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Construction Finance Management Reg. No.

ASSIGNMENT ON

Construction Finance Management NCP 29

ASSIGNMENT

Construction Finance Management Reg. No.

NICMAR / CODE OFFICE

1.

Course No. 2.

PGPM 12 Course Title. -

Construction Finance Management 3. 4. 5. Assignment No. Date of Dispatch Last date of receipt. 2

of Assignment at CODE

ASSIGNMENT

Construction Finance Management Reg. No.

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.

ABSTRACT:

Construction Finance Management Reg. No.

This Project Report is about managing finance in developing and building a construction facility in a land of area 10,000 sq m. Then above mentioned construction project is divided in two no. of stages:-

Developing facility on a 5,000 sq.m. for a charitable trust comprising of housing and health facilities.

Developing 5,000 sq.m. of area as a cost of development

. Succeeding report highlights the financial viability of the construction project. Extracting profit from the project through financial planning is the main feature of this project report.

INTRODUCTION:

Construction Finance Management Reg. No.

Construction Project is a mission, undertaken to create a unique facility, product or service within the specified scope, quality, time and costs. Project can also be defined as organisation and performance of resources such as men, money, machinery, materials, space and technology into logical sequence of activities Finance management in a construction project is mainly related with planning various activities in the project right from the start to the end of the project. A developer must be fully aware about all the key financial aspects of construction.. He must be able to control financial flows in an orderly manner for reaping the results in form of profits..

Profit from the project can be harvested by considering, implementing and following the points stated as under:-

Reducing the cost of construction.

Minimising any kind of wastage whether in term of material or in the form of people time.

Planning the activities prior they actually start at the site.

Construction Finance Management Reg. No.

Scheduling tasks.

Planning and controlling the project.

Arranging fianaces at right time when requires.

Closely monitoring the expenses of the project.

Al though the main aim of a developer is to earn profit from the project by it should be remembered that profit should not be earned at the cost of quality, durability and aesthetics values of construction.

FIANCIAL VIABILITY OF PROJECT

Construction Finance Management Reg. No.

Most construction projects start with a need to have a new facility long before designers start designs and drawing of the projects and certainly before field construction work can commence. Elements of this phase include:

- Conceptual analysis. - Technical and feasibility studies and - Environmental impact reports.

Here the project is divided in two stages first developing & building facility for a charitable trust and using 5,000 sq. m area of land free as a cost of production. As the developer has to earn profit by investing in the land of 5,000 sq. m area the best investment feasible is by building a housing society. As developer can invest only Rs 10 lakhs from his own fund and loan of maximum Rs 50 lakhs can me taken from bank there is a financial constrain in developing the above mentioned construction project.

Construction Finance Management Reg. No.

So keeping in mind the financial constrain constructing, housing building in only half of the available land i.e. 2500 sq. m of land is the most suited economical option. As the land is located at prime location of Pune, so flat of the purposed residential building can be sell at higher prices earning a good profit margin for the developer. The residential building will be three storey building to be built on a space on an area of 500 sq.m X 500sq.m. Ground floor of the building will be meant for two wheeler and four wheeler parking.

The Proposed residential building will comprise of:S.No. ITEMS 1. 3 BHK Flats 2. 2 BHK Flats 3. 4. 5. 6. 7. Balcony Lobby staircase Parking lot Guard room QANTITY 3 , one on each floor 6 , two on each floor 3, one for each floor 3, one for each floor ----------At ground level 1 at ground level adjacent to entrance gate

All 3 BHK flats will be front facing and linked with the other two no. 2 BHK flat via. a lobby. Balcony will be provided at all three no. 3 BHK flats. Flats

Construction Finance Management Reg. No.

will be constructed and then will be fully furnished. Fully furnished flats will then be ready for selling to the costumers with ready to move option

Conclusion: - As flats to be constructed are spacious, parking facilities along with security is also been provided so flat will going to attract the potential buyers easily. Posh location will also add to the amount on which flats can be sell. So developing a residential building on a free of cost land and selling the flats of the building is a sure sort assurance of profit. So this investment on this construction project is a totally win win situation for the developer and positively promises the profit.

PROJECT SCOPE

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Construction Finance Management Reg. No.

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 in order to minimize shrinkage cracks. Internal walls will be neeru finished and External walls will be Sponge finished.

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Construction Finance Management Reg. No.

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 up to height of 0.6m above platform.

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Construction Finance Management Reg. No.

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.

Sanitary ware: All Sanitary ware will be of Standard range of Hind ware 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.

TECHNICAL STUDIES

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Construction Finance Management Reg. No.

a.)

Cost of construction

Now a day 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 in order to increase his margin. Therefore in the planning stage itself the quantities have to be worked out and materials have to be ordered early in order to avoid the loss by spending higher amounts at various stage of Construction. Hence the Finance 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.

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Construction Finance Management Reg. No.

Calculating the cost of construction is also helpful in the financial management and planning as it gives the idea that how much finance will probably will required for developing the project. Break-Up of Cost of Construction is listed in the table given below:S. NO. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. ITEMS R.C.C. Reinforcement Masonry Plastering Flooring Framework Painting and Polishing Plumbing Sanitary ware Water Storage Electricals Grand Total TOTAL COST (Rs.) 2,000,000 1,000,000 80,0000 1,000,000 1,000,000 30,0000 30,0000 20,0000 30,0000 30,0000 80,0000 8,000,000

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

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Construction Finance Management Reg. No.

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 has 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.

Manpower Requirement For R.C.C & Structural Works No. 10-15 8-10 8-10 5-8 20-25 TIME COST

S. NO. MANPOWER 1. 2. 3. 4. 5. Mason Carpenters Painters Blacksmiths Mazdoors Grand Total

PERIOD 4 months 3,50,000 3 months 2,50,000 2.5 months 2,00,000 2.5 months 2,00,000 5 months 5,00,000 1,500,000

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Construction Finance Management Reg. No.

Manpower Requirement For Finishing, Plumbing & Electrical Work MANPOWER Mason Electricians Plumbers Grand Total TIME PERIOD COST 4 months 2,50,000 1.5 months 1,50,000 1.5 months 1,00,000 5,00,000

S. NO. 1. 2. 3.

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 Permissible 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 in order to find buyers very easily in terms of looks as well as funds both and apartments so designed should suit the requirements of the buyer.

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Construction Finance Management Reg. No.

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.

d.) Work schedule on quarterly basis Working out the Task & Time schedule of a project in preliminary stages is must for the accurate financial planning. Main motive of a work schedule is to break down the construction activities to be carried out for a project in the form of various tasks, stating the specific time to be consumed for the planned tasks.

For this project a total time period of 2 years has been considered and all the construction activities will be carried out in this tenure. Project start date is fixed on 15/08/11 and commissioning of project is scheduled on 15/08/13. So Project activities is divided in to four quarterly phases namely Phase-I,

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Construction Finance Management Reg. No.

Phase-II, Phase-III & Phase-IV, each phase covers a period of 8 to 4 months depending on the activities carried in the respective phase.

Break-Up of Work Schedule is listed in the table given below:PHASE-I S. NO. ACTIVITIES START TIME 1. R.C.C. Foundation 15/08/11 2. Reinforcement Work 11/11/11 3. Masonry Work 21/01/12 4. Plastering 01/03/12 Total Time Elapsed FINISH TIME 10/11/11 20/01/12 28/02/12 15/4/12 8 months

PHASE-II S. NO. ACTIVITIES START TIME 1. Flooring 15/04/12 2. Framework 01/08/12 3. Painting and 16/10/12 Polishing Total Time Elapsed

FINISH TIME 31/07/12 15/10/12 15/12/12 8 months

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Construction Finance Management Reg. No.

PHASE-III S. NO. ACTIVITIES START TIME 1. Plumbing 16/12/12 2. Sanitary ware 16/02/13 Total Time Elapsed

FINISH TIME 15/02/13 20/04/13 4 months

PHASE-IV S. NO. ACTIVITIES START TIME 1. Water Storage 21/04/13 2. Electricals 21/06/13 Total Time Elapsed

FINISH TIME 20/06/13 15/08/13 4 months

* Note: All Task durations are tentative and can be changed as per construction planning and site conditions.

FINANCIAL AND ECONOMICS EVALUATION: Financial management is mainly concerned with management of funds i.e. management of monetary issues. There are two basic aspects of financial management viz procurement of funds and an effective use of these funds.

a.) Total Investments cost

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Construction Finance Management Reg. No.

Primary step in financial planning of a project is to estimate total investment cost involved in the development of project. Investment cost of project is the sum of following costs stated as under:-

Land Cost - It involves the cost required to acquire the land on which construction of housing colony is to be carried out.

Raw Material Cost - It comprises cost of raw material required for

construction like cement, TMT bars for reinforcement, aluminum & wooden frames, tiles, electrics, sanitary wares etc.

Construction Cost - All money spend for carrying construction activities add on to form this cost.

Manpower Cost - Cost of recruiting skilled and non-skilled

employees contribute to this type of cost.

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Construction Finance Management Reg. No.

S. NO. 1. 2. 3. 4.

COST BREAK-UP Land Cost Raw Material Cost Construction Cost Man Power Cost Grand Total

REMARKS Not Applicable As Land Was Free

INVOLVED COST (Rs.) 0 8,000,000 2,000,000 2,000,000 12,000,000

Hence the total investment for this Housing Colony Construction Project is one crore and twenty lakhs i.e. 12,000,000.

b.) Project Financing Proposed Capital Structure / Loan requirements

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Construction Finance Management Reg. No.

One of the major problems facing any business enterprise is that of obtaining finance and ascertaining the cost of project. Finance can be obtained from different sources and since finance arranged from different sources have different characteristics in terms of risk, cost and control. Sources of finance depend upon the business structure. There are several sources of finance available for a construction project like:-

Long Term Finance.

Middle Term Finance

Short Term Finance.

As in this Construction Project there are some restrictions in the investment like: Developer can invest only Rs 10 lakhs as his own fund. Only Rs 50lakhs can be raise as bank loan.

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Construction Finance Management Reg. No.

So the rest finance for project i.e. Rs 60 lakhs is to be managed / procure. As the project duration is of 2 years and developer seeks early and quick profit Middle term and Short Term Finance seems to be the feasible options. Types of finance considered for the Construction project are stated as under: Middle Term Finance

Loans from Banks - Primary role of banks is to cater to the

finance requirement of a project. Usually bank charges 15 % of interest rate in financing such type of construction project. So

amount of Rs. 50 lakhs will be managed from the bank in the form of loan for a period of 2 years.

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Construction Finance Management Reg. No.

Lease Financing Leasing is a general contract between the

owner and user of the asset over a specified period of time. The asset is purchased initially by the lessor and thereafter leased to the lersco company. As for this project total available land is 5000 sq m and only 2500 sq m of land has been used to develop the project the remaining land of 2500 sq m can be use as a lease item and finance can be managed from that. So after giving the land on lease for 5 years Rs 40 lakhs can be generated.

Short Term Finance

Advance From Customers As this Construction Project

comprises a housing colony in which flats are to be constructed

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Construction Finance Management Reg. No.

for selling to the costumer, money can be generated from the potential costumers in the form of advance down payment for booking the flats. Hence remaining fund for the Project i.e. Rs 20 lakhs can be generated.

Interest Calculations As only Rs 50 lakhs is been taken loan from banks on 15 % of interest for 5 years so only this amount is subjected to the interest

Total amount

- Rs. 5.000,000

Rate of interest - 15 % Years -2

Total; interest amount to be paid = (5,000,000 x 15 x 2 ) / 100 = 15,00,000 So total amount paid to the bank as interest is Rs 15 lakhs

c.) Cash Flow Management

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Construction Finance Management Reg. No.

Cash Flow management basically deals with inflow and outflow of cash during a particular time. Quarterly Break Up of Cash Outflow
S. NO. 1. 2. 3. 4. 5. 6. 7. PHASES Phase I Phase II Phase III Phase IV Cumulative Construction cost for all 4 phases Cumulative Man Power cost for all 4 phases Interest amount payable to bank Grand Total Amount 4,800,000 1,600,000 5,00,000 1,100,000 2,000,000 2,000,000 1,500,000 13,500,000 Sink Foundations Work Flooring & Frame work Pipe Fitting Work Electrical & Finishing work

S. NO. 1. 2. 3. 4. 5. 6. 7.

Quarterly Break Up of Cash Inflow

Amount 4,800,000 1,600,000 5,00,000 1,100,000 2,000,000 2,000,000 18,000,000 Source 25 lakhs(Bank) + 5 lakhs(own fund) + 18 lakhs(lease amount) 5 lakhs(own fund) + 11 lakhs(lease amount) 5 lakhs(Bank) 11 lakhs(lease amount) 20 lakhs()

PHASES Phase I Phase II Phase III Phase IV Bank Loan Costumer advance Flat selling amount

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Construction Finance Management Reg. No.

Conclusion As the total investment for this Construction Project is Rs 1 crore 35 lakhs and by selling the flats amount of Rs 1crore 18 lakhs has been earned so this project is fully financially feasible and have potential to reap high profit for the developer. Profit calculation

A. Total cost of project = Rs 13,500,000

B. Total amount earned from the project = I + II = 18,000,000 I.

Selling price of 3 nos of 3 BHK flats = 3,000,000 x 3 = 9,000,000.

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Construction Finance Management Reg. No.

II.

Selling price of 6 nos of 2 BHK flats = 1,500,000 x 6 = 9,000,000

C. Net Profit = B A = 18,000,000-13,500,000 = 4,500,000 D. Profit Percentage = (C x 100) 13,500,000 = 33.33 % of Profit Earned

/ A = (4,500,000 x 100)/

References: 1) Course Material, NICMAR