thoughtful financial planning can easily take a backseat to daily life.- (Suze Orman)
3
Background
Financial management may be defined as the use of a companys financial resources and
encompasses all decisions that affect a companys financial health. Many everyday decisions
affect a companys financial health. The difference between a marginally profitable and a
very profitable company is good financial management. Business schools teach the
fundamental principles of financial management; however, because of the many unique
characteristics of the construction industry, the usefulness of these financial principles as
taught by business schools is limited. To be useful, these principles must be adapted
specifically to the construction industry.
Significance
Financial management of your small business encompasses more than keeping an accurate set
of books and balancing your business checking account. You must manage your finances so
you dont overspend and so you remain prepared for all expenditures, as well as profit
distributions. Your financial management responsibilities affect all aspects of your business.
A company that sells well but has poor financial management can fail. Some of the
authoritative definitions are given below:
Scope
Financial Management is worried for ideal use about assets. Assets need aid. Limited,
especially clinched alongside creating nations. So, the focus, everywhere, will be should
make. Most extreme benefit, in the manifestation from claiming output, starts with those set
inputs. Financial management is necessary over each sort of organization, a chance to be it
state funded or private segment. Equally, its importance exists to both benefit situated
furthermore non-profit associations. Financial management will be that's only tip of the
iceberg clinched alongside loss-making associations to transform them with gainful ventures.
4
Study uncovers a number associations have maintained losses, because of nonattendance for
proficient financial management.
Objective
The objective of the study is to research on the theoretical and practical developments and
innovative strategies in the financial management of construction project, through all its
stages including the initial concept, decision making, investment, planning and financial
return. We will further discuss different ideas with respect to cost implications of
Methodology
The methodology used to achieve our goal will be based mainly on interviews through
contractors and owners; who are the major victims of the conflicts. At some points, site
investigations will be done and issues will be discus face by face to solve these issues and
also to discuss those issues which are faced during the mitigation process.
In the end, statistical analysis will be done through respondents results and conclusions will
be dawn along with future recommendations.
5
CHAPTER 2
LITRATURE REVIEW
INTRODUCTION
Financial management is part of the decision-making, planning and control subsystems of an
enterprise. It incorporates the:
treasury function, which includes the management of working capital and the
implications arising from exchange rate mechanisms due to international competition
evaluation, selection, management and control of new capital investment
opportunities
raising and management of the long-term financing of an entity
need to understand the scope and effects of the capital markets for a company
need to understand the strategic planning processes necessary to manage the long and
short term financial activities of a firm.( L. Fung. 2015. Pg1)
FINANCIAL MANAGEMENT
Financial management is the effective control of all monetary related issues associated with a
project. The areas include controlling expenditure, advising on cash flow and payments
(Ashworth, 2004, p. 514). Similarly Burtonshaw-Gunn (2009) described financial
management to be understanding what, when and why costs will be incurred before the
project commences and then during the project knowing what costs have been incurred...
6
when this expenditure happened and what future costs are planned. (Grant Bryan Jackson.
2011. Pg 14)
I always sayshare the financial information with your team and anyone of importance
charging time to your project. The more they see real numbers, the more likely they will be
accountable for an accurate reporting of their time and effort to your project. What do I really
mean by this? At the end of the week, that last 5-10 hours of time that project team members
know they worked but really can't account for have to go somewhere. And that somewhere is
going to be the project whose project manager is NOT watching the financials like a hawk. If
you discuss financials and any concerns with them regularly, then your project will not be the
one to get those "grey" hours charged to it. Trust me on this one. Better yet, try it, and see for
yourself.(Brad Egeland. 2014. Pg 1)
Financial Management should be considered from the outset of setting up a new business, but
understandably in reality this isnt always the case. There are however a number of trigger
points which can point towards a need for proper financial management practices as your
business grows, including:
The interview of D. Hugh Taylor by Mel Hensey addresses four financial issues that
engineering managers must understand and address through their accounting staff to
design firm. These areas are: basic financial data, accounting reports and support, other
financial management essentials, and acquisitions of other firms. The paper provides basic
background and parameters for successful financial management (D. Hugh Taylor, Melville
7
Financial risk and construction goes hand-in-hand, and the further away a company is from
the project developer, the more risk it shoulders. The scope of financial risk on a construction
project is a huge topic contemplating under-funded or underbid projects, contractor default
problems, misappropriation of project funds and more. Following are five ways companies
can reduce or manage these financial risks.
A closer understanding of the relationship between the two inter-related topics of risk
management and finance on construction projects, it is becoming increasingly crucial to
achieve the objectives of the investor, the owner (end user) and the constructor and its
supply chain. Financial risk have broadly be classified as Bankruptcy of project partner,
Fluctuation of inflation rate, Fluctuation of interest rate, Fluctuation of exchange rate, Rise in
fuel prices, Insurance risk , Currency exchange risk, Liquidity Risk . Financial risk are one of
the critical risk faced by any construction industry as financial failures may lead to complete
closer of the company leading to huge losses and legal suits.
(Dr. M. J. Kolhatkar. 2013. Pg 5)
8
Benefits of Good Financial Management
Good financial management will help your organization to:
9
CHAPTER 3
METHODOLOGY
3.1 Research Design
First of all initial data that is also termed as secondary data and is very necessary to conduct
the research work was gathered from different sources. The source of secondary data
collection includes previous research articles, books and blogs related to risk management.
Although in research papers this kind of data is regarded as secondary data but it is very
useful and provides a lot of guidance in preparing interview questions, it also helps in
broadening your horizon and gives you different aspects of the topic to think about.
After previewing many research articles and books, some articles and topics (that I found the
most reasonable) were selected for review. Those cherry picked articles were reviewed in
detail and preliminary data was prepared.
After preparing the secondary data, different professionals from construction field are
contacted and are requested for interview. People from both the side that is consultant and
contractor side are interviewed, in order to obtain a comprehensive outcome.
In interviews first the whole background and nature of the research study was conveyed to
the interviewee, than they are asked to give their on potential risk that could occur in different
risk categories during planning or construction phase, they are also asked to suggest the
impact of risk and remedial measure that must be taken to avert the
10
CHAPTER 4
STUDY DESIGN
Questionnaire Description
The questionnaire was compiled merely in two portions based on the requirement of the
research. However second Portion further sub divided in eight parts. Each question is asked
to mark on scale from 1 to 5, where 1 represents the least while 5 represent the most. The
main reason for such questionnaire is to get maximum response without irritating the
interviewee. The actual questionnaire is attached in appendix II
Firstly, phase 1 consist of personal information of the expertise which includes there
experience, designation and their organizational details.The interviewee section was sub-
divided in five(5) portions with significant to the research study. This section includes the
main objective of the questionnaire which involves the particular questions to be interviewed
by the expertise of the construction industry. These sections are enlisted according to the
major construction phases which are required to build up the finance of construction project.
The sections are as follows;
After conducting the survey the suggestions which were suggested by the expertise are
examined and there results are analyzed to achieve the outcomes of the research study.
11
The responses are set on a scale of 1 to 5 (where 5 refers to the highest significance and 1
refers to the less significant)
Targeted Audience
The targeted audience was construction industries professional practicing for more than ten
years. Special attention given to the project managers, Resident Engineers, site staffs,
contract administrators other managerial staff of targeted companies who have significant
experience of finance issues. The data collected from all the three stakeholders of the
construction industry but more focused on the contractors as they are more likely to
encounter with the finance issues.
12
CHAPTER 5
DATA ANALYSIS
Analyses of Responses:
The interviews were conducted to consultants and clients in order to obtain the more
comprehensive point of view. Table below shows the categories and number of respondents.
1. Contractor 4
2. Client 4
3. Consultant 4
Total 12
The below charts describe the section 1 of the questionnaire as its comprises of personal
information of the interviewer whereas these charts shows the cumulative frequency of the
section under the following headings:
Type (Table 1)
Experience (Table 2)
Qualification (Table 3)
13
Table: 1
Table: 2
14
Table: 3
Table: 4
POTENTIAL ENTRANTS
80
70
0
1 2 3 4 5
15
Evaluation of Industrial Competitors:
Diversification is s risk management technique that mixes a wide variety of investment
within a portfolio. According to the response, 50% believes that the project diversification is
generate through competition and 25% believes that it is not necessary to have a diversify
project. Also 67% believes that the competition effect on the cost of the project. The more
you diversify your project the more company gets competitive advantage over the
competitors
Table: 5
INDUSTRY COMPETITORS
80
70
60
50
Does competition gives the
40 project a diversification?
Evaluation of Substitutes:
According to the respondents, 67% agrees to have substitute product or services that is
beneficial for financial management also 58% believes that it effects on performance of the
project. If company hires more contractor or engineer in a project it gives best result in less
time but it will affect the finance of the company. Also in order to have any mishap happened
companies always uses backup plan ready in order to gain competitive advantage.
16
Table: 6
SUBSTITUTES
80
70
60
Does the substitute product or
50 services gives high impact on the
40 financial management?
30 Does substitute effects on the
performance of the project?
20
10
0
1 2 3 4 5
Evaluation of Buyers:
Sometimes it bargains switching cost affects the project shows the survey, 50%. Also it
information, and differentiation shows 33% improvement in construction industry. 42%
believes that many consultants in a project give the less commutation on the project. This
shows that switching cost gives the project more investment but it gives the effective result.
Management focuses more on 3 engineers on every project so that communication barriers
not come in between the profitability.
Table: 7
BUYERS
60
Does bargain switching cost
50 relative to firm switching cost
effects the project?
40
Does buyer information and profit
30 improves the cost efficiency and
relationship in construction
20 industry?
Does many consultant involves in a
10 project gives the client less
communication or control on the
0 project?
1 2 3 4 5
17
Evaluation of Suppliers:
If suppliers encourages the bargaining that will gives edge to the competitors, but the cost of
the project increases, the results shows that 50% individual believes that the encouragement
gives the company to increase their supplying cost. Also improve the threat of forward
integration of the firm.
Table: 8
SUPPLIERS
70
60
0
1 2 3 4 5
18
Table: 9
DELIVERY SYSTEM
90
80
70
60
Design Bid Build
50
Design Build
40
EPC / Turn key
30
Construction Management
20
10
0
1 2 3 4 5
Table: 10
PHASES OF CONSTRUCTION
80
70
60 Planning
50 Design
40
Construction
30
Evaluation
20
Finishes
10
0
1 2 3 4 5
19
Evaluation of Stakeholders:
The respondents interviewed that in construction project engineers are highly responsible for
maintaining the finance of the project because at their stage they punch list of items, strong
documentation of preceding stages play vital role in satisfying the all stakeholders.
Table: 11
STAKEHOLDERS
80
70
60
50 Client
40
Engineers
30
20 Contractor
10
0
1 2 3 4 5
20
CHAPTER 6
Overall it can be concluded that to secure the finance of the project the management be very
much dedicated to their performance, cost and money of the firm. Whereas assuring financial
management of the project to be most effective it should have an eagle eye over all the
activities and techniques implemented on the project. Each and every item of the project must
be enlisted so that finance of the project can easily be managed and be controlled by the
authorities. Hence the delivery system which got the highest significance is design bid build
method and construction phase possess maximum affect in the change of finance in the
project whereas this all depends upon the engineer which can either safe the money of the
project or get it to another peak.
21
REFRENCES
1. https://www.ashgate.com/pdf/SamplePages/Risk_Financial_Management_Constructio
n_Intro.pdf
2. Journal of Financial Management of Property and Construction Emerald Article:
Component ratios of new building costs in Nairobi: a contractors' perspective S. Masu,
H. Gichunge, O.A. K'Akumu
3. THE USE OF SCHEDULES OF QUANTITIES IN PROVIDING FINANCIAL
MANAGEMENT IN CONSTRUCTION PROJECTS Grant Bryan Jackson 2011
4. Project management maturity in the construction industry of developing countries by
Abadir H Yimam 2011
5. Burtonshaw-Gunn, S. A. (2009). Risk and financial management in construction.
Surrey, England: Grower Publishing Limited.
6. Ashworth, A. (2004). Cost studies of buildings (4th ed.). Harlow, England:
Pearson/Prentice Hall.
7. 21 Sep 2014 6 Steps to Turning Around a Financially Failing Project Part 1 ~ By
Brad Egeland
8. http://burgesshodgson.co.uk/blog-details.asp?ArticleID=355#.VkjC5nYrLIU
9. Benchmarking of Clients Financial Management Practices in the Construction
Sector of Pakistan by Raza Ali Khan (Associate Professor,Department of Civil
Engineering, NED University of Engg. & Technology, rakhan@neduet.edu.pk
10. Five Ways to Reduce Financial Risk on a Construction Project By Scott Wolfe Jr.
Thursday, November 7, 2013
11. FINANCIAL RISKS AND CONSTRUCTION PROJECTS (Dr. M. J. Kolhatkar1, Er.
Amit Bijon Dutta 2013), IJAIEM.
12. Financial management L. Fung AC3059(2015)
22
Appendix I
QUESTIONNAIRE
Topic:
Financial Management in Construction Project
Research Supervisor
Usmanalii.1992@gmail.com
23
QUESTIONNAIRE
TOPIC: FINANCIAL MANAGEMENT IN
CONSTRUCTION PROJECT
Personal Information
Name (optional)
Qualification Diploma Bachelors Masters Doctorate
Designation
Working Experience
Contact no. / Email
(optional)
Organization Name
Best Describe as Client Consultant Contractor
S.N
Please mark the following. (1 refer to least frequent and 5 refer to most frequent)
Potential Entrants
1 Is a new entrant affect company's performance on the
project?
2 Is company requiring more cash or assets resources to
compete against the new entrants?
3 Does switching cost is the main factor of new entrants faced
by the company?
Industry Competitors
1 Does competition gives the project a diversification?
2 Does competition effects the cost of the project?
Substitutes
1 Does the substitute product or services gives high impact on
the financial management?
2 Does substitute effects on the performance of the project?
Buyers
1 Does bargain switching cost relative to firm switching cost
effects the project?
2 Does buyer information and profit improves the cost
efficiency and relationship in construction industry?
3 Does many consultant involves in a project gives the client
less communication or control on the project?
Supplier
1 Does the bargaining power of supplier encourage the
competition by differentiation of input in project?
24
According to the experience what is the frequency of funds stability in following type of delivery
system
1 Design Bid Build
2 Design Build
4 EPC / Turn key
5 Construction Management
1 Planning
2 Design
3 Construction
4 Evaluation
5 Finishes
1 Client
2 Engineers
3 Contractor
2 Does the bargaining power of suppliers helps to improve the
threat of forward integration relative to the threat of
backward integration of the firm?
25