Finance New

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Construction Finance Management

ASSIGNMENT

NICMAR / CODE OFFICE

1. Course No. -PGPM 12

2. Course Title. - -Construction Finance Management

3. Assignment No.- 4

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.

Manpower Single Storey Double StoreyFour Storey

R . C . C. Framed

Structure

Mason ( days ) 1.335 A + 28 1.335 A + 26 1.67 A – 2

Carpenter ( days ) 1.184 A - 9 1.194 A - 9 1.61 A

Painter ( days ) 0.089 A 0.089 A 0.09 A

Blacksmith 2.069 A - 4 0.274 A - 4-16 + 1.01 A –

( days )0.004 A2

Mazdoor ( days ) 4.769 A +32 4.91 A + 33 5.49 A - 92

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

· Equations for material and Labour Requirements for Sub –

Structure in Four Storeyed( R. C. C. Framed ) Building.

MATERIALS Equations MANPOWEREquations

Cement ( tone ) 0.02044 A - 0.014 Mason ( days )0.023 A

Sand ( sq. m.) 0.036 A Carpenter 0.05 A

( days )

Coarse Aggregate 0.071 A – 0.01 Blacksmith ( days-1.6 + 0.1 A –

)0.0003 A2



Steel ( kg ) -171 + 10.46 A – Mazdoor ( days )0.343 A

0.041 A2

Timber Shuttering 0.0007 A

( sq. m.)

* * 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 externalfinance required for completion of the project.

Short Term Loans

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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

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