Construction Study Guide

Friday, December 09, 2011 7:42 PM

Lesson 7: Managing Money II, Time Value of Money, Cash Flow Valuation 1. Halpin & Senior, Chapter 10 Chapter 10: The Mathematics of Money 10.4 Interest the fee that a lender charges for use of their money. Interest Interest rate the money that $1 dollar earns for each unit of time that it is loaned. Total interest money earned by charging interest The degree of investment risk, the inflation rate, and the stability of the market where the money will be used are important factors determining the IR of a loan 10.5 simple and compound interest The total interest, depends on the principal, the time that the money was borrowed, and the interest rate. And whether it is simple or compound pay interest on the principal, but not on the interest accumulated over previous periods. For simple Simple interest future value Fn = P*(1+i*n) interest interest is owed after each time period is computed by adding the total interest accumulateed from Compound previous periods to the loan principal then multiplying this total by the interest rate. Interest Fn =P*(1+ i)^n This also works in the opposite way to find P(present value) 10.6 Nominal, and effective rate To protect customers, congress passed in 1968 the Truth Lending Act, which requires lenders clearly indicate interest rates as an annual % of each receiving dollars. Nominal rate vs effective IR: Annual percentage yueld (APY): effective annual rate that you pay on a loan:

Equivalence and Minimum Attractive Rate of Return MARR: Discount rate Discount Rate:

high enough to make an indifference Minimum attractive rate of return. when we know the value in the future of a given sum, and want to know its equivalent value now. P = Fn/ (1+i)^n

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Discount Rate: Opportunity cost of capital: The cost of an alternative that must be forgone in order to pursue a certain action. Impacts of Discount Rate: Higher Discount Rates Make Projects Less Attractive (generally), Minimize Long-Term Benefits Mathematical Means for Establishing Present Value Establishes Whether Project Is Worthwhile Should Represent Productivity of Last Increment of Money Available Annuity is a series of equal payments paid out or received in a sequence over a period of time. (paying by a number of equal amounts of money (installments) over a number of time periodss. (There's a present value equation for this) Used to find the price of a merchandise and then to ccompute the montly amount to be paid for the merchandise. FINDING A GIVEN P Conditions for Annuity calculations: 1. All payments must be equal, carry the same interest, and take place without interruption throughout a number of periods of the same lenghts. a. Compound amount factor(f/p) b. Present worth factor(p/f) c. Compound amount factor uniform series (F/A) d. Sinking fund factor (A/F) e. Present worth factor uniform series (P/A) f. Capital recovery factor (A/P)

10.16 Worth Analysis Techniques of an investment consists of the present value of all the amounts involved in the investment. If Present worth this sum, which is the net present worth of the entire investment, is negative, then you would be better off. PW is perfect for knowing if we are paying too much upfront for something that will yield future profit. Equivalent Annal worth (EAW) all money is converted into equivalent annuities and these annuities are added up. the EAW of an investment is its value expressed as a uniform dollar amount over a time period. It is the equivalent annuity of an investment.

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10.19 IRR< internal rate of return of an ivnestment is the interest rate at which the investment has a PW of 0 The PW of any investment depends on the interest used for the computations, the higher the interest, the lower the investment's PW. 10.20 Limitations: results of PW and IRR methods could be contradicting, and also IRR is not well suited for selecting mutually exclusive options unless their size and time frame is similar. Worthwhile Investment(Net Present Value):
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Worthwhile Investment(Net Present Value):

Example 8-1 NPV Analysis To Calculate: Cash flow projections, Discount rate (opportunity cost of capital, MARR) Decision Rule: Accept investments that have positive net present values NPV = B-C Methodology Estimate service life Estimate cash inflow & outflow each period Determine net cash flow each period Determine a discount rate Calculate NPV NPV Strengths & Weaknesses Strengths: focus on quantity of money Weaknesses-difficult to use for ranking-selection of DR challenging -difficult to explain Benefit Cost Ratio: Ratio of discounted benefits to the discounted costs at the same point in time. Used frequently in public sector where non-economic benefits/costs are included.

Internal Rate of Return: IRR is DR for which NPV of project is zero To Calculate: Cash flow projections Discount rate not required Decision Rule: Accept investments where IRR is greater than opportunity cost of capital Economic Equivalence: A concept that links different cash flows associated with different alternatives so that comparisons of economic worth can be made. EXAMPLE 7-1 EXAMPLE 7-2 to EXAMPLE 7-5 _______________________________________________________________________ Lesson 8 Managing Money II, Project Cash Flow, Project Funding 1. Halpin & Senior, Chapters 11 & 12 Chapter 11: Project Cash Flow The difference between the revenue and expense profiles indicates the need on the part of the contractor to finance part of the construction until such time as he is reimbursed by the owneustoemrs who are rated as relia ble and who represent an extremely small risk of default Role of Money in Construction: Borrow to purchase equipmen, to finance operations, to finance project Project Cash Flow:

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Project Cash Flow:

Effect of Mobilization:

Project Financing: Private Owner/Developer -Mortgage Loan -Construction Loan Large Corps & Public Agencies -Bonds

Chapter 12: Project Funding The four Ms: money, machines, manpower, materials Two-Step Process Short-Term (Construction):provide funds for items such as facility construction land purchases or land development, and is provided by a lending institution -period of construction (1-2 years typ.) Long-Term (Mortgage) -10 to 30 years (typ) First secure long-term commitment, Firm Financial Statements, Personal financial statements (principals),Title,Preliminary drawings & cost estimates, Market study, Pro forma statements Pro Forma Example:

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Pro Forma Example:

Long term Pro forma: Leverage: when the developer tries to expand a small initial asset input into a large amount of usable money. The amount of the mortgage loan should be a happy medium between too much and too little The amount the lender is willing to lend as long term funding is derived from two concepts:the economic value of the project(measure of the project's ability to earn money) and the cap rate. Lender will attempt to establish a rate that is conservative but attractive. Once the long term financing commitment has been obtained the netoiation of a cosntruction loan is possible. Commercial banks often make construction loans because they have some guarantee that the loan will be repaid from the long term financing Large corporations and public institutions commonly use the procedure of issuing bonds to raise money for construction projects. A bond is a kind of formal promise issued by that a future point in time. E borrower promising to pay back a sum of money Discounting the loan: for public offferings that are particularly attractive, banks bid for the opportunity to handle the placement of the bonds. The banks recover their expenses and profit by offering to provide a sum of money slightly less than the amount to be repaid. The bank that offers the lowest effective rate is normally selected, this represents the basic cost incurred for te use of the money. Prime rate: interest rate charged preferred cs Insert pic Economic Value: Measure of the Projects Ability to Earn Money Economic Value = Expected Net Income/Cap Rate Cap Rate-rate of return on an investment property Mortgage Loan tied to Economic Value Construction Loan: Due Diligence -review designer & contractor -require contractor bonds Draw Schedule -release of funds in defined manner Public Financing: Current Revenues Grants Debt (Bonds) -General Obligation, Revenue, Project Debt vs. Pay as you go: Benefits future generations High initial costs a deterrent Tax-rate instability Bonds:
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Bonds: Security Issued in Connection with a Borrowing Arrangement Issuer Typically Makes Semi-annual Payments (Coupon Payments) and Repays Par (Face) Value at Maturity Bond Value = Present Value of Coupons + Present Value of Principal (Par Value) Interest Rate Fluctuations Are Main Source of Risk Default Risk Measured by Moodys, S&P, Fitch ________________________________________________________________________________________

Lesson 10 Construction Equipment,Equipment Costs, Equipment Productivity, Earthmoving Equipment, 1. Halpin & Senior, Chapters 13 & 14.1-14.4 2. Tatum, C.B et. al. (2006. Systems Analysis of Technical Advances in Earthmoving Equipment
Chapter13: Equipment Ownership 1. Productive equipment describes units that alone or in combination lead to an end product that is recognized as a unit for payment a. Pavers,haulers, loaders, rollers, entrechers 2. Support equipment: required for operations related to the placement of construction such as movement of personnel and materials and activities that influence the placement environments: hoists, scaffolds. 3. Construction equipment costs: a. Certain costs(depreciation, insurance, and interest charges) acrue wether the piece of equipment is in a productive state or not. i. These are fixed costs because they are time dependent and can be caulculated based on a fixed formular. ii. Operating/variable costs occur only during the operation period iii. Operating costs are variable in total amount, being a function of the number of operating hours. iv. Ownership costs: composed of ane stimate for depreciation on the cost of using the euipment itself, and estimates of allowance for interest, insurance and taxes(fuel, oils, filters, maintenance). b. Three types of materials:excavating, material handling, placing and finishing The hybrid of the Hydraulic Excavator and the Front-End Loader. The most versatile piece of equipment which has become a standard requirement on most construction projects. Used for minor excavations, loading, material handling, minor grading & finishing works. Most popular manufacturers include Caterpillar, JCB, Case. Wide range of attachments for handling, auguring, pneumatic applications (demolition hammers, etc) 13.3 Depreciation of equipmenet 1. Straight line: a. Assumes uniformity 2. Declining balance- accelerated methods that allow alrger amounts of depreciation to be taken in the early years of the life of the assetto calculate and ensures that the depreciation is availale from the asset a. When applied to new equipment of a usesful life of at least 3 year b. the effective rate at which the balance is reduced may be twice the striaght line rate. c. In this method it is the rate that is important because it remains constant throughtout the calculations.

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d.

3. Production method: based on usage If the contractor tries to claim depreciation on a given unit of equipment at the same time th equipment is generating profit to reduce the tax that might otherweise be payable . *popular with smaller contractors since it is easy Three major factors in calculating depreciation of an asset: a. Initial cost or basis in dollars b. Service life in years or hours c. Salvage values in dollars Salvage values some residual value in the piece of equipment at the end of its life, unelss this value exceeds 10% of the first cost of the equipment, this value is neglected and the entire first cost is considered to be available for depreciation. Depreciation is a legitimate cost of busines that recognizes the loss in value of equipment over time, as such it is an expense that can be deducted from revenues, resulting in a lowering of taxes. reflects the loss of value and obsolescence or property (e.g. equipment) involved in the operation of a business. the equipment occurs when to provide for the replacement of the equipment at some point in the future, contractors charge the client an amount that provides a fund to purchase new equipment.. This is a protocol in theindustry and allows the contractor to accumulate funds for renewing the equipment fleet over time

Depreciation vs Amortization: Depreciation: Amortizing

IIT Costs,Interest,insurance and tax costs Insurance, applicable taxes, interest on loan % of Average Annual Value (AAV) AAV= C(n+1)/2n Aav is the average annual life, c is the initial value of the asset, and n is the number of years. Chapter 14: Equipment Productivity

Two characteristics that dictate the rate of output

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Two characteristics that dictate the rate of output 1. Cyclic capacity-establishes the number of units produced per cycle 2. Cyclic rate- speed of a piece of equipment Material has different weight to volume ratio when it is placed in its construction location and is compacted to its final density. Bank cubc yards, (cu ydp[bank], in situ volume) Loose cbic yards Comapcted cubic yards The higher the load factor the smaller tendency the material has to bulk up, threfore, with a high load factor the loose volume and th in situ volume tend to be closer to one another. The shrinkage factor relates the volume of the compacted material to the volume of the bank material. Insert pic here

1. 2. 3. a. b.

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The second factor affecting rate of ouput is time required to complete a cycle This function is governed by a. The power required b. Power available c. The usable portion of the power available that can be developed to propel the equipment unit Rolling resistance (RR) due to internal friction and friction developed between the wheels or tracks and the traveled surface. Grade resistance:power required is also a function of the grade resistance inherent in the slope of the traveled way Upward slope= RR+GR and vicerversa for downward slope

14.3 Power available: controlled by the engine size of the equipment and the drive train, which allows transfer of power to the driving wheels or power take off point Maximum power is the peak power that can be developed in a gear for a short period of tiem to meet extraodinary power requirements. Two primary constraints in using the available power are the road surface traction characteristics, and the altitude at which operations are conducted Coeficient of traction is a measure of the ability of a aprticular surface to receive and develop the power being delivered to the driving wheels and has been determined by experiment. Usable poounds pull (revisit) Power Available -engine size -drive train -manufacturers tables Usable Power-road surface traction -altitude CHAPTER 10 EXAMPLES ______________________________________________________________________________ Lesson 11 Labor, Cost Estimating Labor Estimate Types Methods of Cost Determination Airport Estimate Example Halpin & Senior, Chapters 15 & 16 Chapter 15. Labor Resource: The Man power component of the four M
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The Man power component of the four M 1. Labor Organization 2. Labor Law 3. Labor Cost 4. Labor productivity Key Legislation:

Pro Management Sherman Antitrust Law enacted to suppress the formation of large corporate trusts and cartels, which dominated the market and acted to fix prices and restrain free trade. (1908) Taft-Hartley Act (1947) The wagner act endorsed the concept of the closed shop and made it legal. This concept was later revoked by the tafft hartley act and replaced by union shop. It is the first post depression law to place effective constraints on the activites of labor. monitors the activities and power of labor unions

Pro labor Clayton Act (1914) In 1914 congress acted to offset the effect of the sherman antitust act by passing the clayton act which authorized employees to neogtiate with a aprticuar employer provides wages and fringe benefits on all federal and federal and federally funded projects shall be paid at the "prevailing" rate in the area. also referred as the Anti-Injuction Act, specifically stated that the courst could not intercede on the part of management so as to obstruct the formation of labor organizations. It outlawed the use of "yellow" dog contracts which had an employee sign a contract upon being hired in which he agreed not to join or become active in any union organization.

Davis-Bacon Act (1931) Norris-LaGuardia Act (1932)

Wagner Act (1935) National labor relations act, Wagner act, established a total framework within which labor management relations are to be conducted. established a national minimum wage,[3] guaranteed 'time-and-a-half' for overtime in certain Fair Labor jobs,[4] and prohibited most employment of minors in "oppressive child labor," Standards Act (1938) Watch dog organizations ensure its provisions are propertly administered NLRB Closed shop- if the majority voted for union membershp,then to work in the shop the new employee had to belong t the union. In an open shop employees which are not organized and do not belong to an union Union shop: a shop in which a nonmember can be hired. The worker Is given a grace period usually 30 days during which time he or she must become a union member,.This shop gives the worker a chance to join the union \ 15.11 Vertical vs Horizontal Labor Organizational structure Union Structure: National, State&City, Union Local Traditional craft unions are horizontally structured unions, strong power base that is located in the union local, lConstruction unions are craft unions with a strong local organization. The Associated general contractots AGC in the local area acts such way. The real power inmost issues however, is concentrated at the local level , the horizontal organization with strenthg at the bottom and coordination the top Vertically structured unions tend to concentrate more of the power at the national level, CIO While AFL maintains a strong local horizontal structure
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While AFL maintains a strong local horizontal structure 15.12: Define Jurisdictional disputes Jurisdictional disputes present fewer problems in vertically structured unions, since craft integrity is not a matter that determins the strenght of the union. 15.13 the largest labor organization in the US is AFL-CIO american dederal labor and congress of industrial organizations. Union locals: are smalles divison of the nation union and provide for contact with other works in the same trade and area to obtain bette working conditions etc. 15.18. Secondary boycotts:

15.19 in an open shop firm there is no union agreement and workers are paid and advanced on a merit basis., open sho contractors have bid succesfully in the housing and small building market in which the rquired skill level is not as high. Union contractors have dominated the more sohphsitcated building and heavy construction market s based on ther ability to attact skilled labor with higher wages and benefits. To be able to bid in both open shop and unio formats some firms have Double breasted Operations cotractos. Large firms will have on subsidiary that opreats with no union contrac.ts a separately managed company will be signed to al union contracts. In this way the parent firm can bid both in union shop markets and in markets in which the lower priced open shop encourages more cost competitive buildings Contracts include: maintenance of membership, fringe benefits, work rules, wages, hours, union area, etc. Fringe benefits are economic concessions gained by unions covering vacation pay, health and wefare, differents in pay due to shift, contrubution by the contractor to apprenticeship pograms,etc these are paid by the contractor in addition to the base wage and garnish the salary of the worker. Work rules are an important item of negotiation and have a significant efect on the productivity of workers and the cost of instaled construction. 15.21 Labor costs The contractor must know how much cost to put in the bid to cover the salary and associated contributions for all the workers. Hourly average cost of a work to the contractor consists of the following components: direct wages, fringe benefits, social security contributions (FICA), unemployment insurance, Public liability and property damage insurance, etc. All workers most pay socials ecurity and medicare on a portion of their salary, for every dollar the worker pays the employer must pay a matching dollar.

1.

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Chapter 16: Estimating: the process of looking into the future and trying to predict project costs and resource requirements Unrealistic estimating and bidding practices are major reasons for failure 1. Preliminary design: takes place at 40% project completion and is prepared by the architect or architect/engineer to reflect expected costs based on more definitive data, once this has been approved final or detail design is completed. 2. Four level of estimates a. Conceptual,Preliminary, Engineer's, Bid Estimate b. Detailed Estimates: i. Break project into cost centers ii. Quantity takeoffs iii. Establish pricing -unit cost -resource enumeration iv. Run the extensions Quantity takeoff: quantities required for cost centers that represent physical end items 1. 2. 3. 4. Five of the most common errors in quantity takeoff: Arithmetic Transposition(copying or transferring figures) Poor reference(scaling drwaings rather than using indicated dimensions) Unrealistic waste or loss factors Types of estimates: 1. Unit-price : standard project, normally nationally averaged price per unit (averaging of previous job, inflation) a. Althought unit pricing data are presented in dollars per unit format, the cost of the resource group and the rate of production achieved must be considered. b. Unit cost: ratio of resource costs to production rate. Bare cost is direct cost of labor and materials. Total cost includes th cost of burdens, taxes, and subcontractor o&p c. O&P charnges associated with labor: fringe benefits, workmen's compensation, average fixed overhead, subcontractor overhead and profit. d. Disadvantages: unit price available from averaging values on previous jobs has to be treated with some caution. Since every job Is unique, some of the estimator's intuition must be applied to ensure that the value is adapted to the conditions of the job being estimated. e. Use of unit-pricing approach assumes that historical data have beeen maintained for commonly encountered cost accounts. 2. Resource Enumeration: used for unusual architectural itemas that are unique to the structure and require special forming or erectionnproceduresl in this case the price must be developed byu breaking the special work item into its subfeatures and assigning a typical resource group to each subfeature. a. Advantages: allows the estimator to stylize the resource set or crew to be used to the work in question b. In the unit pricing approach, the resource costs and the production rates are the aggregate values of resources and rates accumulated on a number of jobs over a historical data collection period c. Resource enumeration, the estimator specifies a particular crew or resource group at a particular charge rate and particular prodcuction level for the specific work element being estimated., yielding a much more precise cost per unit definition. d. (+)greater precision (-) time consuming so only used when no unit cost data is availble, and for big ticket items which constitute a alrge percentage of the overall cost of a job and requries a precise cost analysis, or an extremely complex work items on complicated and unique proejcts 3. work package collection sheets used. (can be thought of as an extension of the resource enumeration method

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Lesson 12: Safety costs: Direct costs of previous accidents, direct cost of eac accident occurrence, indirect cost (investigation, loss of skilled workers, equipment, and production) Impact of an accident: Direct cost - Workers compensation - Insurance Indirect cost - Overtime cost - Replacement of worker - Training and orientation - Investigation of accident Limited and short tenure of worker Dynamic and Complex Large and labor-intensive Disputes Resolution Techniques Arbitration use of an arbitrator to settle a dispute Litigation a legal proceeding in a court; a judicial contest to determine and enforce legal rights. Role of the Civil Engineer Risk-averse & defensive Implement agendas set by others We should be the Decision-Makers Political & Social Challenge Well-rounded educational program -speak the lingo Influence choices that affect infrastructure

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PM Examples
Thursday, December 08, 2011 5:32 PM

Example 7-1. Bank Offers 3 repayment plans on a $20k loan for 5 years at 9%interest

Example 7-2: Recently retired Special Agent Jack Bauer has taken a $150,000 mortgage on his house at an interest rate of 6% per year. If the mortgage calls for 30 equal annual payments, what is the amount of each payment?

Example 7-3

Example 7-4

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Example 7-4

Example 7-5

Year

Beg of Year Balance

Year-end Interest on Balance

Total Yearend Payment

Amortization of Loan

End-ofyear Balance

1 2 3

100,000

10,516

40,576.98 30,060.98 69,939

69,939
36,716

7354.79
3861

40,576.98 33,222.19 36,716

40,576.98 36,716 0

Example 8-1 Discount Rate Assume you receive $5000 to invest for your future. Your available alternatives for this money are: -use up to $2500 of it to pay a tuition loan, on which you pay 12% interest on unpaid balances. -put as much as you want of the $5000 in a savings bank to earn 5% per year. -buy a discounted bond for $5000 (the smallest denomination), that is redeemable only after 3 years for $8500. You can then reinvest this money in more of the same type of bonds. (a) What is the opportunity cost, in percent, of the $5000? (b) What discount rate should you use for evaluating an investment opportunity for the entire $5000 in some other business? For only $2500 of the $5000?

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Example 10-1 You have just bought a new pusher dozer for your equipment fleet. Its cost is $ 100,000. It has an estimated service life of 4 years. Its salvage value is $12,000. a. Calculate the depreciation for the first and second year using the straight-line and DDB methods.

b. The IIT components of ownership cost based on average annual value are:
Tax: 2% 2% 7%

Insurance: Interest:

What cost per hour of operation would you charge to cover IIT?

Example 10-2 Depreciation Using MACRS Table Find the yearly depreciation of a $100,000 five-year class concrete mixer, assuming that it is new when purchased. What would the firms projected tax savings be in Year 2, assuming a corporate tax rate of 34%?

Example 10-3 Earth Volume Relationships A customer estimates that he is getting 30 cu yd (loose) of gypsum in his scraper. Determine the percent overload if the load estimate is correct. The maximum load capacity of the scraper is 84,000 lb.

Example 10-4 Available Power

The ABC Company is planning to start a new operation hauling sand to a ready-mix concrete plant. The equipment superintendent estimates that the company-owned 30-yd wheel tractor scrapers can obtain 26-ton loads. He is concerned about the high rolling resistance of the units in the sand (RR factor 250 lb/ton) and the low tractive ability of the tractors on this job. Will traction be a problem? If so, what do you suggest to help?

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