Revision on the McTavish

and Company Project

Main Assignment
 Outline of Presentation

This Class for Construction Financial Management will focus on the Main
Assignment dealing with McTavish and Company.
This Assignment counts for 70% of the Overall Module with the balance of 30%
being provided by the Online Learning Element (Discussion Board plus Class
Test).
Please remember that this Assignment is not about writing an academic essay
about the general theme of the Assignment but at answering the specific
questions and deliverables posed in the brief. Please read this in the light of
the points raised in the initial project presentation.
 Assignment Objectives

The key thing to remember when completing this Assignment is that you are
consultants reporting to the directors of the company on a proposed change in
business strategy. So there is no need to waste time and pages stating who the
client
.
is and the background to the company. They are well aware of these
facts!
.
So please focus on the key deliverables outlined in the project brief. Also,
remember that Individuals taking this Assignment only need to complete Task
One, while those in Groups (usually three to five students) should attempt all
Five Tasks.
 Task One: Type of Work
This task should attempt to identify the nature of projects that should be
encouraged, accepted and totally avoided in future. This should examine the
following Tasks:
1. Procurement routes: Negotiated, selective, and open tendering, speculative and
contract work.
2. Client types: Private and public sector.
3. Project types: Schools, housing, factories, etc.
4. Geographical spread: Bathgate/Livingston, Armadale, the Calders, etc.
5. Value range: Should there be an upper limit on contracts bid for or a lower limit?
 Task One: Type of Work

The idea is to identify a hierarchy of project types going from the most
preferred to those which are acceptable, through to those which may be
accepted if nothing better. Those which should be avoided at all costs should
also be listed.

This should be based on the evidence of how particular project categories

have worked out over the period of the company’s existence. This should look
at profitability and also take account of the cash flow patterns of the various
projects. While profitability is the prime driver, cash flow may also be key.
 Task One: Type of Work

This particular task involves cross checking each of the designated categories
individually but then comparing the results to see if any interference. For
example, the two Housing Association projects both turned out to be loss
making. They were also the only two projects bid for by open competition.
Does that tell us to avoid both or either categories in the future?

So was it the client category or the procurement route that caused the
problem? It could also be argued that those two projects were two of the
largest contracts that the company was involved with. So was the size of the
projects the underlying problem rather than the tendering method?
 Task One: Type of Work

It is comparatively easy to pick categories that have always proved profitable

including the likes of fire repairs, and extensions. However that may not add
up to a sufficient body of work to sustain the company.

So you should look to identify a hierarchy of projects that the company should
be prepared to consider in the future in order of preference and also identify
those which it should not consider under any circumstances.

This hierarchy could be based on value of project, location, client,

procurement method, and nature of project.
 Task One: Value of Project

The value of project seems to have proved significant. If the multi-phased

speculative Contract Number 8 is excluded, many of the large value projects
appear to have been problematical and, in some cases, loss making.

The small projects appear to have usually gone without any problems.

The question remains if the company can generate sufficient work if the larger
projects are excluded.

This involves selecting a (loose?) upper limit on projects that they should bid
for.
 Task One: Location and Client Type

The Location issue is if the company does better with projects located near
their base in Bathgate and Livingston as opposed to those located further East
to the Calders or the Western fringe of Edinburgh or to the West in Armadale,
Blackridge or even towards Glasgow.

The Client issue is if the company does better with private sector clients or
Local Authority work. There is also the issue of Housing Association work
which has proved problematical in the past for the Company. It is possible
that those problems may be connected with the size of those projects or the
system of bidding.
 Task One: Procurement Methods
1. Open competitive tender where any qualified contractor can bid for the
project.
2. Selective competitive tender when a short list, usually of five to eight
contractors are selected to bid for the project.
3. Negotiated tendering where one contractor is selected and the tender price is
determined by negotiation.
4. Speculative development where the roles of developer and contractor are
effectively fused.
The question is which of the above categories should be preferred and what should
be excluded from future bids.
 Task One: Nature of Project

This is concerned with the preferred types of project.

The Projects undertaken so far represent a fair range of projects including

Speculative Housing, Social Housing, Schools, Office Blocks, Factories, and
Repair and Maintenance Work.
Again, care should be taken to try to disentangle the type of project from issues
such as procurement route plus scale and location of the projects carried out
so far.
 Task Two: Bidding Strategy

This Task concerns the bidding strategy for contract work and more specifically
the allocation of Head Office Overhead costs between contracts. It should also
deal with the determination of the required profit margin on such work to
secure the financial health of the company. It also involves the identification of
the target turnover of the company for such contract work.

The approach to taking profits on uncompleted projects should also be

addressed here – direct from cash flow or pro-rata or only when complete –
which the company have failed to apply consistently.
 Task Two: Bidding Strategy

Bidding strategy represents the fundamental trade off for construction

companies. Bidding low will obviously increase the probability of winning a
contract. It will also cause the margins to be squeezed.

Alternatively, high bids will reduce the chance of the tender being successful,
but, if accepted, it is more likely to meet financial targets.

Getting the bid wrong is a lose-lose for a contractor trying to meet financial
targets. It could be the cause of tenders not being accepted and turnover
falling if the bids are too high. Equally it could cause contracts being obtained
but end up losing money if the bids were too low.
 Task Two: Bidding Strategy

The outcome will obviously depend on the procurement method employed.

With Negotiated Contracts, the likelihood is that the award of the contract will
not be that sensitive to the bidding price. It that was not the case, the contract
would not have been let on a negotiated basis.

With Selective Tendering, there is usually much more competition to win

contracts. This sometimes did not apply during periods of construction boom
as evidenced by the Report by the UK Office of Fair Trading investigating
Collusion in Bidding for Construction Projects discussed earlier.
Open Tendering can often produce very perverse outcomes.
 Task Three: Speculative Work

This should examine the strategy for speculative housebuilding including the
volume of work in terms of a target turnover per year, the policy on land
purchases, and the phasing of work in terms of the number of houses built in
each phase.

The pricing and funding strategies for speculative housing should be covered
including profit margin and share of overhead costs to be allocated to this.

If the decision is to avoid or temporarily pause speculative housing, the ideas

on how to deal with unused building land should be outlined.
 Task Three: Speculative Work

This Task has produced a wide variety of responses from students in the past.
Some appear to want to base the workload of the company on speculative
housebuilding while others wish to abandon it in favour of contract work.

This range of responses experienced is not really that much of a surprise.

On one hand speculative housebuilding has proved one of the consistently

profitable areas of the company’s workload. McTavish have sufficient land
available for three years before they need to seek further purchases, The
company seems to have a reputation for good quality work.
 Task Three: Speculative Work

The downside for the company as far as speculative housebuilding is

concerned is the need for working capital to sustain a housebuilding
schedule.

Even with a decent supply of land, speculative housebuilding is very capital

hungry. Funds will have to be available to build the houses. No cash will be
generated until the first batch of houses are read for sale unless potential
purchasers can be persuaded to put down a deposit. Even so, this will be a
nominal sum as a show of good faith and do little for the cashflow of
McTavish and Company.
 Task Three: Speculative Work

So the question will probably come down to whether McTavish has, or can
obtain, the capital resources needed to remain in speculative housebuilding
regardless of the potential for profit that appears to be there?

This will stray into the territory of Task Four on Financial Strategy .

One approach that might be considered is that used in the Case Study on ABC
developments. Here a Finance Company was brought in to partially fund the
land purchases and house construction. The Finance Company would be
reimbursed as and when each house was sold.
 Task Four: Financial Strategy

This is concerned with the level of funding required for the company in order
to overcome its current financial situation. This should address the approaches
to find sufficient working capital to solve the liquidity crisis. What sources of
funding should be used such as bank loans? Or should the company seek
equity funding by introducing a new Director?

Alternatively external finance may be sought for speculative housing as

outlined in the Case Study: ABC Developments as flagged up earlier.

The extent of the funding required should be outlined along with the
repayment period for any loan.
 Task Four: Financial Strategy
This Task is concerned with ensuring the immediate survival of the company as
they undoubtedly face the issue of meeting the wage bill until such time as any
new strategy starts to generate enough cash.
A number of options could be available:
1. External finance in the form of a bank loan or overdraft facility.
2. Equity finance from a new active executive director.
3. Equity finance from a finance company or hedge fund.
4. Raising cash from the sale of surplus property assets held by the firm.

There is also the idea of using external finance for Speculative Housebuilding
as already mentioned.
 Task Five: Staffing

This should address the issue of how many Head Office Staff should be
company employ. Should the number be expanded to get a better control of
the finances or should it be reduced to save on overhead costs.

This latter course may involve increased use of consultants rather than
employees for task such as estimating. While consultants would cost more
than employees, they would only be paid when there was work there for
them.

The structure of the staff relationships could also be examined to bring it in

line with the future of the company as recommended in the report.
 Task Five: Staffing

Many who have looked at this problem, were of the opinion that the problems
faced by the company are more to do with having too few staff rather than
employing too many.

Maybe McTavish’s fundamental strategy of essentially operating as a

management contractor could even be called into question.

There have been some examples, notably Contract 13, where a large loss of
nearly £1.2 million followed the insolvency of the client. Clearly clients can go
bust but the question remains as to how a deficit of more that one million
pounds could have been built up without the plug being pulled on the project?
 Task Five: Staffing

This raises another trade-off issue between employing more head office staff
and increasing overhead costs and hence potentially squeezing margins,
against employing less staff and risk costs rising and revenue falling.

Obviously the more head office staff employed, the higher the overhead costs
will be, provided all goes well.

It is perfectly possible that increased staffing by the contractor will help to

increase revenue by the identification of potential claims and/or reduce costs
by spotting when to cease work on a project where the client could be
becoming insovent.
 Focus on the Key Issues

When dealing with this Assignment, please focus on the key deliverables listed
in the Project Brief. Do not waste words on writing a traditional academic essay
and produce essentially a technical report. You may decide to list references if
you consider it important but this is not mandatory for this project.

Every part of the Assignment should be assessed against the question: Does
this answer the question posed? If it does not then cut it out of the submission.

That approach is known as “Occam’s razor”. Cut out everything that is not
essential.
 The key point for those opting for a Group is to
make the five sections of the Report coherent
and consistent with each other.

There are obvious impacts of the decisions

Coherence of taken on the type of projects (Task One) on
other areas and in particular the financial
the Group strategy from Task Four will have implications
elsewhere.
Report So please make any Group submission look
internally consistent and not resemble five
different reports written by different people
without any thought to making it appear one
report.
 I have avoided setting a hard word limit for the
Assignment. Instead I deal with guidelines as to the
scope of any submission

For Individual Submissions on Task One, the

Guidelines suggested word limit is between 1,500 and 2,500
words excluding Diagrams. Tables, etc. This limit is
for the not mandatory, it is intended as a suggestion of
what the Assignment ought to require to deal with
Assignment the issues posed.

For Group Submissions, the word limit will be

increased in line with the size of the Group. A
Group of three students may require 5,000 to 7,000
word while a group of five would need 7,500 to
10,000 words.