Constructing a building or facility

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Contents
Question no: 1.............................................................................................................................................2
The rationale for a construction project to be funded................................................................................2
Question no: 2.............................................................................................................................................3
Prepare a budget for construction of a building..........................................................................................3
Planning for construction budget............................................................................................................3
Question no: 3.............................................................................................................................................5
Question no: 4.............................................................................................................................................6
Contingency plan.........................................................................................................................................6
Question no: 5.............................................................................................................................................7
Financial activity analysis.............................................................................................................................7
References...................................................................................................................................................8
Question no: 1

The rationale for a construction project to be funded

We will use some different methods to fund our construction project. The meaning of funding is
that capital, financial resources but skills, information, time & land are also used for the project
of construction. Funding is mostly used for the internal purposes of an organization. But the
sources of capital that are external refer to as the financing of business.

If the projects are for the public they are allocated their amount which is necessary from local
budgets or from departmental. If the amount is not enough that local budgets or departmental
provide to project then those who are responsible is the project sponsor. The project sponsors
work with the different budget holders that are responsible for securing funds for projects.

Another source of funding is that it can become from that reserves which are already allocated
to the acquisition, which results in the capital expenditure, enhancement, or construction of
significant assets that are fixed includes buildings, land, & also equipment. These fixed assets
are used for more than one year (Tucker, M. and Masuri, M.R.A., 2016.).

The funding is limited in the case of internal funding, also there are some conditions imposed
on this type of funding. Also, there is a business planning cycle that is a factor that is
determining the allocation of funds to the project.

Following is the different fund arrangements that are based on the partnership formed with the
external organizations:

 The first funding arrangement for the construction project name is private finance
initiative ‘
 The second funding arrangement for the building of construction is a public-private
partnership

The first arrangement is named a private finance initiative in the form of (PPP). This is a strategy
that is procurement routes used for civil government projects. In the private finance initiative
projects, there is a team appointed, & also facilities management & construction experts build
& design development. To fund the construction projects a supply team finances the project &
also leases to the government. They finance construction projects for the agreed period. This
type of arrangement is usually suitable for that projects which is at a large scale.

The second arrangement is named a public-private partnership. This is a partnership that is at a

broad range. In which both private & public sectors collaborate for some mutual benefit. This
type of fund was first established in 1990 in the United Kingdom. The public-private partnership
covers the partnership to deliver the services, policies, infrastructures, or buildings, etc. The
three different categories of public-private partnership are as follows:

 The public-private partnership helps to provide concessions to private sectors on behalf

of the public authority, for this concession public pays them.
 In the case of private finance authority where private sector project finances & also
public sectors projects take services of maintenance, construction & operations. In this
case, they are funded by a public authority.
 In the public-private sector company is established that is a joint venture jointly private
company & a public company to provide the public service.

There are some self-funded projects which means that the project will generate enough capital
for the later work. Those projects which are external can take the fund in form of loans, from
venture capitalists, donations, grants, shareholders, crowdfunding, & also from subsidies ( Koo,
B., Fischer, M. and Kunz, J., 2007.).

Question no: 2

Prepare a budget for the construction a building

In this question, we will prepare a budget for the construction of the building & also suggest
ways of preparing the budgeting.

The construction budget we are making here is to anticipate the cost of our new project
building. Mostly, many contractors estimate their costs with the help of professionals & also
from subcontractors & suppliers. The budget helps a company in accounting purposes.

Planning for construction budget

There are many ways of developing the construction budget. But the most effective method is
here to divide the expenses in between the soft cost & hard cost. According to accounting
terms, the soft cost in the project is an expense that is not physically related to the project. Soft
cost is an expense that is almost 30% total budget of a construction project. The other cost
which is 70% is related to the hard cost of the project. This is a cost that is directly linked with
the construction project of the building. This cost is a tangible cost & this cost is usually easier
to control cost & also easier to estimate cost. If we compare soft cost to hard cost it is difficult
to estimate because this type of expense is intangible.
Property cost

This cost varies that depends on the project scope & also location. If the location is desirable
then the land cost is accounted for 60 to 65% of the total project cost. If the location is not
desirable then the land cost is almost less than 10 to 15% only of your budget.

Professional services & fees

Constructing a building required experts & also other services. This type of cost is considered
the soft cost. According to business requirement, there is need of professionals in the project
who provide their services & also proceeds with the project of construction.

Following the soft costs incurred in the construction of the building:

 Testing, studying, & surveying fees for example environmental & geotechnical fees.
 Occupancy & building permitted from association cost & local government cost
 Stamp fee of professional engineers for example electrical, structural, civil engineers,
mechanical, etc.
 Real estate fee, banking fee & accounting (Aminbakhsh, S., Gunduz, M. and Sonmez, R.,
2013.).

Material

Some of the costs that occur in the project are non-negotiable. The material cost of a project
can be tightened to a budget. You can tighten your cost by making good relations with the
suppliers. If you have good relations with your suppliers you can take quality products or may
less costly material.

Labor

The main aspect of constructing the budget is to predict the labor cost of the project. Estimate
the labor cost is the most difficult part of budgeting. It is difficult to estimate that in how many
hours a worker will work.

Equipment & tools

A construction project surely needs tools & equipment to construct the building. It may depend
that the tools & equipment that will use in the hard cost or soft cost. The following expense is
considered in the tools & equipment:

 Rental fee of equipment

 Cost of delivery
 Cost of fuel
  Repairing & maintenance cost

Project management

There is a need for highly organized & skilled management staff for the construction project.
This team also needs their supplies & equipment to perform their duty. In the project
management, the cost which is occurred is salaries of staff & the expenses of the office.

Professional bonds & liability insurance

All size construction projects needed liability projection as well as insurance coverage. The cost
of the professional bond is a compulsory cost which is lying under the soft cost. In certain
projects, there is also a requirement of performance bonds & payment bonds.

Taxes & utilities

This type of expense is depending on the project for example water, gas, electrical installation
& sewer. These utilities have hookup fees that are factored in the project of the construction
budget.

Contingencies

This is an unexpected cost that may occur in the construction budget. This is an amount that is
set aside for that expenses occur unexpectedly. This cost occurs once in the project when it is
started. This is not allocated as a particular cost. This type of cost is not more than 3% to 10% of
the budgeted cost.

Following are some contingencies fund that should be included:

 Material upgrade or designing cost

 Breakdown of tools & equipment & malfunctions
 Changing in the scope of the project
 Unknown cost occur (Hosseininasab, S.M., Shetab-Boushehri, S.N., Hejazi, S.R. and Karimi,
H., 2018. )
Question no: 3
Here we show the budget for our new construction plan for building:

2021
The construction project for building budget
(Australia)
Wage & salary base $388,000
Wages & salary overtime $63,500
Social cost (medicare, employer FICA, etc) $32,500
Retirement (401k, pensions, etc). $38,500
Training & personnel development $1500
Insurance & health care $55,850
Life insurance $770
other costs
Engineering cost & architect 931,000
Construction management 162,000
Acquisition of land 550,000
Fixtures & furniture 460,000
Security system, network, telephone 150,000
Quality control testing 90,000
Fees & permits 85,000
Value engineering 50,000
Other cost 151,800
Contingency 1,181,000
Total other cost 3,900,000
Total project $ 4,480,620
Question no: 4

Contingency plan
As we know that contingency plan helps to reduce the risks of the businesses. This helps in the
effective responses & also allows projects for flexibility. This is a risk management strategy that
also helps in avoiding, identifying, accepting risks & mitigating. This helps to projects the
negative events. Mostly government creates this type of contingencies to mitigate the
economic crisis & also natural disasters. There are some positive contingencies plans too. The
contingency plan shows positive when company sales are higher than expected, software of the
company releases early & the advertisement goes viral then contingency proves positive. In
brief, this is a strategy that helps in the negative or positive also disruptive events.

Our contingency plan will be as follows if our desired funding is not available to the optimal
level desired:

 The first step of our contingency plan is that we will draft our plan. We will work out the
opportunities & risks of the project. We will create a plan for contingency by identifying
opportunities & threats. We will try to reduce our threats.
 The second step for our contingency plan is that we will weigh risks that are based on
the likelihood & severity. There is no need to make a plan for every risk. We should just
consult with the stakeholder for the identification of that risk which has a greater
impact on the project.
 In our contingency plan, the third step of our is to identify the important risks. After
weighing risks you will be able to know what are the important risk. If there is a high
likelihood & high severity then there is a need to make a robust contingency plan.
 The fourth step in the contingency plan is that you have to create a plan for the larger
risks. In this step, the contingency plan includes an immediate response, who should
inform & who is involved.
 The fifth step for a contingency plan is to get approval. You have to make sure about the
relevant company leaders.
 Another step for a contingency plan is the distribution. Share your plan with the right
people after creating your contingency plan. Try to keep your contingency plan as a
source of truth. This will help everyone to get access if they need it.
  The next step for your contingency plan is that you have to review it to make sure that it
is accurate or not. You have to consider new opportunities & new risks ( Akinradewo, O.,
Ngwenya, L., Aigbavboa, C., Thwala, W. and Mphela, L., 2019) .

Question no: 5

Financial activity analysis

The financial analysis of a business is to identify projects, finance-related transactions, budgets.
This helps in determining the suitability & performance of the project. Moreover, the financial
analysis helps in analyzing the company whether it is solvent, stable, profitable, or liquid.

Following financial activity analysis we will use to know the position of our project:

Projected cash flow

Initial Year 1 (20%) Year 2 (30%) Year 3 (35%) Year 4 (40%) Year 5 (50%)
investment
-4,480,620 896,124 1,344,186 1,568,217 1792248 2240310

Payback period = initial investment / cash inflows

= 672093 / 1792248

= 3.75 years

This means our payback period is good which is 3.75 years. Lower the payback period higher it
is good for the project. Because at this point you get back all your investment.

Internal rate return = (cash flow) / (1 + r)n – initial investment

= 7839085 / (1 + 0.07)^5 – 4480620

= 1118726
References
a) Koo, B., Fischer, M. and Kunz, J., 2007. Formalization of construction sequencing rationale and
classification mechanism to support the rapid generation of sequencing alternatives. Journal of
Computing in Civil Engineering, 21(6), pp.423-433.
b) Tucker, M. and Masuri, M.R.A., 2016. The rationale to integrate facilities management into the
development process. Property management.
c) Hijazi, A.A., Perera, S., Calheiros, R.N. and Alashwal, A., 2021. The rationale for the Integration
of BIM and Blockchain for the Construction Supply Chain Data Delivery: A Systematic Literature
Review and Validation through Focus Group. Journal of Construction Engineering and
Management, 147(10), p.03121005.
d) Aminbakhsh, S., Gunduz, M. and Sonmez, R., 2013. Safety risk assessment using analytic
hierarchy process (AHP) during planning and budgeting of construction projects. Journal of safety
research, 46, pp.99-105.
e) Hosseininasab, S.M., Shetab-Boushehri, S.N., Hejazi, S.R. and Karimi, H., 2018. A multi-
objective integrated model for selecting, scheduling, and budgeting road construction
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g) Akinradewo, O., Aigbavboa, C., Oke, A. and Coffie, H., 2019, November. Appraisal of risk
contingency planning for construction projects. In IOP Conference Series: Materials Science and
Engineering (Vol. 640, No. 1, p. 012019). IOP Publishing.
h) Kaplinski, O., 2010. Risk analysis of construction projects: From risk identification to contingency
timetable. Advances and Trends in Structural Engineering, Mechanics and Computation, 268.
i) Akinradewo, O., Ngwenya, L., Aigbavboa, C., Thwala, W. and Mphela, L., 2019, November.
Improving the efficacy of cost contingency plans for construction projects in South Africa. In IOP
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j) AREAS, B., 2018. Financial analysis. growth, 30, p.10.
k) Friedlob, G.T. and Schleifer, L.L., 2003. Essentials of financial analysis (Vol. 23). John Wiley &
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