ASSIGNMENT QUESTIONS

WRITE ELABORATELY ON THE FOLLOWING TOPICS -

1. IMPACT OF TAXATION ON THE WHOLE LIFE COST OF A BUILDING.

2. DIFFERENTIATE BETWEEN CASH-FLOW AND DISCOUNTED CASH-FLOW

TECHNIQUE IN WHOLE LIFE COSTING.

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 QUESTION 1.

1.0 IMPACT OF TAXATION ON THE WHOLE LIFE COST OF A BUILDING

1.1 What is taxation?

Taxation is the imposition of compulsory levies on individuals or entities by governments in

almost every country of the world. Taxation is used primarily to raise revenue for government

expenditures, though it can serve other purposes as well. The main purpose of taxation is to raise

revenue for the services and income supporting the community needs.

In modern economies, taxes are the most important source of governmental revenue. Taxes differ

from other sources of revenue in that they are compulsory levies and are unrequited i.e., they are

generally not paid in exchange for some specific thing, such as a particular public service, the

sale of public property, or the issuance of public debt. While taxes are presumably collected for

the welfare of taxpayers as a whole, the individual taxpayer’s liability is independent of any

specific benefit received. There are, however, important exceptions: payroll taxes, for example,

are commonly levied on labor income in order to finance retirement benefits, medical payments,

and other social security programs all of which are likely to benefit the taxpayer. Because of the

likely link between taxes paid and benefits received, payroll taxes are sometimes called

“contributions” (as in the United States). Nevertheless, the payments are commonly compulsory,

and the link to benefit from it is sometimes quite weak. Another example of a tax that is linked to

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benefits received, if only loosely, is the use of taxes on motor fuels to finance the construction

and maintenance of roads and highways, whose services can be enjoyed only

by consuming taxed motor fuels.

1.2 PURPOSES OF TAXATION

In the 19th century the prevalent idea was that taxes should serve mainly to finance

the government. In earlier times, and again today, governments have utilized taxation for other

than merely fiscal purposes.

One useful way to view the purpose of taxation, attributable to American economist Richard A.

Musgrave, is to distinguish between objectives of resource allocation, income redistribution, and

economic stability. (Economic growth or development and international competitiveness are

sometimes listed as separate goals, but they can generally be sub-sumed under the other three

aforementioned).

In the absence of a strong reason for interference, such as the need to reduce pollution, the first

objective, resource allocation, is furthered if tax policy does not interfere with market-

determined allocations. The second objective, income redistribution, is meant to

lessen inequalities in the distribution of income and wealth. The third objective, stabilization

implemented through tax policy, government expenditure policy, monetary policy, and debt

management is that of maintaining high employment and price stability.

There are likely to be conflicts among these three objectives. For example, resource allocation

might require changes in the level or composition (or both) of taxes, but those changes might

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bear heavily on low-income families thus upsetting redistributive goals. As another example,

taxes that are highly redistributive may conflict with the efficient allocation of resources required

to achieve the goal of economic neutrality.

1.3 PRINCIPLE OF TAXATION

The 18th-century economist and philosopher Adam Smith attempted to systematize the rules that

should govern a rational system of taxation. In The Wealth of Nations (Book V, chapter 2) he set

down four general canons:

I. The subjects of every state ought to contribute towards the support of the government, as

nearly as possible, in proportion to their respective abilities; that is, in proportion to

the revenue which they respectively enjoy under the protection of the state.

II. The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time

of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the

contributor, and to every other person.

III. Every tax ought to be levied at the time, or in the manner, in which it is most likely to be

convenient for the contributor to pay it.

IV. Every tax ought to be so contrived as both to take out and keep out of the pockets of the

people as little as possible over and above what it brings into the public treasury of the state. The

fourth of Smith’s canons can be interpreted to underline the emphasis many economists place on

a tax system that does not interfere with market decision making, as well as the more obvious

need to avoid complexity and corruption.

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Although they need to be reinterpreted from time to time, these principles retain remarkable

relevance. From the first can be derived some leading views about what is fair in the distribution

of tax burdens among taxpayers. These are:

(1) The belief that taxes should be based on the individual’s ability to pay, known as the ability-

to-pay principle

(2) The benefit principle, the idea that there should be some equivalence between what the

individual pays and the benefits he subsequently receives from governmental activities. The

fourth of Smith’s canons can be interpreted to underlie the emphasis many economists place on a

tax system that does not interfere with market decision making, as well as the more obvious need

to avoid complexity and corruption.

1.4 DISTRIBUTION OF TAX BURDENS

Various principles, political pressures, and goals can direct a government’s tax policy. What

follows is a discussion of some of the leading principles that can shape decisions about taxation.

1.4.1 Horizontal equity

The principle of horizontal equity assumes that persons in the same or similar positions (so far as

tax purposes are concerned) will be subject to the same tax liability. In practice this equality

principle is often disregarded, both intentionally and unintentionally. Intentional violations are

usually motivated more by politics than by sound economic policy (e.g., the tax advantages

granted to home owners, farmers, or members of the middle class in general; the exclusion of

interest on government securities). Debate over tax reform has often centered on whether

deviations from “equal treatment of equals” are justified.

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1.4.2 The ability-to-pay principle

The ability-to-pay principle requires that the total tax burden will be distributed among

individuals according to their capacity to bear it, taking into account all of the relevant personal

characteristics. The most suitable taxes from this standpoint are personal levies (income, net

worth, consumption, and inheritance taxes). Historically there was common agreement that

income is the best indicator of ability to pay. There have, however, been important dissenters

from this view, including the 17th-century English philosophers John Locke and Thomas

Hobbes and a number of present-day tax specialists. The early dissenters believed that equity

should be measured by what is spent (i.e., consumption) rather than by what is earned (i.e.,

income); modern advocates of consumption-based taxation emphasize the neutrality of

consumption-based taxes toward saving (income taxes discriminate against saving), the

simplicity of consumption-based taxes, and the superiority of consumption as a measure of an

individual’s ability to pay over a lifetime. Some theorists believe that wealth provides a good

measure of ability to pay because assets imply some degree of satisfaction (power) and tax

capacity, even if (as in the case of an art collection) they generate no tangible income.

The ability-to-pay principle also is commonly interpreted as requiring that direct personal taxes

having a progressive rate structure, although there is no way of demonstrating that any particular

degree of progressivity is the right one. Because a considerable part of the population does not

pay certain direct taxes—such as income or inheritance taxes—some tax theorists believe that a

satisfactory redistribution can only be achieved when such taxes are supplemented by direct

income transfers or negative income taxes (or refundable credits). Others argue that income

transfers and negative income tax create negative incentives; instead, they favor public

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expenditures (for example, on health or education) targeted toward low-income families as a

better means of reaching distributional objectives.

Indirect taxes such as VAT, excise duties, sales, or turnover taxes can be adapted to the ability-

to-pay criterion, but only to a limited extent, for example, by exempting necessities such as food

or by differentiating tax rates according to “urgency of need.” Such policies are generally not

very effective; moreover, they distort consumer purchasing patterns, and their complexity often

makes them difficult to institute.

Throughout much of the 20th century, prevailing opinion held that the distribution of the tax

burden among individuals should reduce the income disparities that naturally result from the

market economy; this view was the complete contrary of the 19th-century liberal view that the

distribution of income ought to be left alone. By the end of the 20th century, however, many

governments recognized that attempts to use tax policy to reduce inequity can create costly

distortions, prompting a partial return to the view that taxes should not be used for redistributive

purposes.

1.5 CLASSES OF TAXES

1.5.1 Direct and indirect taxes

In the literature of public finance, taxes have been classified in various ways according to who

pays for them, who bears the ultimate burden of them, the extent to which the burden can be

shifted, and various other criteria. Taxes are most commonly classified as either direct or

indirect, an example of the former type being the income tax and of the latter the sales tax. There

is much disagreement among economists as to the criteria for distinguishing between direct and

indirect taxes, and it is unclear into which category certain taxes, such as corporate income

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tax or property tax, should fall. It is usually said that a direct tax is one that cannot be shifted by

the taxpayer to someone else, whereas an indirect tax can be.

1.5.1.1 Direct taxes

Direct taxes are primarily taxes on natural persons (e.g., individuals), and they are typically

based on the taxpayer’s ability to pay as measured by income, consumption, or net wealth. What

follows is a description of the main types of direct taxes.

Individual income taxes are commonly levied on total personal net income of the taxpayer

(which may be an individual, a couple, or a family) in excess of some stipulated minimum. They

are also commonly adjusted to take into account the circumstances influencing the ability to pay,

such as family status, number and age of children, and financial burdens resulting from illness.

The taxes are often levied at graduated rates, meaning that the rates rise as income rises. Personal

exemptions for the taxpayer and family can create a range of income that is subject to a tax rate

of zero.

Taxes on net worth are levied on the total net worth of a person—that is, the value of his assets

minus his liabilities. As with the income tax, the personal circumstances of the taxpayer can be

taken into consideration.

Personal or direct taxes on consumption (also known as expenditure taxes or spending taxes) are

essentially levied on all income that is not channeled into savings. In contrast to indirect taxes on

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spending, such as the sales tax, a direct consumption tax can be adjusted to an individual’s ability

to pay by allowing for marital status, age, number of dependents, and so on. Although long

attractive to theorists, this form of tax has been used in only two countries, India and Sri Lanka;

both instances were brief and unsuccessful. Near the end of the 20th century, the “flat tax”—

which achieves economic effects similar to those of the direct consumption tax by exempting

most income from capital—came to be viewed favorably by tax experts. No country has adopted

a tax with the base of the flat tax, although many have income taxes with only one rate.

Taxes at death take two forms: the inheritance tax, where the taxable object is

the bequest received by the person inheriting, and the estate tax, where the object is the total

estate left by the deceased. Inheritance taxes sometimes take into account the personal

circumstances of the taxpayer, such as the taxpayer’s relationship to the donor and his net worth

before receiving the bequest. Estate taxes, however, are generally graduated according to the size

of the estate, and in some countries they provide tax-exempt transfers to the spouse and make an

allowance for the number of heirs involved. In order to prevent the death duties from

being circumvented through an exchange of property prior to death, tax systems may include a

tax on gifts above a certain threshold made between living persons. Taxes on transfers do not

ordinarily yield much revenue, if only because large tax payments can be easily avoided through

estate planning.

1.5.1.2 Indirect taxes

Indirect taxes are levied on the production or consumption of goods and services or on

transactions, including imports and exports. Examples include general and selective sales

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taxes, value-added taxes (VAT), taxes on any aspect of manufacturing or production, taxes on

legal transactions, and customs or import duties.

General sales taxes are levies that are applied to a substantial portion of consumer expenditures.

The same tax rate can be applied to all taxed items, or different items (such as food or clothing)

can be subject to different rates. Single-stage taxes can be collected at the retail level, as the U.S.

states do, or they can be collected at a pre-retail (i.e., manufacturing or wholesale) level, as

occurs in some developing countries. Multistage taxes are applied at each stage in the

production-distribution process. The VAT, which increased in popularity during the second half

of the 20th century, is commonly collected by allowing the taxpayer to deduct a credit for tax

paid on purchases from liability on sales. The VAT has largely replaced the turnover tax—a tax

on each stage of the production and distribution chain, with no relief for tax paid at previous

stages. The cumulative effect of the turnover tax, commonly known as tax cascading, distorts

economic decisions.

Although they are generally applied to a wide range of products, sales taxes sometimes exempt

necessities to reduce the tax burden of low-income households. By comparison, excises are

levied only on particular commodities or services. While some countries impose excises and

customs duties on almost everything—from necessities such as bread, meat, and salt, to

nonessentials such as cigarettes, wine, liquor, coffee, and tea, to luxuries such as jewels and furs

—taxes on a limited group of products—alcoholic beverages, tobacco products, and motor fuel

—yield the bulk of excise revenues for most countries. In earlier centuries, taxes on consumer

durables were applied to luxury commodities such as pianos, saddle horses, carriages, and

billiard tables. Today a main luxury tax object is the automobile, largely because registration

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requirements facilitate administration of the tax. Some countries tax gambling, and state-run

lotteries have effects similar to excises, with the government’s “take” being, in effect, a tax on

gambling. Some countries impose taxes on raw materials, intermediate goods (e.g., mineral oil,

alcohol), and machinery.

Some excises and customs duties are specific i.e., they are levied on the basis of number, weight,

length, volume, or other specific characteristics of the good or service being taxed. Other excises,

like sales taxes, are ad valorem—levied on the value of the goods as measured by the price.

Taxes on legal transactions are levied on the issue of shares, on the sale (or transfer) of houses

and land, and on stock exchange transactions. For administrative reasons, they frequently take

the form of stamp duties; that is, the legal or commercial document is stamped to

denote payment of the tax. Many tax analysts regard stamp taxes as nuisance taxes; they are most

often found in less-developed countries and frequently bog down the transactions to which they

are applied.

Having discussed what taxation is all about, it will be good to discuss what is meant by whole

life costing of a building before talking about the impact of taxation on it for better background.

1.6 WHOLE LIFE COSTING OF A BUILDING

Whole-life costs consider all costs associated with the life of a building, from inception

to constructions. it can also be defined as all significant and relevant initial and

future costs and benefits of a building facility or an asset, throughout its life cycle, while

fulfilling the performance requirements. It is also a methodology for the systematic

economic evaluation used to establish the total cost of ownership, or the whole life

costing of option appraisals. It is a structured approach addressing all costs in connection with

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 a building or facility (including construction, maintenance, renewals, operation, occupancy,

environmental and end of life). It can be used to produce expenditure profiles of

a building or facility over its anticipated life span or defined period of analysis.’

Whole-life costs for a building include:

 Procurement costs (including land acquisition, design, construction, equipment, etc.).

 Maintenance and refurbishment costs.

 Operational costs (including running costs and one-off costs associated with the project such

as change management).

 Disposal costs.

Whole-life costs are considered a better way of assessing value for money than construction

costs, which can result in lower short-term costs but higher ongoing costs through the life of

the building. This can also apply to things such as design fees, where saving money on fees at the

beginning of a project can be outweighed by very much higher

ongoing costs through construction and occupation.

An attempt to demonstrate this by making a rough assessment of the typical costs of an office

building over 30 years, generated the ratio:

 0.1 to 0.15 for design (ref. OGC Achieving Excellence Guide 7 - Whole-Life costing).

 1 for construction costs.

 5 for maintenance and building operating costs during the lifetime of the building.

 200 for the cost of operating the business during the lifetime of the building.

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However, this has been criticized as misleading, not least because the construction

industry accounts for around 7% of GDP, implying a much more significant proportion

of business costs than the ratio suggests.

Other ratios of construction costs to operational costs to business costs have suggested figures as

low as 1:0.6:6 for some types of buildings. However, the usefulness of these ratios is

questionable, other than if they are calculated based on actual figures for specific businesses.

Whole-life costing is a process of providing information about the likely life of a project to

enable decisions to be made about value for money in the planning stages.

Information about whole-life costs will be prepared by different people at different stages of

the project. In the early stages they may be produced in-house or by independent client advisers.

The cost consultant may contribute information about building costs (construction and operation)

during the design and construction phases. The client may contribute information about

the impact of proposals on their business operation. This means that whole-life

costing involves collaborative working to assess the full implications of options.

On public projects, where an integrated project team may

be appointed to design, build, operate and maintain a development, an assessment of whole-

life costs will be a fundamental part of the contractors responsibility and tenders will be

evaluated on the basis of whole-life costs.

Whole-life costing can benefit from comparison with other similar projects,

however consideration needs to be given to likely future cost trends.

If whole-life costing is required, then this should be made clear in appointment documents.

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In as much as whole-life costing (WLC) is a field of continuous growing interest in the real

property sector, there is no legislative framework that imposes WLC calculations in the

evaluation of real estate projects. Hence, although the importance of WLC has long been

recognized and substantial amounts of research into the field can be found in the literature, its

application has not been implemented into standard practice. The lack of historical data and

databases on building operation and maintenance and the complexity of calculating the factors

involved in WLC have been determined as reasons for this (Kehily and Hore, 2012). An obvious

need therefore exists in the real property market for the development of a consistent and easy to

implement WLC methodology/tool not only for initial investment appraisal purposes but also for

effective property management through its entire life-cycle.

Building production process complexity affects project management triangular parameters of

cost, time and quality (Baccarini, 1996). Despite this complexity, real property is one of the

largest markets worldwide contributing to about 10 percent of gross national product (GNP) in

industrialized countries, involving a vast spectrum of stake-holders and playing a significant role

in the development and achievement of society’s goals (Allmon et al., 2000). Moreover, real

property construction today is increasingly sophisticated with clients demanding “best value for

money” rather than lowest cost. Nonetheless, the cost performance of building projects has often

been criticized and this has been a major concern for the industry at large (Baloi and Price,

2003). As De Ridder and Vrijhoef (2004) explained, the predictability of the costs of buildings

has proven to be difficult, particularly over the project whole-life cycle. The special

characteristics of construction, such as fragmented demand and supply chains, the uniqueness

and complexity of projects are basic causes, often leading to cost/time overruns, delivery of less

value than agreed, and dissatisfied clients and users. In addition, it is difficult to assess

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uncertainty and risk beforehand. Besides, fixed prices and predefined contractual specifications

make it difficult to respond to changing demands and circumstances. Kishk et al. (2003) argued

that the traditional approach to costing building projects has been to focus primarily on initial

capital costs and since the capital costs of construction is almost always separated from the

running costs, it is normal practice in the building industry to accept the lowest initial cost and

then hand-over the building to be maintained by others. Tietz (1987) believes that the initial

building costs can be wholly misleading because capital savings can result in major life-time

expenses caused by extra maintenance work or earlier obsolescence. Furthermore, with

occupancy costs representing up to 70 percent of the total cost of a building over its entire life-

cycle (Flanagan and Norman, 1987), this pre-occupation with capital expenditure has led to

designs which do not meet clients’ desire to set the right budget and to reduce their life-cycle

costs, and it is important to understand the benefits of life-cycle costing (LCC) (Kirk and

Dell’Isola, 1995). In addition, energy prices have also risen and are subject to wide price

fluctuations and, as a result, clients are more aware that running costs should be examined very

closely from a sustainable development perspective. These rising concerns over the long-term

environmental impact of a building have forced designers to adopt a more holistic attitude and

to look more closely at the costs incurred over the project life-cycle, from conception to

demolition (Al-Hajj and Horner, 1998). It is not only original designs that matter for building

productivity, but the nature of the materials used, and the manner in which buildings are

monitored, maintained, and re-evaluated over the whole-life cycle. Good design and

construction does not, therefore, end at the erection of the building – it involves the provision

of building services over the product life-time (nCRISP, 2003).

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1.7 BENEFITS FROM THE USE OF WLC OBJECTIVES AS IDENTIFIED BY THE

ROYAL INSTITUTE OF CHARTERED SURVEYORS (RICS, 1986) ARE TO:

1. Enable investment options to be more effectively evaluated and facilitate choice between

alternative scenarios

2. Consider the impact of all costs rather than only initial capital costs.

3. Assist in the effective management of completed buildings and projects.

1.8 USE OF WLC PARTICULARLY ASSISTS IN CLIFT (2003):

1. Determining whether a higher initial cost is justified by reductions in future costs (for

new build or when considering alternatives to “like for like” replacement).

2. Identifying whether a proposed change is cost-effective against the “do nothing” (or

status quo) alternative, which has no initial investment cost but higher future costs.

1.9 THE BENEFITS FOR CLIENTS, AS IDENTIFIED IN THE CLIENT’S GUIDE

TO WHOLE LIFE COSTING (CONSTRUCTION CLIENTS’ FORUM, 2000),

INCLUDE.

1. Encouraging analysis of business needs and communication of these to the project team.

2. Optimizing the total cost of ownership/occupation by balancing initial capital and

running costs.

3. Ensuring risk and cost analysis of loss of functional performance due to failure or

inadequate maintenance occurs.

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 4. Promoting realistic budgeting for operation, maintenance and repair.

5. Encouraging discussion and recording of decisions about the durability of materials and

components at the outset of the project.

6. Providing data on actual performance and operation compared with predicted

performance for use in the future planning and benchmarking.

2.0 ILLUSTRATION OF A WLC

2.1 STEPS IN WLC INCLUDES;

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 a) Project life-time (the analysis period)

b) The discount rate (to address “time value of money”)

c) Inflation and taxation;

d) Construction cost;

e) Operating cost;

f) Repair and maintenance cost;

g) Occupancy cost;

h) End of life/disposal cost;

i) Non-construction costs;

j) Incomes

k) Externalities (social/environmental costs/benefits);

l) Uncertainty (risk assessment/sensitivity analysis)

2.2 MATHEMATICAL EXPRESSION OF WLC

There is a variety of numerical approaches to the evaluation of WLCC, but the

underlying theory is similar in most cases. In the most simplistic format, WLCC is given

by the following formula:

WLCC = CC + OC + RC ---------------------------------------- (3.1)

Where CC = Capital Cost

OC = Operational Cost

RC = Residual Cost

2.3 TAXATION TYPE AND CHARGES ON A PROPERTY

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The tax regime within which the real property owner is operating may determine which future

costs are allowable for tax (tax deductibles) – in the UK for example, capital allowances are

currently available on new industrial buildings, hotels, industrial and commercial buildings in

enterprise zones, agricultural buildings and on small workshops. Many items of plant,

equipment, leased plant and, sometimes, associated builders’ work are eligible for allowances.

These allowances also vary depending on the financial situation of the property owner – whether

or not there is a taxable profit against which allowances can be claimed (BRE, 2004). There are

two aspects in considering taxes in WLC calculations. The first deals with the probability that

environmentally inefficient structures will attract future environmental taxes, and hence, WLC is

an essential activity insuring elimination of this kind of risks. This can be addressed in the same

way as any other risks. For each risk, the probability of occurrence and the likely impact can be

established and a risk allowance is made. The second deals with general allowances for

unspecified taxes in the calculations. There are several areas where costs might increase at a rate

higher than inflation for a variety of reasons. Although capital costs for plant and equipment are

usually a budgeted one-off attracting various tax allowances, the ongoing reliability, efficiency

and maintainability will affect the bottom line for the life of equipment (Davis Langdon

Management Consulting, 2007). Ashworth (2015) believes that inclusion of taxes in WLC

calculations is important in the assessment of projects for the private sector; this tends to favor

alternatives with lower initial cost because taxation relief is generally available only against

repairs and maintenance. The taxation environment is traditionally presented by tax rates and

fees for indirect,

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Direct and property taxes. According to the current Greek legislation, these tax bases are

summarized as follows.

2.3 INDIRECT TAXES

The most popular tax category in real property is indirect taxation. The following tax rates and

fees are levied.

2.4 TAXES AND FEES ON LAND PURCHASE.

Property transfer tax levies in the contract value; the tax rate is 8 percent on property with a

value up to e20,000.00 and the percentage increases to 10 percent for property values greater

than e20,000.00; Commercial property whole life costing 63 .

City tax 3 percent levies on the total payment on property transfer tax when the property is

transferred.

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Fee 0.65 percent for legal fund on contract authorship.

Fee 0.45-0.75 percent for legal fund on contract registry.

Additional fee 0.45-0.75 percent on contract registry

Notary fee 1 percent on purchase value.

2.5 TAXES ON PROPERTY CONSTRUCTION.

Value added tax (VAT) 23 percent on construction materials.

VAT 23 percent on net value of contracting work.

Social security contribution or social security charges (SSC): employer’s social security

contribution 65 percent on wages calculated on net value of contracting work.

2.6 TAXES ON PROPERTY MAINTENANCE COST.

VAT 23 percent on maintenance materials.

VAT 23 percent on net value of work required for property maintenance.

SSC: employer’s social security contribution 19.95 percent on wages calculated on net value of

maintenance work.

2.7 TAXES ON PROPERTY OPERATING COST.

VAT 23 percent on net value of work required for property operation.

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SSC: employer’s social security contribution 28.56 percent on wages calculated on net value of

operating work.

2.8 TAXES ON PROPERTY COMPLETION COST.

SSC: employer’s social security contribution 28.56 percent on wages calculated on net value of

labor rates.

2.9 TAXES ON PROPERTY END OF LIFE COST.

VAT 23 percent on net value of work required for property end of life.

3.0 DIRECT TAXES ON INCOME.

26 percent corporate tax on income; plus tax on dividends 9 percent; total average tax rate on

income 33 percent

Additional tax on rental income 3 percent.

3.1 PROPERTY TAXES.

a. Annual property taxation: the tax rate ranges from 0.25 to 0.35 percent and is imposed on

the objective value of the property.

b. Special end properties: a special estate fee of e3.00-e16.00 per square meter with an

average property tax of e4.00 per square meter; JPIF 32,1 64 .

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 c. Municipal lighting and cleaning fees in accordance with the decisions of the municipal

council of the city-owned property.

d. Fees for drainage properties according to the decisions of the municipal council of the

city-owned property.

e. Primary end occupation of sidewalks according to the decisions of the municipal council

of the city-owned property.

f. Nowadays in Greece, a debate exists whether to increase property tax ratio from 1 to 2

percent or more.

Tax theory holds that tax raises price, and this assertion is made mainly from the perspective of

consumer goods. Since house property is a commodity, the tax levied in the transaction process

will cause its price to rise. Whether the seller or the buyer pays the transaction tax, the latter must

bear at least part of it. Current real estate transaction taxes include personal income tax, business

tax, land value-added tax, deed tax, stamp duty, urban maintenance and construction tax,

education surcharge, etc. All these taxes, to a certain extent, will be included into housing price.

Most of our economic intuition about taxation comes from transaction tax, because there are few

taxes during the stage of keeping real estate. Taxes on ordinary commodities in the process of

keeping them can increase the storage cost and price of them.

3.2 PROPERTY TAXES ARE DIVIDED INTO TWO BROAD GROUPS:

Recurrent taxes and other taxes (non-recurrent property taxes).

Recurrent taxes on the property are typically paid annually, at sub-national level and linked to

some measure of the value of the property. However, other taxes, such as taxes on financial and

capital transactions, are paid when the ownership of the property changes hands from the

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lifecycle of a property, there are different taxing options depending on the economic transaction

involved: buying, holding, renting, selling or bequeathing

The taxation aspects of construction can have a fundamental effect on the true costs of the

construction and operation of facilities.

Effective tax planning can turn an apparently non-viable project into a viable one, or change the

ranking order of a number of project proposals or design choices. Even in the absence of such

dramatic effects, effective taxation cost planning offers significant benefits for clients of the

construction industry. This is so because the greater the proportion of the cost eligible for tax

relief, the lower the net (after tax) cost will be. The cost of construction also constitutes the

whole life cost of a project. Construction materials, labor supply, cost and investment are

significantly affected due to tax reforms. Thus, the impact of tax reforms on these aspects of the

construction projects are discussed in the following sections.

3.3 IMPACT OF TAXATION ON CONSTRUCTION MATERIAL

There is a significant impact of tax on material supply. Accordingly, the impact of a tax

contrition material depends on the ability to transfer that tax to another party. Current tax

practice does not trace entire supply chain members, some small-scale local suppliers, who are

not registered for tax generally incorporate the tax to the price and this makes it impossible to

claim those taxes.

From the perspective of the client, the impact of a tax reduction or an exemption is on the

temporary cash flow if tax rates excessively increase, complicated situations like price

rescheduling and cash forecast issues have to be encountered. On the contrary, when tax is

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reduced, the material costs also reduce accordingly, and because of this favorable nature, the

selection pool and the verity of the suppliers would increase as well.

From the contractor perspective, if pre ordered large quantities of materials are available, the

expected price reduction of tax reforms would not occur. The impact of tax change on materials

is determined by price escalations.

From the end of the suppliers, the effect of tax would result in increased construction material

price when importing. Taxes such as custom duty, CESS, and PAL as the main taxes that affect

imports. Suppliers would be reluctant to import goods under an unstable and high tax regime if

the price of a material is increased by a substantial amount, the demand for it would be lower,

whereby the suppliers would be forced to supply the goods to the customers at an increased

price. It is apparent that the tax reforms have a significant impact on construction material

supply.

3.4 IMPACT OF TAXATION ON LABOUR ASPECT IN CONSTRUCTION

The impact of tax on labor supply is not significant and it is of a rather indirect nature.

Furthermore, the respondents identified that VAT, PAYE, and income tax have an indirect effect

on labor supply. Withholding tax has a direct impact on labor supply among clients, increment of

withholding tax would persuade the suppliers to withdraw since percentage deduction from the

cash flow would be high laborers will demand a higher remuneration with tax rate increase.

Therefore, the contractors will have to increase the wage, which would ultimately affect the

construction cost.

3.5 IMPACT OF TAXATION ON CONSTRUCTION COST

The construction cost has the most significant effect of tax changes. The impact on construction

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cost depends on the ability for that tax to be transferred. If a tax cannot be transferred it has to be

absorbed to the cost, which results in the cost component of that particular supply chain member

to be increased. The impact of tax changes on construction cost depends on the incorporation of

changes in legislation clause and the extent that tax reform is represented by price escalations.

The construction cost depends on how the end-user of supply chain is affected by tax reforms.

Suppliers are of the view that the manufacturers generally transfer the impact of most of the tax

reforms to the suppliers, which leads the suppliers to transfer the impact to other supply chain

members. Withholding tax is a tax, which has to be set off by income tax and if the

subcontractors are not paying taxes, there is no possible way for that subcontractor to recover

that tax. Therefore, there are instances, where the contractor has to absorb the withholding tax

component. Suppliers agreed that the construction cost is likely to escalate with the tax rate. In a

measure and pay contract, the client has to bear up the construction price increments resulting

from tax reforms. In such situations the client will be forced to change a part of the project by

bringing up value engineering proposals or has to downsize the labor force.

CONCLUSION

As it has been expressed above, it is obvious that taxation has a significant impact on the whole

life costing of a project both directly and indirectly. The impact on construction material is so

significant that if tax rates excessively increase, complicated situations like price rescheduling

and cash forecast issues have to be encountered. On the contrary, when tax is reduced, the

material costs also reduce accordingly, and because of this favorable nature, the selection pool

and the verity of the suppliers would increase as well. Also, we can see its impact on labor

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indirectly. But withholding tax has a direct impact on labor supply among clients, increment of

withholding tax would persuade the suppliers to withdraw since percentage deduction from the

cash flow would be high laborers will demand a higher remuneration with tax rate increase.

Therefore, the contractors will have to increase the wage, which would ultimately affect the

construction cost.

Hence, with increase in tax, there will be a resultant increase in construction cost.

QUESTION 2

3.6 DIFFERENTIATE BETWEEN CASH-FLOW AND DISCOUNTED CASH-FLOW

TECHNIQUE IN WHOLE LIFE COSTING.

It is expedient to understand the subject matter “discounted cash flow and cash flow”

before launching into what the difference may be.

3.7 CASH-FLOW TECHNIQUE

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3.8 WHAT IS CASH FLOW?

The term cash flow refers to the net amount of cash and cash equivalents being transferred in and

out of a company. Cash received represents inflows, while money spent represents outflows. A

company’s ability to create value for shareholders is fundamentally determined by its ability to

generate positive cash flows or, more specifically, to maximize long-term free cash flow (FCF).

FCF is the cash generated by a company from its normal business operations after subtracting

any money spent on capital expenditures. Cash flow is the amount of cash that comes in and goes

out of a company. Businesses take in money from sales as revenues and spend money on

expenses. They may also receive income from interest, investments, royalties, and licensing

agreements and sell products on credit, expecting to actually receive the cash owed at a late date.

In terms of whole life costing of a project which includes the cost of construction, cash-flow

refers to the inputted in a project and the resultant value it gets in the future.

Assessing the amounts, timing, and uncertainty of cash flows, along with where they originate

and where they go, is one of the most important objectives of financial reporting. It is essential

for assessing a company’s liquidity, flexibility, and overall financial performance. Positive cash

flow indicates that a company's liquid assets are increasing, enabling it to cover obligations,

reinvest in its business, return money to shareholders, pay expenses, and provide a buffer against

future financial challenges. Companies with strong financial flexibility can take advantage of

profitable investments. They also fare better in downturns, by avoiding the costs of financial

distress.

3.9 CASH-FLOW ANALYSIS

Cash flows can be analyzed using the cash flow statement, a standard financial statement that

reports on a company's sources and usage of cash over a specified time period. Corporate

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management, analysts, and investors are able to use it to determine how well a company can earn

cash to pay its debts and manage its operating expenses. The cash flow statement is one of the

most important financial statements issued by a company, along with the balance sheet and

income statement

4.0CASHFLOW IN CONSTRUCTION

4.1 Client cash flow:

Until the main contractor has been appointed, client cash flow projections are likely to be based

only on agreed fee payment schedules for consultants and a simple division of the construction

cost over the likely construction period (or perhaps an allocation of construction cost over an s-

curve distribution). It is only when the main contractor is appointed, a master programme

prepared and some form of payment schedule agreed that cash flow projections become reliable.

Cash flow projections may be affected by the need for the early purchase of long-lead time items

or by items that the client may wish to purchase that are outside of the main contract (such as

furniture or equipment).

4.1.1 Supply chain cash flow

Cash flow is also an issue for the construction supply chain, and is a common reason for

contractors and sub-contractors becoming insolvent. This can be catastrophic for a project in

terms of time and money. It is in the client's interest therefore to ensure that the supply chain is

paid promptly. A number of measures can be adopted to improve payment and so cash flow in

the supply chain, including:

 Fair payment practices.

 Construction supply chain payment charter.

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  Project bank accounts

4.2 TYPES OF CASH FLOW

4.2.1 Cash Flows from Operations (CFO)

Cash flow from operations (CFO), or operating cash flow, describes money flows involved

directly with the production and sale of goods from ordinary operations. CFO indicates whether

or not a company has enough funds coming in to pay its bills or operating expenses. In other

words, there must be more operating cash inflows than cash outflows for a company to be

financially viable in the long term. Operating cash flow is calculated by taking cash received

from sales and subtracting operating expenses that were paid in cash for the period. Operating

cash flow is recorded on a company's cash flow statement, which is reported both on a quarterly

and annual basis. Operating cash flow indicates whether a company can generate enough cash

flow to maintain and expand operations, but it can also indicate when a company may need

external financing for capital expansion. CFO is useful in segregating sales from cash received.

If, for example, a company generated a large sale from a client, it would boost revenue and

earnings. However, the additional revenue doesn't necessarily improve cash flow if there is

difficulty collecting the payment from the customer.

4.2.2 Cash Flows From Investing (CFI)

Cash flow from investing (CFI) or investing cash flow reports how much cash has been

generated or spent from various investment-related activities in a specific period. Investing

activities include purchases of speculative assets, investments in securities, or the sale of

securities or assets. Negative cash flow from investing activities might be due to significant

30
amounts of cash being invested in the long-term health of the company, such as research and

development (R&D), and is not always a warning sign.

4.2.3 Cash Flows From Financing (CFF)

Cash flows from financing (CFF), or financing cash flow, shows the net flows of cash that are

used to fund the company and its capital. Financing activities include transactions involving

issuing debt, equity, and paying dividends. Cash flow from financing activities provide investors

with insight into a company’s financial strength and how well a company's capital structure is

managed.

4.3 CASH FLOW VS. PROFIT

Cash flow isn't the same as profit. It isn't uncommon to have these two terms confused because

they seem very similar. Cash flow is the money that goes in and out of a business. Profit, on the

other hand, is specifically used to measure a company's financial success or how much money it

makes overall. This is the amount of money that is left after a company pays off all its

obligations. Profit is whatever is left after subtracting a company's expenses from its revenues

4.4 DISCOUNTED CASH FLOW (DCF)

Discounted cash flow (DCF) refers to a valuation method that estimates the value of an

investment or a project using its expected future cash flows. DCF analysis attempts to determine

the value of an investment today, based on projections of how much money that investment will

31
generate in the future. It can help those considering whether to acquire a company or buy

securities make their decisions. Discounted cash flow analysis can also assist business owners

and managers in making capital budgeting or operating expenditures decisions.

4.5 HOW DOES DISCOUNTED CASH FLOW (DCF) WORK

The purpose of DCF analysis is to estimate the money an investor would receive from an

investment, adjusted for the time value of money. Discounted cash flow analysis finds the

present value of expected future cash flows using a discount rate. Investors can use the concept

of the present value of money to determine whether the future cash flows of an investment or

project are greater than the value of the initial investment or project. If the DCF value calculated

is higher than the current cost of the investment or project, it shows gain/profit on the other end

if the calculated value is lower than the cost, the project or investment tends to lose in the long

run.

4.6 DCF ANALYSIS IN WHOLE LIFE COSTING OF A PROJECT

To conduct a DCF analysis, a client or client representative must make estimates about future

cash flows and the ending value of the project and its constituents. The client must also

determine an appropriate discount rate for the DCF model, which will vary depending on the

project or investment under consideration. Factors such as the client`s risk profile and the

conditions of the capital markets can affect the discount rate chosen. If the client cannot estimate

future cash flows, or the project is very complex, DCF will not have much value and alternative

models should be employed. For DCF analysis to be of value, estimates used in the calculation

must be as solid as possible. Badly estimated future cash flows that are too high can result in an

investment that might not pay off enough in the future. Likewise, if future cash flows are too low

due to rough estimates, they can make a project appear too costly.

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4.7 DISCOUNTED CASH FLOW TECHNIQUES

The discounted cash flow methods provide a more objective basis for evaluating and selecting an

investment project. These methods consider the magnitude and timing of cash-flows in each

period of a project’s life. Discounted cash-flow methods enable us to isolate the differences in

the timing of cash-flows of the project by discounting them to know the present value. The

present value can be analyzed to determine the desirability of the project. These techniques

adjust the cash-flows over the life of a project for the time value of money.

4.8 TIME VALUE OF MONEY

Sound decision making demands logical comparability of cash-flows, which differ in timing and

risk. Recognition of time value of money and risk by adjusting cash-flows for their differences in

timing and risk is extremely vital in financial decision making. Most financial decisions, such as

buying assets or borrowing funds involve cash-flows at different periods of time. For example, if

a firm purchases any machinery which will be used to produce a certain type of product; the firm

will have an immediate cash outflow; and a series of cash inflows will be there for many future

periods as the finished products will be sold. Similarly, if an individual borrows money, she will

have an immediate cash inflow and a series of cash outflows as she will commit an obligation to

service the debt for many future periods. These cash-flows which differ in timing are not directly

comparable. And, sound decision making demands logical comparability of cash-flows.

4.9 ADVANTAGES AND DISADVANTAGES OF DISCOUNTED CASH-FLOW

4.9.1 Advantages

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  Discounted cash flow analysis can provide investors and companies with an idea of

whether a proposed investment is worthwhile.

 DCF can be applied to a variety of investments and capital projects where future cash

flows can be reasonably estimated.

 Its projections can be tweaked to provide different results for various “what if” scenarios.

This can help users account for different projections that might be possible.

4.9.2 Disadvantage

The major limitation of discounted cash flow analysis is that it involves estimates, not actual

figures. So the result of DCF is also an estimate. That means that for DCF to be useful, project

clients, individual investors and companies must estimate a discount rate and cash flows

correctly. Furthermore, future cash flows rely on a variety of factors, such as market demand, the

status of the economy, technology, competition, and unforeseen threats or opportunities. These

can't be quantified exactly. Project clients and investors must understand this inherent drawback

for their decision-making.

5.0 How to Calculate DCF

Calculating the DCF involves three basic steps.

1. Forecast the expected cash flows from the investment.

2. Select a discount rate, typically based on the cost of financing the investment or the

opportunity cost presented by alternative investments.

3. Discount the forecasted cash flows back to the present day, using a financial calculator, a

spread-sheet, or a manual calculation.

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5.1 DIFFERENCES BETWEEN CASH FLOW AND DISCOUNTED CASHFLOW

TECHNIQUE IN WHOLE LIFE COSTING

1. Cash- flow technique are not adjusted to incorporate time value of money while discounted

cash flow are adjusted to incorporate the time value of money

2. Discounted cash flow capital budgeting techniques include NPV, IRR, discounted payback

method, Profitability index and so forth. These methods are importantly different from cash-flow

capital budgeting techniques in that they employ time value of money concept in evaluating

different capital projects. While the cash-flow capital methods, such as payback period, break-

even point analysis, etc. do not account for the time value of money concept in assessing the

project's worth to make a decision.

3. Cash flow only deals with money imputed in relation to the resultant value while Discounted

cash flow (DCF) provides a more insightful and realistic intuition given the uncertainty of the

future outcomes. However, one has to be very critical in determining a discount rate that truly

reflects the riskiness of the project.

CONCLUSION

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Cash flow in the whole life costing is the total amount of money invested in a project either of a

residential, commercial or industrial nature in relation to it resultant value in the future.

Discounted cash flow estimate the value of an investment or a project using it expected future

cash flows taking into consideration time value of money. That constitute the major difference

between cash flow and discounted cash flow technique, the former does not take into account

time value of money, but the latter does.

REFERENCE

36
(Ref. Report of the Royal Academy of Engineering on The long term costs of owning and

using buildings (1998).)

Jaggar, D. , Ross, A. , Smith, J. and Love, P. (2002) Building Design Cost Management,

Blackwell Publishing, Oxford.

Kelly, J. , Male, S. and Drummond, G. (2004) Value Management of Construction Projects,

Blackwell Publishing, Oxford.

Ashworth, A. and Perera, S. (2015) Cost Studies of Buildings, 6th edition, Routledge, Oxford.

Chapter 1 Introduction, pp. 121. Chapter 3 The Construction Industry, pp. 3248Bon, R. (1989)

Building as an Economic Process, Prentice Hall, Englewood Cliffs, New Jersey.

Kirkham, R. (2014) Ferry and Brandon Cost Planning of Buildings, 9th Edition, John Wiley and Sons,

London. Chapter 10 Introduction; Chapter 15 Cost Planning the Brief; Chapter 16 Cost Planning at

Scheme Development Stage

Isaac, D. (1996) Property Development: Appraisal and Finance, Palgrave, Basingstoke, UK. Ministry of

Public Buildings and Works (1968) Cost Control during Building Design, HMSO, London

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