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ASSIGNMENT 8 ON

CONSTRUCTION FINANCE MANAGEMENT & COST ACCOUNTING NCP 29


____________________________________________________________________

SUBMITTED BY: Arunashish Mazumdar GPPM, M-19 REG NO: 212-06-14-10687-2141

____________________________________________________________________ DEPARTMENT OF GPPM NATIONAL INSTITUTE OF CONSTRUCTION MANAGEMENT AND RESEARCH SCHOOL OF DISTANCE EDUCATION 25/1, BALEWADI, N.I.A. POST OFFICE, PUNE 411045

Date of dispatch: 07/05/2013

Date of receipt: _________________

National Institute of Construction Management and Research, Pune School of Distance Education

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 Aluminum 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 rise not more than Rs. 50 lakhs as bank loan.

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ABSTRACT: 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: Financial management is dealing with the procurement of funds to meet financial needs. Finance and capital are seen as a considerable problem for cooperative, the sources being the members and loans from banks or other institutions and individuals. The sources of capital available to any firm are quite numerous but as noted public limited companies have the greatest variety of sources available for their use and the single person enterprise. The capital structure of any firm is related to the form of the enterprise, its objectives, and the cost of capital. The cost of capital is subject to and governed by many variables, which often operate independently of each other. The firm must consider these influence and their effects on the cost of the individual types of capital to determine the most suitable capital structure. Cash budgeting will play an important role in any type of construction project also capital revenue, finance resource mobilization, cost accounting; management accounting will give proper planning of inflow as well as outflow resources in project. Construction Finance Management & Cost Accounting NCP 29 Page 3 of 20

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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 organization 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:a) Reducing the cost of construction. b) Minimizing any kind of wastage whether in term of material or in the form of people time. c) Planning the activities prior they actually start at the site. d) Scheduling tasks. e) Planning and controlling the project. f) Arranging finances at right time when requires. g) Closely monitoring the expenses of the project.

Although 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.

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FINANCIAL VIABILITY OF PROJECT 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.

STAGE 1: Development and Building of Charitable Trust To develop a commercial site 10,000sqmt and in that 5,000 m2 developed area will be used by the owner and the balance 5,000 m2 area will be utilized by the developer to get back investment and a profit on his investment. The cost of land is Rs. 10,000/ m2 Developer is going to get 5,000sqmt at the rate of 10,000/ m2, which will give him an asset of 5000 x 10000 = 50000000 (Rs 5 crore) Developer will get the area to develop for the trust is 5000 square meter at the rate of 10000/ m2. Within this area total construction area will be 85%. Thus developer has to develop the total area is 5000 X 0.85 = 4250 m2. Generally construction rate is varying with area to area. We can assume the construction cost at this prime locality is 750 Rs/ ft2 i.e. 7000/ m2. Thus total cost of construction will be 4250X7000= 29750000 Rs. (say Rs 3 crore) Construction Finance Management & Cost Accounting NCP 29 Page 5 of 20

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As developer can invest only Rs 10 lakhs from his own fund and loan of maximum Rs 50 lakhs can be taken from bank there is a financial constraint in developing the above mentioned construction project. This total Rs 60 Lakhs is not at all sufficient to develop the proposed development therefore he is going to use the land which he got as a development cost for generate the amount. The developer can generate the amount by giving half of his share of land i.e. 2500 sq. of land for rents to private authorities. Developer is going to get the rent of 800Rs/ m2/month, which will generate the amount for the year as 800 X 2500 X 12 = 24000000 Rs. Thus the Developer is going to generate the total amount of Rs 3 Crores and break even the cost of development of the charitable trust. 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 This 15 Lakhs is taken into account while working out the Economic Feasibility study of the Housing Society in Stage 2. STAGE 2: Development of Housing Society on land given free as cost of Development As the developer has to earn profit by investing in the balance land of 2500 sq. m area the best investment feasible is by building a housing society. So keeping in mind the financial Construction Finance Management & Cost Accounting NCP 29 Page 6 of 20

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constraint constructing, housing building in only half of the available land i.e. 2500 sq. m of land in the first phase 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 sold at higher prices earning a good profit margin for the developer. Also he can take the booking amount for the initial launch of project from customer and use it for launching the project. The residential building will be six 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:Sr.No. 1. 2. 3. 4. 5. 6. 7. ITEMS 3 BHK Flats 2 BHK Flats Balcony Lobby Staircase Parking lot Guard room QUANTITY 6 , one on each floor 12 , two on each floor 6, one for each floor 6, 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 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. 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 Construction Finance Management & Cost Accounting NCP 29 Page 7 of 20

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the amount on which flats can be selling. 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 As it is a Housing project the specifications in general for the residential dwellings will be as follows. a) Structure: R.C.C. Framed structure. As per design of Architect and Engineer. b) Reinforcement: The reinforcement used will be Anti Corrosive TMT Steel. c) Masonry: All Masonry will be of Concrete Block and internal partition with first class wire cut bricks. d) 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 neat finished and External walls will be Sponge finished. e) Flooring: Granite on Floor in Living Room and remaining area Mosaic cement tiles and Kota stone in Bathrooms and Kitchen area. f) Framework: Door frames of Sal wood, Main door of Teak Wood with French polish, Internal Doors Marine Flush Door with Oil paint. g) Windows : Aluminum sliding Windows 3 track anodized h) Painting and Polishing: Internal Walls will be painted with Oil Bound Distemper, External Walls with Apex Weather Shield paint. i) 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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j) 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. k) Sanitary ware: All Sanitary ware will be of Standard range of Hind ware or equivalent and fittings of Jaguar standard range. l) Water Storage: Underground sump and overhead tank. m) Electricals: All wires used will be Finolex or equivalent with fixtures of Crabtree or equivalent.

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 standards-related product and also the financial (amount to invest and returns expected). 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 (a) 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:
(i)

Land acquisition, including assembly, holding and improvement Planning and feasibility studies

(ii)

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(iii)

Architectural and engineering design Construction, including materials, equipment and labor Field supervision of construction Construction financing taxes during construction

(iv)

(v)

(vi)

(vii) Insurance and

(viii)

Equipment and furnishings not included in construction

(ix)

Inspection and testing

The operation and maintenance cost in subsequent years over the project life cycle includes the following expenses:
(i)

Land rent, if applicable Operating staff Labor and material for maintenance and repairs Periodic renovations Insurance and taxes Financing costs

(ii)

(iii)

(iv)

(v)

(vi)

(vii) 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. Construction Finance Management & Cost Accounting NCP 29 Page 10 of 20

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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 high-density 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.

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 for the Housing Project is listed in the table given below:S. NO. ITEMS TOTAL COST (Rs.) 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Cost of R.C.C. Cost of Reinforcement Cost of Masonry Cost of Plastering Cost of Flooring Cost of Framework Cost of Painting and Polishing Cost of Plumbing Cost of Sanitary ware Cost of Water Storage 40,00,000 20,00,000 16,00,000 20,00,000 20,00,000 6,00,000 6,00,000 4,00,000 6,00,000 6,00,000

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11.

Cost of Electricals Grand Total

16,00,000 1,60,00,000

(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 analyzed 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 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 MANPOWER No. TIME PERIOD COST

S. NO.

1. 2. 3. 4. 5.

Mason Carpenters Painters Blacksmiths Mazdoors Grand Total

10-15 8-10 8-10 5-8 20-25

8 months 6 months

7,00,000 5,00,000 4,00,000 4,00,000 10,00,000

5 months 5 months 10 months

30,00,000

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Manpower Requirement For Finishing, Plumbing & Electrical Work MANPOWER Mason TIME PERIOD 8 months COST 5,00,000

S. NO. 1.

2.

Electricians

3 months

3,00,000

3.

Plumbers

3 months

2,00,000

Grand Total

10,00,000

(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. 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

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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 15/01/13 and commissioning of project is scheduled on 15/01/15. So Project activities is divided in to four quarterly phases namely Phase-I, 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. 1. 2. 3. 4. ACTIVITIES R.C.C. Foundation Reinforcement Work Masonry Work Plastering Total Time Elapsed PHASE-II S. NO. 1. 2. 3. ACTIVITIES Flooring Framework Painting and Polishing Total Time Elapsed PHASE-III START TIME 15/09/13 01/01/14 16/03/14 FINISH TIME 31/12/13 15/03/14 15/05/14 8 months START TIME 15/01/13 11/04/13 21/06/13 01/08/13 FINISH TIME 10/04/13 20/06/13 31/07/13 15/9/13 8 months

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S. NO. 1. 2.

ACTIVITIES Plumbing Sanitary ware Total Time Elapsed

START TIME 16/05/14 16/07/14

FINISH TIME 15/07/14 20/09/14 4 months

PHASE-IV S. NO. 1. 2. ACTIVITIES Water Storage Electricals Total Time Elapsed START TIME 21/09/14 21/11/14 FINISH TIME 20/11/14 15/01/15 4 months

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

FINANCIAL AND ECONOMICS EVALUATION FOR HOUSING SOCIETY: 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 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.

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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.

S. NO.

COST BREAK-UP

REMARKS

INVOLVED COST (Rs.)

1.

Land Cost

Not Applicable As Land Was Free

2. 3. 4.

Raw Material Cost Construction Cost Man Power Cost Grand Total

16,000,000 4,000,000 4,000,000 24,000,000

Hence the total investment for this Housing Colony Construction Project is two crore and forty lakhs i.e. Rs 24,000,000/

b) Project Financing for Housing Society Proposed Capital Structure / Loan requirements 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

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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 has already invested his own Rs 10 lakhs in construction of the charitable trust and also an amount of Rs50 lakhs which he has taken as a bank loan. So the complete finance for the housing project i.e. Rs Two Crores and Forty 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. Short Term Finance Advance From Customers As this Construction Project comprises a housing colony in which flats are to be constructed for selling to the costumer, money can be generated from the potential costumers in the form of advance down payment for booking the flats.

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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 for Housing Society 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. Phase I Phase II Phase III Phase IV

PHASES

Amount 4,800,000 8,000,000 10,00,000 2,200,000 4,000,000

Sink Foundations Work Flooring & Frame work Pipe Fitting Work Electrical & Finishing work

Cumulative Construction cost for all 4 phases

6.

Cumulative Man Power cost for

4,000,000

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all 4 phases 7. Interest amount payable to bank Grand Total 1,500,000 25,500,000

Quarterly Break Up of Cash Inflow

S. NO. 1.

PHASES Phase I

Amount 4,800,000

Source 25 lakhs(Bank) + 5 lakhs(own fund) + 18 lakhs(lease amount)

2.

Phase II

8,000,000

5 lakhs(own fund) + 11 lakhs(lease amount) + 25% Customer Advance

3. 4. 5. 6. 7.

Phase III Phase IV Bank Loan Costumer advance Flat selling amount

10,00,000 2,200,000 2,000,000 2,000,000 36,000,000

5 lakhs(Bank) 22 lakhs(lease amount) 20 lakhs()

CONCLUSION As the total investment for this Construction Project is Rs 2 crore 55 lakhs and by selling the flats amount of Rs 1crore 5 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 25,500,000

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B) Total amount earned from the project = I + II = 36,000,000 Selling price of 6 nos of 3 BHK flats = 3,000,000 x 6 = 18,000,000. Selling price of 12 nos of 2 BHK flats = 1,500,000 x 12 = 18,000,000/ C) Net Profit = B A = 36,000,000-25,500,000 = 10,500,000 D) Profit Percentage = (C x 100) / A = (10,500,000 x 100)/ 24,000,000 = 43.75 % of Profit Earned

RECOMMENDATION Particularly during periods of economic recession construction firms are exceedingly conscious of the problem of survival and seek to predict, monitor and control costs and revenues with diligence far surpassing that employed during more buy-ant time. Hence considering real estate value is going up it is recommended to take up the project financial term in the project.

Bibliography 1. Text Books from NICMAR. 2. Financial Management, Second Edition, Oxford Publication by Shrivastava Mishra.

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