Construction Finance Management

ASSIGNMENT NICMAR / CODE OFFICE

PGPM 12 Construction Finance Management

1. Course No. 2. Course Title. 3. Assignment No.-

4. Date of Dispatch 5. Last date of receipt. - of Assignment at CODE

ASSIGNMENT
An offer has been given by a Charitable Trust to develop and build a facility on a 10,000 sq.m. of plot in a prime locality of Pune where 5000 sq.m. of area will be used by the trust for housing, health facilities for senior citizens . 5000 sq.m. will be given free to developer as a cost of development. Cost of land is Rs. 10,000/ sq.m. Specifications of flooring : 10% Granite 40% Kota stone 50% Mosaic cement tiles R.C.C Framed structure Aluminium sliding windows Class A. Rest Specifications as used for Class A. constructions. Discuss the financial viability of the project and the financial planning of the project. Developer would like to have minimum 18% of net profit on his investment. Developer can invest only Rs. 10 lakhs as his own funds and can raise not more than Rs. 50 lakhs

as bank loan.

1. Project scope/specifications : As it is a Housing project the specifications in general for the residential dwellings will be as follows. Structure: R.C.C. Framed structure. As per design of Architect and Engineer. Reinforcement: The reinforcement used will be Anti Corrosive TMT Steel. Masonry: All Masonry will be of Concrete Block and internal partition with first class wire cut bricks. Plastering: Internal/External plaster of walls will be executed with necessary admixtures added to the Cement Mortar inorder to minimize shrinkage cracks. Internal walls will be neeru finished and External walls will be Sponge finished. Flooring: Granite on Floor in Living Room and remaining area Mosaic cement tiles and Kota stone in Bathrooms and Kitchen area. Framework: Door frames of Sal wood, Main door of Teak Wood with French polish, Internal Doors Marine Flush Door with Oil paint. Windows : Aluminium sliding Windows 3 track anodized Painting and Polishing : Internal Walls will be painted with Oil Bound Distemper, External Walls with Apex Weather Shield paint. Kitchen : Granite platform with Stainless steel sink with drain board and Ceramic tiles on dado upto height of 0.6m above platform. Plumbing : All plumbing in the Bathrooms / Toilets will be concealed and CPVC pipes will be used. All External piping and SWR pipes used will be of Finolex Sanitaryware : All Sanitaryware will be of Standard range of Hindware or equivalent and fittings of Jaguar standard range. Water Storage : Underground sump and overhead tank.

Electricals : All wires used will be Finolex or equivalent with fixtures of Crabtree or equivalent.

2. Technical Studies : a. Cost of construction Now a days the rates of all Basic Materials used in Construction is increasing at a high pace, and hence the cost of Construction is always on the rise. Since all materials used for construction are in high demand and supply is correspondingly low there is always a point where material is priced higher by the retailer inorder to increase his margin. Therefore in the planning stage itself the quantities have to be worked out and materials have to ordered early inorder to avoid the loss by spending higher amounts at various stage of Construction. Hence the Project Manager needs to foresee such circumstances before the commencement of the project, in order to achieve the projected Profit Margin set up at the initial stage or at least try to be as close as possible.

b. Manpower requirements/costs For the execution of such a project, the Manpower requirement is very high and hence the whole project needs to be analysed and phased out in order to obtain maximum output from the labour and planning the area of work without much hindrance throughout the site, and easy flow of labour and material stacking accessible in order to reduce the work force and in turn make the project cost effective. Also the cost of labour force i.e. both skilled and unskilled have increased drastically since few years now. The main drawback for the projects which suffer on account of delay etc. is due to lack of

Manpower which is in acute shortage. Hence the planning needs to be done accordingly.

Equations for Manpower requirements. Equations for Super- Structure only.

Single Storey Double Storey Four Storey R . C . C. Framed Structure Mason ( days ) Carpenter ( days ) Painter ( days ) Blacksmith ( days ) Mazdoor ( days ) 4.769 A +32 4.91 A + 33 1.335 A + 28 1.184 A - 9 0.089 A 2.069 A - 4 1.335 A + 26 1.194 A - 9 0.089 A 0.274 A - 4 1.67 1.61 A2 A

Manpower

A 0.09 -16 + 1.01 A 0.004 A2 5.49 A - 92

* where A is the Plinth Area in sq. m. Equations Sub for material and Labour Requirements for

Structure in Four Storeyed

MATERIALS Cement ( tone ) Sand ( sq. m.) Equations 0.02044 A - 0.014 0.036 A

( R. C. C. Framed ) Building.
MANPOWER Mason ( days ) Carpenter ( days ) Equations 0.023 A 0.05 A

Coarse Aggregate

0.071 A 0.01

Blacksmith ( days )

-1.6 + 0.1 A 0.0003 A2

Steel ( kg )

-171 + 10.46 A 0.041 A2

Mazdoor ( days )

0.343 A

Timber Shuttering ( sq. m.)

0.0007 A

* where A is the Plinth Area in sq. m.

c. Design adequacy and alternatives The project Design is the main criteria on which the whole budget as well as the end profit depends. So the design of the structure always needs to be handled at the highest priority and enough time given to the designer to make use of all the objectives to maximize the profit by using as much of the Permisssble F.A.R. possible. Also care needs to be taken during designing that the whole project should be very impressive and should be able to suit the conditions comfortably inorder to find buyers very easily in terms of both looks as well as funds and apartments so designed should suit the requirements of the buyer. The Design should be in such a manner that the buyers can also relate and be able to comfortably alter a few things in such a way so as to not disturb the structure or its elevations etc. e. Work schedule on quarterly basis 3. Financial and Economics evaluation : One of the major problems facing any business enterprise is that of obtaining finance. The construction industry comprises a wide variety of firms from the single person enterprise to the large multinational public company. The sources of capital available to any firm are quite numerous but public companies have the great variety of sources available for their use and the single person enterprise, the least variety

Construction Loans can be classified into short term and long term borrowings. Long term Finance. It is that capital required for five to ten years, either to start a business or to carry out expansion programs. Broadly the capital is used to purchase

buildings, plant and equipment. The risks to the lender are high because of the time scale involved, consequently only established firms are generally considered by the lending institutions. Short term Finance The firm when established often needs short term capital to overcome immediate cash flow problems. Materials have to be purchased, plant hired, labor and sub-contractors paid and so on before payment is received from the Employer.

The common types of Finance are the following: Shares Shares may be of several types, each with different rights. Ordinary shares which are called equity of the company represent the major ownership and risk bearing element of the entrepreneurship. The shareholder is entitles to the residual profits in the company after all other commitments have been met. Ordinary shares usually entitle the holder to voting rights. Preference shares are also common, entitling the shareholder to a dividend up to a prescribed level prior to any distributions being made to holder of ordinary shares. Cumulative preference shares are less common and carry a right for any unpaid to be carried forward for payment out of the profits of future trading periods. A new issue of shares for sale raise capital for the company Debentures These are loans made to the company. They differ from conventional loans insofar as they are offered to the market at a fixed interest rate and are repayable at a set time. The loan is either secured by mortgage on the firm's property or simply on the basis of the firm's reputation. Debenture holders rank ahead of almost any other creditors in the case of liquidation of the firm's assets. Like other loans, Debentures represent a cost to the company and as such the interest payment made is deducted from profits before

allowance is made for tax income. In addition, the payments rank ahead of any dividend declared to shareholders. Bank Loans Loans are not easy to obtain. Most institutions are reluctant to lend long term, particularly to construction firms. They often request the borrower to provide a proportion of the finance from internal resources. Merchant banks tend to demand higher rate of interest than the clearing banks since they are normally dealing with a large loan. Retained earnings Retained earnings is profit retained within the firm instead of being distributed to the owners

Bank overdrafts A bank overdraft is a process whereby a customer of a commercial bank is permitted to overdraw on that account up to an agreed limit for a prescribed period. This is rather similar to a bank loan except that interest is payable for the amount overdrawn only for the period it remains overdrawn and the account is usually repayable on demand or upon the termination of the overdraft period. Trade creditors Delayed payments to creditors and prompt ones from debtors, if handled with care, ease cash flow problems. The construction industry is well suited for this sort of financial arrangement since completed work is paid for by the client in periodical stages. CFF3 Cash Flow Forecasting software is unique construction management software for estimating the difference between cash in and cash out amounts for construction projects, and hence you can realize the construction loan or external finance required for completion of the project. Short Term Loans

Short term loans are available from individuals, banks, and other financial institutions. They are required for the provision of working capital, carry a prescribed rate of interest upon the entire sum and can not be recalled prior to the due date. Usually short term loan are obtained from commercial banks Internal sources of capital Provision for corporation tax Payment of this tax is usually made one year in arrears. The cash therefore remains in the business during that time and acts as a valuable source of short term funds.

Depreciation Depreciation is a bookkeeping and costing exercise by which the initial cost of an asset is written off over its useful life. It can be regarded as a source of capital. If no depreciation was charged on, say equipments, a great amount of profit would be available for distribution to the owners. Thus, reserves created by the process of depreciating fixed assets represent a stake in the firm by the owners, in a similar manner to retained earnings. For purposes of corporation tax, the method to be used for depreciating any asset is prescribed in the tax regulations and so it may be necessary to produce two accounts, one for internal purposes and the other for taxation purposes

References: 1) Course Material, NICMAR