RACHANA M.

KAPADIA
NCP-29
CONSTRUCTION FINANCE MANAGEMENT

ASSIGENMENT:
Project Scope
An offer has been given by a Charitable Trust to develop and
build a facility on a 11,000 sq.m of plot in a prime locality of
Pune where 5,000 sq.m of area will be used by the trust for
housing, health facilities for senior citizens. 5,000 sq.m. will be
given free to the developers as a cost of development
Cost of Land is Rs. 11,000/- sq.m
Flooring specifications for flooring:
-

11% Granite

40% Kota stone

50% Mosaic cement tiles

Developers would like to have minimum 18% net profit on their

investment. Developer can invest only Rs. 11 lakhs as his own

funds and can raise not more than Rs. 50 lakhs as bank loan.
Technical Studies
The technical study is to determine the needs for material and
human means necessary to achieve the objectives. These take
account of the market (availability of raw material, there is a
demand, customer requirement), regulatory and standardsrelated product and also the financial (amount to invest and
returns expected).

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CONSTRUCTION FINANCE MANAGEMENT

The study focuses on two general areas: study of supply and

the study of transformation. To carry out critical analysis of
technical feasibility, there must be enough knowledge of
technical, economic and regulatory environment.
Cost of Construction
The cost of construction includes both the initial capital cost
and the subsequent operation and maintenance costs. Each of
these major cost categories consists of a number of cost
components.
The capital cost for a construction project includes the
expenses related to the initial establishment of the facility:

Land acquisition, including assembly, holding and

improvement

Planning and feasibility studies

Architectural and engineering design

Construction, including materials, equipment and labor

Field supervision of construction

Construction financing

Insurance and taxes during construction

Equipment and furnishings not included in construction

Inspection and testing

The operation and maintenance cost in subsequent years over

the project life cycle includes the following expenses:

Land rent, if applicable

Operating staff

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RACHANA M. KAPADIA
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CONSTRUCTION FINANCE MANAGEMENT

Labor and material for maintenance and repairs

Periodic renovations

Insurance and taxes

Financing costs

Utilities

The magnitude of each of these cost components depends

on the nature, size and location of the project as well as the
management organization, among many considerations. The
owner is interested in achieving the lowest possible overall
project cost that is consistent with its investment objectives.
It is important for design professionals and construction
managers to realize that while the construction cost may be the
single largest component of the capital cost, other cost
components are not insignificant. For example, land acquisition
costs are a major expenditure for building construction in highdensity urban areas, and construction financing costs can reach
the same order of magnitude as the construction cost in large

projects such as the construction of nuclear power plants.

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RACHANA M. KAPADIA
NCP-29
CONSTRUCTION FINANCE MANAGEMENT

The total cost of the project is calculated as below:

Rs./sq Amoun
.ft
t

Particulars

Cost of Superstructure
Cost of Brick work,
plaster etc

450

Cost of Electric work

118

90

Cost of Plumbing

90

Cost of Finishing
Cost of Granite
Flooring

54
130

Cost of Kota Flooring

Cost of Mosaic
Flooring

40
40

53927
640

TOTAL COST

242190
00
484380
0
581256
0
484380
0
290628
0
699660
0
215280
0
215280
0

Work Schedule represents the necessary framework to

permit

scheduling

of

construction

activities,

along

with

estimating the resources required by the individual work tasks,

and any necessary precedences or required sequence among
the tasks. The terms work "tasks" or "activities" are often used
interchangeably in construction plans to refer to specific,
defined items of work. The scheduling problem is to determine
an appropriate set of activity start time, resource allocations
and completion times that will result in completion of the

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RACHANA M. KAPADIA
NCP-29
CONSTRUCTION FINANCE MANAGEMENT

project in a timely and efficient fashion. Construction planning

is the necessary fore-runner to scheduling. In this planning,
defining work tasks, technology and construction method is
typically done either simultaneously or in a series of iterations.
The definition of appropriate work scheduling can be a
laborious and tedious process, yet it represents the necessary
information for application of formal scheduling procedures.
Since construction projects can involve thousands of individual
work tasks, this definition phase can also be expensive and
time consuming. Fortunately, many tasks may be repeated in
different parts of the facility or past facility construction plans
can be used as general models for new projects. For example,
the tasks involved in the construction of a building floor may be
repeated with only minor differences for each of the floors in

the building.

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RACHANA M. KAPADIA
NCP-29
CONSTRUCTION FINANCE MANAGEMENT

The work schedule on quarterly basis for the project is given

below:
ID

Outlin
e
Numbe
r

Name

Dura
tion

1.0

Contracts

1.1

0.00d

1.2

1.3

__Supply Lot Sale

Agreement
__Supply Construction
Agreement
__Supply Contract Plans

1.4

0.00d

1.5

1.6

__Supply Contract
Specifications
__Supply Contract Site
Plan
__Secure Financing

1.7

0.00d

2.0

11

2.1

__Construction Loan
Settlement
Document Review &
Revision
__Review & Finalize Plans

11

2.2

12

2.3

13

2.4

__Review & Finalize

Specifications
__Review & Finalize Site
Plan
__Print Construction
Drawings

0.00d
0.00d

0.00d
0.00d

15.00
d
20.00
d
1.00d
5.00d

Start

Finish

QUARTER
1
1-May2012
1-May2012
1-May2012
1-May2012
1-May2012
1-May2012
1-May2012

1-May2012
1-May2012
1-May2012
1-May2012
1-May2012
1-May2012
1-May2012

2-May2012
27-May2012
16-Jun2012
18-Jun2012

26-May2012
15-Jun2012
17-Jun2012
22-Jun2012

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RACHANA M. KAPADIA
NCP-29
CONSTRUCTION FINANCE MANAGEMENT

2.5

__Approve Revised Plans

0.00d

23-Jun2012
23-Jun2012
23-Jun2012

23-Jun2012
23-Jun2012
23-Jun2012

15

2.6

0.00d

16

2.7

17
18

3.0
3.1

__Approve Revised
Specifications
__Approve Revised Site
Plan
Site Work
__Clear Lot

26-Jun2012
27-Jun2012
28-Jun2012
29-Jun2012
1-Jul2012

1.00d

24-Jun2012
27-Jun2012
28-Jun2012
29-Jun2012
30-Jun2012
QUARTER
2
2-Jul-2012

19

3.2

__Strip Topsoil & Stockpile 1.00d

20

3.3

21

3.4

__Stake Lot for

Excavation
__Rough grade lot

22

3.5

__Excavate for foundation 2.00d

23

4.0

Foundation

24

4.1

__Layout footings

25

4.2

1.00d

3-Jul-2012

4.3

__Dig Footings & Install

Reinforcing
__Footing Inspection

26

0.00d

4-Jul-2012

27

4.4

__Pour footings

1.00d

5-Jul-2012

28

4.5

__Pin Footings

1.00d

6-Jul-2012

29

4.6

1.00d

7-Jul-2012

30

4.7

__Stock Block, Mortar,

Sand
__Build Block Foundation

8-Jul-2012

31

4.8

15.00
d
__Foundation Certification 0.00d

32

4.9

33

4.1

34

4.1

14

0.00d
3.00d

1.00d
1.00d

__Fill Block Cores w/

Concrete
__Steel Delivery

1.00d

__Set Lintels, Bolts, Cap

Block

2.00d

1.00d

22-Jul2012
22-Jul2012
23-Jul2012
24-Jul2012

2-Jul2012
3-Jul2012
4-Jul2012
5-Jul2012
6-Jul2012
7-Jul2012
22-Jul2012
22-Jul2012
22-Jul2012
23-Jul2012
25-Jul2012

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RACHANA M. KAPADIA
NCP-29
CONSTRUCTION FINANCE MANAGEMENT

4.1

__Lumber Delivery

1.00d

36

4.1

1.00d

37
38

5.0
5.1

__Waterproofing and
Drain Tile
Rough Carpentry
__Set Steel

39

5.2

__1st Floor Deck Framing

4.00d

40

5.3

__1st Floor Wall Framing

4.00d

41

5.4

__2nd Floor Deck Framing 2.00d

42

5.5

__2nd Floor Wall Framing

3.00d

43

5.6

__Set Roof Trusses

2.00d

44

5.7

__Frame Roof

7.00d

45

5.8

__Install Roof Plywood

5.00d

46

5.9

2.00d

47

5.1

__Install Windows &

Doors
__Frame Basement

48

5.1

2.00d

49
50

6.0
6.1

51

6.2

52

6.3

__Frame Basement
Bulkheads
Concrete Slabs
__Basement Slab
Preparation
__Termite Treatment
Basement Slab
__Slab Inspection

53

6.4

__Pour Basement Slab

1.00d

54

6.5

__Prep Garage Slab

1.00d

55

6.6

1.00d

56

6.7

__Termite Treatment
Garage Slab
__Pour Garage Slab

35

1.00d

3.00d

2.00d
1.00d
1.00d

1.00d

26-Jul2012
27-Jul2012

26-Jul2012
27-Jul2012

28-Jul2012
29-Jul2012
2-Aug2012
6-Aug2012
8-Aug2012
11-Aug2012
11-Aug2012
18-Aug2012
23-Aug2012
25-Aug2012
11-Aug2012

28-Jul2012
1-Aug2012
5-Aug2012
7-Aug2012
11-Aug2012
11-Aug2012
17-Aug2012
22-Aug2012
24-Aug2012
27-Aug2012
11-Aug2012

12-Aug2012
14-Aug2012
15-Aug2012
16-Aug2012
17-Aug2012
18-Aug2012
19-Aug-

13-Aug2012
14-Aug2012
15-Aug2012
16-Aug2012
17-Aug2012
18-Aug2012
19-Aug-

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NCP-29
CONSTRUCTION FINANCE MANAGEMENT

7.0
7.1

Plumbing Rough-in
__Plumbing Sub-slab

2.00d

59

7.2

__Plumbing Layout

1.00d

60

7.3

__Plumbing rough-in

5.00d

61
62

8.0
8.1

Electric Rough-in
__Set Electric Boxes

2.00d

63

8.2

2.00d

64

8.3

__Install Electric Service

Panel
__Electrical Walk-through

65

8.4

__Electrical Rough-wire

14.00
d

66
67

9.0
9.1

68

9.2

Specialty Rough-ins
__Central Vacuum Roughin
__Alarm System Rough-in

69

9.3

70

9.4

71

9.5

57
58

1.00d

5.00d
5.00d

__Telephone System
Rough-in
__Television System
Rough-in
__Audio Visual Rough-in

5.00d
5.00d
5.00d

72

11.0

Electrical inspection

0.00d

73

11.0

Framing Inspection

0.00d

74
75

12.0
12.1

Roofing
__Roofing Paper Installed

3.00d

76

12.2

__Stock Roof Shingles

1.00d

77

12.3

__Install Roof Shingles

7.00d

78
79

13.0
13.1

Exterior Finishes
__Siding

3.00d

2012

2012

20-Aug2012
22-Aug2012
23-Aug2012

21-Aug2012
22-Aug2012
27-Aug2012

28-Aug2012
30-Aug2012
1-Sep2012
2-Sep2012

29-Aug2012
31-Aug2012
1-Sep2012
15-Sep2012

16-Sep2012
21-Sep2012
26-Sep2012
1-Oct2012
6-Oct2012
11-Oct2012
11-Oct2012

20-Sep2012
25-Sep2012
30-Sep2012
5-Oct2012
11-Oct2012
11-Oct2012
11-Oct2012

11-Oct2012
12-Oct2012
14-Oct2012

12-Oct2012
13-Oct2012
20-Oct2012

20-Oct-

20-Oct-

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NCP-29
CONSTRUCTION FINANCE MANAGEMENT

13.2

__Exterior Trim

7.00d

81

13.3

__Brick Arch Forms

1.00d

82

13.4

__Brick Veneer

45.00
d

83
84

14.0
14.1

Insulation
__Caulk & Air Seal

1.00d

85

14.2

__Draft & Fire Stop

1.00d

86

14.3

__Insulation

3.00d

87

15.0

Floor Finishes

88

15.1

__Ceramic Tile

89

15.2

__Install Hardwood Floor

90

15.3

5.00d

91

15.4

__Sand, Stain, Seal

Hardwood
__Install Carpet

92

15.5

__Final Coat Hardwood

2.00d

93
94

16.0
16.1

95

16.2

Paint
__Prep Drywall for Prime
Coat
__Prime Paint Drywall

96

16.3

97

16.4

__Prep Trim for Prime

Coat
__Prime Trim

98

16.5

__Finish Coat Trim

99

16.6

11
0

16.7

80

15.00
d
4.00d

4.00d

2.00d
2.00d
2.00d
2.00d

11.00
d
__Finish Coat Drywall
14.00
d
__Caulk Exterior Windows 1.00d
& Doors

2012
20-Oct2012
20-Oct2012
20-Oct2012

2012
20-Oct2012
20-Oct2012
20-Oct2012

20-Oct2012
22-Oct2012
24-Oct2012
QUARTER
3
27-Oct2012
11-Nov2012
15-Nov2012
20-Nov2012
24-Nov2012

21-Oct2012
23-Oct2012
26-Oct2012
11-Nov2012
14-Nov2012
19-Nov2012
23-Nov2012
25-Nov2012

26-Nov2012
28-Nov2012
30-Nov2012
2-Dec2012
4-Dec2012
14-Dec2012
28-Dec2012

27-Nov2012
29-Nov2012
1-Dec2012
3-Dec2012
13-Dec2012
27-Dec2012
29-Dec2012

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RACHANA M. KAPADIA
NCP-29
CONSTRUCTION FINANCE MANAGEMENT

11
1
11
2
11
3
11
4
11
5
11
6
11
7
11
8
11
9
11
1
11
1
11
2
11
3
11
4
11
5
11
6
11
7
11
8
11
9
12
0
12

16.8

1.00d

17.0

__Finish Coat Exterior

Trim & Siding
Exterior Landscaping

17.1

__Rough Final Grade

1.00d

17.2

__Patios

7.00d

17.3

__Porches

5.00d

17.4

__Sidewalks

7.00d

17.5

__Decks

7.00d

17.6

__Driveways

2.00d

17.7

__Final Grade and Seed

3.00d

18.0

Hardware

18.1

__Door Hardware

2.00d

18.2

__Bath Hardware

2.00d

18.3

__Mirrors

5.00d

18.4

__Shower Doors

18.5

Final Building Inspection

11.00
d
0.00d

19.0

Cleaning

19.1

__Windows

3.00d

19.2

__Rough Clean

3.00d

19.3

__Final Clean

2.00d

20.0

Final Walk-through

21.0

Move-in

30-Dec2012
QUARTER
4
1-Jan2012
2-Jan2012
9-Jan2012
14-Jan2012
21-Jan2012
28-Jan2012
30-Jan2012

31-Dec2012

1-Feb2012
3-Feb2012
5-Feb2012
11-Feb2012
19-Feb2012

2-Feb2012
4-Feb2012
9-Feb2012
19-Feb2012
19-Feb2012

19-Feb2012
22-Feb2012
25-Feb2012

21-Feb2012
24-Feb2012
26-Feb2012

1-Jan2012
8-Jan2012
13-Jan2012
20-Jan2012
27-Jan2012
29-Jan2012
1-Feb2012

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RACHANA M. KAPADIA
NCP-29
CONSTRUCTION FINANCE MANAGEMENT

Financial and economic Evaluation

Capital - Business requires capital. The term capital is used
differently in different contexts. It is used in the sense of means
of production, usually the assets held by the firm. It is also used
in the sense of finance obtained by a firm. In accounting,
capital is used in the second sense. A part of the finance
obtained by a firm is in the form of interest free credit, such as
credit allowed by suppliers of materials or services and
advance payment received by customers. The interest free
credit is settled in the normal operating cycle of the business
and is not included in the capital.
Revenue Revenue is the income that arises from exchange
transactions with customers in the course of ordinary activities
of an enterprise. An entitys revenue earning activities include
selling of goods, rendering of services, and allowing others to

use entitys resources yielding interest, royalties and dividends.

Revenue increases the equity of the enterprise. As a general
principle, an enterprise recognizes revenue when it receives
cash, receivables or other consideration in its own account. For
example, in an agency relationship, the agent recognizes the
commission as revenue.
Finance Resource mobilization Resource mobilization can
facilitate the flow of resources from various sources and
catalyze the flow of additional resources from official and

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RACHANA M. KAPADIA
NCP-29
CONSTRUCTION FINANCE MANAGEMENT

private institutions. For projects and programs that are too

large to be handled by one funding agency, mobilizing co
financing from various funding sources can help meet these
large resource requirements. Resources can be in any form
such as finances, technology, manpower both skilled and labor,
knowledge, information, etc
Financial accounting - Financial accounting consists of
recording, classifying and analyzing the business transactions
so as to facilitate the preparation of Profit and loss account for
a period and also the position statement (i.e. Balance Sheet) as
on a particular day. Thus, the emphasis of financial accounting
is on the ascertainment of profit and loss of the concern and
not on the more important aspects of the business i.e. planning,
control and decision-making.
Cost accounting - Cost accounting analyses the transactions
in an objective manner for the purposes of planning, control
and decision making. Cost accountancy is the application of

costing and Cost accounting principle, methods and techniques

to the science, art and practice of cost control and the
ascertainment of profitability. It includes the presentation of
information derived there from for the purpose of managerial
decision making. Cost accounting is also defined as the process
of accounting for cost from the point at which expenditure is
incurred or committed to the establishment of its ultimate
relationship with cost centers and cost units.
Management

accounting

Management

accounting

is

another aspect of accounting which has developed in recent

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RACHANA M. KAPADIA
NCP-29
CONSTRUCTION FINANCE MANAGEMENT

years and is being employed in many concerns as an

informative mechanism to aid the management in decision
making by providing various information they need for the
purpose. Both cost and management accounting working
together can keep the management well informed about what
is going on in the business and what changes, if any, is required
to be given effect to.
Capital budgeting or investment appraisal is the planning
process used to determine whether a firm's long term
investments such as new machinery, replacement machinery,
new plants, new products, and research development projects
are

worth

pursuing.

It is

budget for

major

capital,

or

investment, expenditures.
Many formal methods are used in capital budgeting, including
the techniques such as Accounting rate of return, Net present
value, Profitability index, Internal rate of return, Modified
internal rate of return, Equivalent annuity etc. These methods
use the incremental cash flows from each potential investment,

or project Techniques based on accounting earnings and

accounting rules are sometimes used - though economists
consider this to be improper - such as the accounting rate of
return, and "return on investment." Simplified and hybrid
methods are used as well, such as payback period and
discounted payback period
Cash flow forecasting is in a corporate finance sense, the
modeling of a company or assets future financial liquidity over

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RACHANA M. KAPADIA
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CONSTRUCTION FINANCE MANAGEMENT

a specific timeframe. Cash usually refers to the companys total

bank balances, but often what is forecast is treasury position
which is cash plus short-term investments minus short-term
debt. Cash flow is the change in cash or treasury position from
one period to the next; in the context of the entrepreneur or
manager, forecasting what cash will come into the business or
business unit in order to ensure that outgoing can be managed
to as to avoid them exceeding cash flow coming in. If there is
one thing entrepreneurs learn fast, it is to become very good at
cash flow forecasting.

Proposed Project Financing

Capital structure refers to the way a corporation finances its
assets through some combination of equity, debt, or hybrid
securities. A firm's capital structure is then the composition or

'structure' of its liabilities. The proposed capital structure for

the project is as below:
Capital Structure

Asset
Equity
Debt

50,000,000
.00
1,000,000.
00
4,000,000.

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RACHANA M. KAPADIA
NCP-29
CONSTRUCTION FINANCE MANAGEMENT

00

The debt raised by the promoter is Rs 40 lacs. The total

debt would not be taken all at once rather it would be disbursed
in 4 equal quarterly installments. This debt will carry a fixed
interest expense as follows:

Month

Apr-11
May-11
Jun-11
Jul-11
Aug-11
Sep-11
Oct-11
Nov-11
Dec-11
Jan-12
Feb-12
Mar-12

Amou
nt
(Rs.)
11000
00
11000
00
11000
00
11000
00

Int.
Payable

Int.
Payable
Quarter
Monthly
ly

Closing
Loan bal

11000
11000
11000

30000

1100000
1100000
1100000

60000

2000000
2000000
2000000

90000

3000000
3000000
3000000

120000

4000000
4000000
4000000

20000
20000
20000
30000
30000
30000
40000
40000
40000

*Loan disbursed in 4 equal quarterly

installments

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RACHANA M. KAPADIA
NCP-29
CONSTRUCTION FINANCE MANAGEMENT

**Assuming interest @ 12%

p.a.

Profit Measures
A profit measure is defined as an indicator of the
desirability of a project from the standpoint of a decision maker.
A profit measure may or may not be used as the basis for
project selection. Since various profit measures are used by
decision makers for different purposes, the advantages and
restrictions for using these profit measures should be fully
understood.
There are several profit measures that are commonly used
by decision makers in both private corporations and public
construction projects. Each of these measures is intended to be
an indicator of profit or net benefit for a project under
consideration. Some of these measures indicate the size of the
profit at a specific point in time; others give the rate of return

per period when the capital is in use or when reinvestments of

the early profits are also included. Some of the most frequently
used profit measures are as follows:
1. Net Future Value and Net Present Value. When an
organization makes an investment, the decision maker looks
forward to the gain over a planning horizon, against what might
be gained if the money were invested elsewhere. A minimum
attractive rate of return (MARR) is adopted to reflect this

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RACHANA M. KAPADIA
NCP-29
CONSTRUCTION FINANCE MANAGEMENT

opportunity cost of capital. The MARR is used for compounding

the estimated cash flows to the end of the planning horizon, or
for discounting the cash flow to the present. The profitability is
measured by the net future value (NFV) which is the net return
at the end of the planning horizon above what might have been
gained by investing elsewhere at the MARR. The net present
value (NPV) of the estimated cash flows over the planning
horizon is the discounted value of the NFV to the present. A
positive NPV for a project indicates the present value of the net
gain corresponding to the project cash flows.
2. Internal Rate of Return. The internal rate of return (IRR) is
defined as the discount rate which sets the net present value of
a series of cash flows over the planning horizon equal to zero. It
is used as a profit measure since it has been identified as the
"marginal efficiency of capital" or the "rate of return over cost".
The IRR gives the return of an investment when the capital is in
use as if the investment consists of a single outlay at the
beginning and generates a stream of net benefits afterwards.

However, the IRR does not take into consideration the

reinvestment opportunities related to the timing and intensity
of the outlays and returns at the intermediate points over the
planning horizon. For cash flows with two or more sign reversals
of the cash flows in any period, there may exist multiple values
of IRR; in such cases, the multiple values are subject to various
interpretations.
3. Adjusted Internal Rate of Return. If the financing and
reinvestment policies are incorporated into the evaluation of a

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CONSTRUCTION FINANCE MANAGEMENT

project, an adjusted internal rate of return (AIRR) which reflects

such policies may be a useful indicator of profitability under
restricted

circumstances.

Because

of

the

complexity

of

financing and reinvestment policies used by an organization

over the life of a project, the AIRR seldom can reflect the reality
of actual cash flows. However, it offers an approximate value of
the yield on an investment for which two or more sign reversals
in the cash flows would result in multiple values of IRR. The
adjusted internal rate of return is usually calculated as the
internal rate of return on the project cash flow modified so that
all costs are discounted to the present and all benefits are
compounded to the end of the planning horizon.
4. Return on Investment. When an accountant reports
income in each year of a multi-year project, the stream of cash
flows must be broken up into annual rates of return for those
years. The return on investment (ROI) as used by accountants
usually means the accountant's rate of return for each year of
the project duration based on the ratio of the income (revenue

less depreciation) for each year and the un-depreciated asset

value (investment) for that same year. Hence, the ROI is
different from year to year, with a very low value at the early
years and a high value in the later years of the project.
5. Payback Period. The payback period (PBP) refers to the
length of time within which the benefits received from an
investment can repay the costs incurred during the time in
question while ignoring the remaining time periods in the
planning

horizon.

Even

the

discounted

payback

period

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RACHANA M. KAPADIA
NCP-29
CONSTRUCTION FINANCE MANAGEMENT

indicating the "capital recovery period" does not reflect the

magnitude or direction of the cash flows in the remaining
periods. However, if a project is found to be profitable by other
measures, the payback period can be used as a secondary
measure of the financing requirements for a project.

BILIOGRAPHY / READINGS:
CONSTRUCTION FINANCE MANAGEMENT
TECHNIQUES, PUBLISHED BY NICMAR, 2010.

1.

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