TERM PAPER

FINANCIAL MANAGEMENT IN
CONSTRUCTION PROJECT

COURSE
ACCOUNTING & FINANCIAL MANAGEMENT

EM-502

PREPARED BY:

USMAN ALI AHMED (CM-WK-34)

COURSE INSTRUCTOR
DR. RAZA ALI KHAN

DEPARTMENT OF CIVIL ENGINEERING

NED UNIVERSITY OF ENGINEERING AND TECHNOLOGY
UNIVERSITY ROAD, KARACHI
 TABLE OF CONTENTS

ABSTRACT..2

CHAPTER 1: INTRODUCTION
1.1 Background........3
1.2 Significance4
1.3 Study Scope4
1.4 Objective5
1.5 Methodology .5

CHAPTER 2: LITERATURE REVIEW

Literature Review6-9

CHAPTER 3: METHODOLOGY
3.1 Research Design..10

CHAPTER 4: STUDY DESIGN..11-12

CHAPTER 5: DATA AMALYSIS..13-20

CHAPTER 6: CONCLUSION.21

REFERENES.22

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 ABSTRACT
The scope of this paper is to discuss the financial management of a construction project. This
paper attempts to approach this subject in a logical and systematic way. It communicates the
importance of financial analysis and planning along with cash planning. This report is not
intended to be an all-inclusive discussion of financial management in construction. The
research is undertaken to discuss; how much effective financial management is necessary for
the construction project and overall which factor mostly affect the financial status of the
project and where we have to be more alert to maintain the financial status in the industry.
Whereas to evaluate the study different expertise present in construction industry locally are
interviewed.

The discoveries of this study can be utilized for enhancing general money related
administration practices of customers in neighborhood development division through
mindfulness crusades, preparing workshops and ability advancement programs.

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 CHAPTER 1

INTRODUCTION
The construction activity includes gathering and assembling materials which are produced by

a group of suppliers, working in a diversity of technologies and discipline, to create a built

environment. These activities consist of construction, manufacture, regulation, design,

maintenance and decommissioning of various structures and buildings. Their scale and

complexity usually varies on the basis of the work undertaken, whether they are small

jobbing builders or internationally renowned companies undertaking high cost and complex

projects.

Moreover, every construction project requires financial management, and to arrange for

finance various factors are needed to be studied, whether the project is a public, private or a

public-private venture.

The companys financial resources include cash and assets of the firm and this is deriving

from the term financial management. Decisions that are made on the basis of financial

management affect a companys financial future and therefore the decision made by the

personnel is very important regarding the companys benefits and industries image in future.

The decision to bid on a large project has great impact on the finances of a company.

Thoughtful financial planning can easily take a backseat to daily life.- (Suze Orman)

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Background
Financial management may be defined as the use of a companys financial resources and
encompasses all decisions that affect a companys financial health. Many everyday decisions
affect a companys financial health. The difference between a marginally profitable and a
very profitable company is good financial management. Business schools teach the
fundamental principles of financial management; however, because of the many unique
characteristics of the construction industry, the usefulness of these financial principles as
taught by business schools is limited. To be useful, these principles must be adapted
specifically to the construction industry.

Significance
Financial management of your small business encompasses more than keeping an accurate set
of books and balancing your business checking account. You must manage your finances so
you dont overspend and so you remain prepared for all expenditures, as well as profit
distributions. Your financial management responsibilities affect all aspects of your business.
A company that sells well but has poor financial management can fail. Some of the
authoritative definitions are given below:

1. Financial Management is concerned with the efficient use of an important economic

resource, namely, Capital Funds Solomon
2. Financial Management is concerned with the managerial decisions that result in the
acquisition and financing of short-term and long-term credits for the firm
Phillioppatus
3. Business finance is that business activity which is concerned with the conservation
and acquisition of capital funds in meeting financial needs and overall objectives of a
business enterprise Wheeler

Scope
Financial Management is worried for ideal use about assets. Assets need aid. Limited,
especially clinched alongside creating nations. So, the focus, everywhere, will be should
make. Most extreme benefit, in the manifestation from claiming output, starts with those set
inputs. Financial management is necessary over each sort of organization, a chance to be it
state funded or private segment. Equally, its importance exists to both benefit situated
furthermore non-profit associations. Financial management will be that's only tip of the
iceberg clinched alongside loss-making associations to transform them with gainful ventures.

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Study uncovers a number associations have maintained losses, because of nonattendance for
proficient financial management.

Objective

The objective of the study is to research on the theoretical and practical developments and

innovative strategies in the financial management of construction project, through all its

stages including the initial concept, decision making, investment, planning and financial

return. We will further discuss different ideas with respect to cost implications of

sustainability issues which are involved in construction development.

Methodology

The methodology used to achieve our goal will be based mainly on interviews through

contractors and owners; who are the major victims of the conflicts. At some points, site

investigations will be done and issues will be discus face by face to solve these issues and

also to discuss those issues which are faced during the mitigation process.

In the end, statistical analysis will be done through respondents results and conclusions will
be dawn along with future recommendations.

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 CHAPTER 2
LITRATURE REVIEW

INTRODUCTION
Financial management is part of the decision-making, planning and control subsystems of an
enterprise. It incorporates the:
treasury function, which includes the management of working capital and the
implications arising from exchange rate mechanisms due to international competition
evaluation, selection, management and control of new capital investment
opportunities
raising and management of the long-term financing of an entity
need to understand the scope and effects of the capital markets for a company
need to understand the strategic planning processes necessary to manage the long and
short term financial activities of a firm.( L. Fung. 2015. Pg1)

1) Investment choices incorporates investment done settled possessions (called

Concerning illustration money budgeting). Venture On current stakes would
likewise and only financing choices called working capital decision.
2) Financial decisions - they identify with those raising of particular fund from
different assets which will rely on choice for sort for source, time for financing,
expense about financing and the returns thereby.
3) Dividend decision-the fund administration faculty need with take choice with
views of the net benefit distribution. Net profits are generally divided into two:
a. Dividend for shareholders- Dividend and the rate of it has to be decided.
b. Retained profits-Amount of retained profits has to be finalized which will
depend upon expansion and diversification plans of the enterprise.

FINANCIAL MANAGEMENT
Financial management is the effective control of all monetary related issues associated with a
project. The areas include controlling expenditure, advising on cash flow and payments
(Ashworth, 2004, p. 514). Similarly Burtonshaw-Gunn (2009) described financial
management to be understanding what, when and why costs will be incurred before the
project commences and then during the project knowing what costs have been incurred...

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when this expenditure happened and what future costs are planned. (Grant Bryan Jackson.
2011. Pg 14)

I always sayshare the financial information with your team and anyone of importance
charging time to your project. The more they see real numbers, the more likely they will be
accountable for an accurate reporting of their time and effort to your project. What do I really
mean by this? At the end of the week, that last 5-10 hours of time that project team members
know they worked but really can't account for have to go somewhere. And that somewhere is
going to be the project whose project manager is NOT watching the financials like a hawk. If
you discuss financials and any concerns with them regularly, then your project will not be the
one to get those "grey" hours charged to it. Trust me on this one. Better yet, try it, and see for
yourself.(Brad Egeland. 2014. Pg 1)

Financial Management should be considered from the outset of setting up a new business, but
understandably in reality this isnt always the case. There are however a number of trigger
points which can point towards a need for proper financial management practices as your
business grows, including:

Missing important deadlines such as payment of bills or VAT return submission;

You have less time to spend generating sales and new business, or completing orders,
as administration becomes a burden;
Invoicing not being completed in a timely manner and outstanding debts not being
chased;
You may be suffering from stress and work may be taking over personal time.
(Burgess Hudgson. Blog)

The interview of D. Hugh Taylor by Mel Hensey addresses four financial issues that

engineering managers must understand and address through their accounting staff to

collaboratively provide for effective financial management of their consulting engineering or

design firm. These areas are: basic financial data, accounting reports and support, other

financial management essentials, and acquisitions of other firms. The paper provides basic

background and parameters for successful financial management (D. Hugh Taylor, Melville

Hensey, 1990).(Dr. Raza Ali Khan. Pg 4)

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Financial risk and construction goes hand-in-hand, and the further away a company is from
the project developer, the more risk it shoulders. The scope of financial risk on a construction
project is a huge topic contemplating under-funded or underbid projects, contractor default
problems, misappropriation of project funds and more. Following are five ways companies
can reduce or manage these financial risks.

I. Lean for lien rights

II. Contract and credit agreements
III. Credit checks and monitoring
IV. Joint check agreements
V. Consistency
(Scott Wolfe. 2013)

A closer understanding of the relationship between the two inter-related topics of risk
management and finance on construction projects, it is becoming increasingly crucial to
achieve the objectives of the investor, the owner (end user) and the constructor and its
supply chain. Financial risk have broadly be classified as Bankruptcy of project partner,
Fluctuation of inflation rate, Fluctuation of interest rate, Fluctuation of exchange rate, Rise in
fuel prices, Insurance risk , Currency exchange risk, Liquidity Risk . Financial risk are one of
the critical risk faced by any construction industry as financial failures may lead to complete
closer of the company leading to huge losses and legal suits.
(Dr. M. J. Kolhatkar. 2013. Pg 5)

Maturity of Project Financial Management

Financial management includes the processes of acquiring and managing the financial
resources for the project. Compared to project cost management, project financial
management is more concerned with revenue sources and monitoring net cash flows for the
construction project than with managing day-to-day costs. The major processes involved in
financial management are Financial Planning, Financial Control, Administration and Records.
(Abadir H. Yimam. 2011. Pg 134)

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Benefits of Good Financial Management
Good financial management will help your organization to:

Make effective and efficient use of resources

Achieve objectives and fulfill commitments to stakeholders
Become more accountable to donors and other stakeholders
Gain the respect and confidence of funding agencies, partners and beneficiaries
Gain advantage in competition for increasingly scarce resources
Prepare for long-term financial sustainability.

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 CHAPTER 3

METHODOLOGY
3.1 Research Design
First of all initial data that is also termed as secondary data and is very necessary to conduct
the research work was gathered from different sources. The source of secondary data
collection includes previous research articles, books and blogs related to risk management.
Although in research papers this kind of data is regarded as secondary data but it is very
useful and provides a lot of guidance in preparing interview questions, it also helps in
broadening your horizon and gives you different aspects of the topic to think about.

After previewing many research articles and books, some articles and topics (that I found the
most reasonable) were selected for review. Those cherry picked articles were reviewed in
detail and preliminary data was prepared.

After preparing the secondary data, different professionals from construction field are
contacted and are requested for interview. People from both the side that is consultant and
contractor side are interviewed, in order to obtain a comprehensive outcome.

In interviews first the whole background and nature of the research study was conveyed to
the interviewee, than they are asked to give their on potential risk that could occur in different
risk categories during planning or construction phase, they are also asked to suggest the
impact of risk and remedial measure that must be taken to avert the

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 CHAPTER 4

STUDY DESIGN
Questionnaire Description
The questionnaire was compiled merely in two portions based on the requirement of the
research. However second Portion further sub divided in eight parts. Each question is asked
to mark on scale from 1 to 5, where 1 represents the least while 5 represent the most. The
main reason for such questionnaire is to get maximum response without irritating the
interviewee. The actual questionnaire is attached in appendix II

Phase 1: Personal Information

Phase 2: Interviewed Section

Firstly, phase 1 consist of personal information of the expertise which includes there
experience, designation and their organizational details.The interviewee section was sub-
divided in five(5) portions with significant to the research study. This section includes the
main objective of the questionnaire which involves the particular questions to be interviewed
by the expertise of the construction industry. These sections are enlisted according to the
major construction phases which are required to build up the finance of construction project.
The sections are as follows;

I. Potential Entrants the threat of new entrants;

II. Industry Competitors rivalry among existing firms;
III. Substitutes the threat of substitute products or services;
IV. Buyers the bargaining power of buyers;
V. Suppliers the bargaining power of suppliers.

After conducting the survey the suggestions which were suggested by the expertise are
examined and there results are analyzed to achieve the outcomes of the research study.

Data Collection Methodology

There can be various ways of how data can be collected; it can be via personal interview,
telephonic interviews, post mails, and online, but due to time constraints and availability of
resources and to ensure proper collection of data, we went for some personal interviews and
online questionnaire through mail or by Google forms.

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The responses are set on a scale of 1 to 5 (where 5 refers to the highest significance and 1
refers to the less significant)

Targeted Audience
The targeted audience was construction industries professional practicing for more than ten
years. Special attention given to the project managers, Resident Engineers, site staffs,
contract administrators other managerial staff of targeted companies who have significant
experience of finance issues. The data collected from all the three stakeholders of the
construction industry but more focused on the contractors as they are more likely to
encounter with the finance issues.

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 CHAPTER 5

DATA ANALYSIS

Analyses of Responses:
The interviews were conducted to consultants and clients in order to obtain the more
comprehensive point of view. Table below shows the categories and number of respondents.

S.No Respondents Interviews Conducted

1. Contractor 4

2. Client 4

3. Consultant 4

Total 12

The below charts describe the section 1 of the questionnaire as its comprises of personal
information of the interviewer whereas these charts shows the cumulative frequency of the
section under the following headings:
Type (Table 1)
Experience (Table 2)
Qualification (Table 3)

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Table: 1

Table: 2

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 Table: 3

Evaluation of Potential Entrants:

According to the survey, respondents believes that new entrants does effect the performance,
as well as the resources and switching cost compare to the organization itself. The new
entrants give the organizations threats as well as opportunity to perform better. In order to
gain advantage, 75% respondents think that the company uses more resources to compete
against them. Additionally 67% believes that switching cost effects on company project.

Table: 4

POTENTIAL ENTRANTS
80

70

60 Is a new entrant affect company's

performance on the project?
50

40 Is company requiring more cash or

assets resources to compete against
30 the new entrants?
Does switching cost is the main
20 factor of new entrants faced by the
company?
10

0
1 2 3 4 5

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Evaluation of Industrial Competitors:
Diversification is s risk management technique that mixes a wide variety of investment
within a portfolio. According to the response, 50% believes that the project diversification is
generate through competition and 25% believes that it is not necessary to have a diversify
project. Also 67% believes that the competition effect on the cost of the project. The more
you diversify your project the more company gets competitive advantage over the
competitors

Table: 5

INDUSTRY COMPETITORS
80
70
60
50
Does competition gives the
40 project a diversification?

30 Does competition effects the cost

of the project?
20
10
0
1 2 3 4 5

Evaluation of Substitutes:
According to the respondents, 67% agrees to have substitute product or services that is
beneficial for financial management also 58% believes that it effects on performance of the
project. If company hires more contractor or engineer in a project it gives best result in less
time but it will affect the finance of the company. Also in order to have any mishap happened
companies always uses backup plan ready in order to gain competitive advantage.

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 Table: 6

SUBSTITUTES
80
70
60
Does the substitute product or
50 services gives high impact on the
40 financial management?
30 Does substitute effects on the
performance of the project?
20
10
0
1 2 3 4 5

Evaluation of Buyers:
Sometimes it bargains switching cost affects the project shows the survey, 50%. Also it
information, and differentiation shows 33% improvement in construction industry. 42%
believes that many consultants in a project give the less commutation on the project. This
shows that switching cost gives the project more investment but it gives the effective result.
Management focuses more on 3 engineers on every project so that communication barriers
not come in between the profitability.

Table: 7

BUYERS
60
Does bargain switching cost
50 relative to firm switching cost
effects the project?
40
Does buyer information and profit
30 improves the cost efficiency and
relationship in construction
20 industry?
Does many consultant involves in a
10 project gives the client less
communication or control on the
0 project?
1 2 3 4 5

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Evaluation of Suppliers:
If suppliers encourages the bargaining that will gives edge to the competitors, but the cost of
the project increases, the results shows that 50% individual believes that the encouragement
gives the company to increase their supplying cost. Also improve the threat of forward
integration of the firm.

Table: 8

SUPPLIERS
70

60

Does the bargaining power of

50
supplier encourage the competition
by differentiation of input in project?
40

30 Does the bargaining power of

suppliers helps to improve the threat
20 of forward integration relative to the
threat of backward integration of the
firm?
10

0
1 2 3 4 5

Evaluation of Delivery System:

The respondent were asked to mark the significance of delivery system which suit them best
to handle financial issues of their firm, which were anticipated through the literature review.
After the statistical analysis it was found that overall design bid build has the highest
significance in delivery system.

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 Table: 9

DELIVERY SYSTEM
90
80
70
60
Design Bid Build
50
Design Build
40
EPC / Turn key
30
Construction Management
20
10
0
1 2 3 4 5

Evaluation of Phase of Construction:

Construction phase is the one which is mostly affected by the finance due to the reason of
physical work and extreme interconnection between the different trades. Finance in this stage
can be prevent by maintain the contractors schedule of critical path with resource loading as
it is rated highest in the survey while frequent site activity reporting to the client is also
important.

Table: 10

PHASES OF CONSTRUCTION
80
70
60 Planning
50 Design
40
Construction
30
Evaluation
20
Finishes
10
0
1 2 3 4 5

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Evaluation of Stakeholders:
The respondents interviewed that in construction project engineers are highly responsible for
maintaining the finance of the project because at their stage they punch list of items, strong
documentation of preceding stages play vital role in satisfying the all stakeholders.

Table: 11

STAKEHOLDERS
80
70
60
50 Client
40
Engineers
30
20 Contractor
10
0
1 2 3 4 5

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 CHAPTER 6

CONCLUSION AND RECOMMENDATIONS

Construction industry is one of the most associated industries of the world so finance is most
likely to come in it which can jeopardize the relationship between the project stakeholders.
There is no guarantee that finance can be avoided entirely. Finance requires understanding
about presentation, budget and assets issues. So it is foremost to figure out the financial
stability of the project before the construction project start and make some appropriate efforts
to avoid the financial problems. The above study focuses the different phases / aspects of the
construction project and found that each phase has potential to disturb financial steadiness
and if proper attention not pay.

Overall it can be concluded that to secure the finance of the project the management be very
much dedicated to their performance, cost and money of the firm. Whereas assuring financial
management of the project to be most effective it should have an eagle eye over all the
activities and techniques implemented on the project. Each and every item of the project must
be enlisted so that finance of the project can easily be managed and be controlled by the
authorities. Hence the delivery system which got the highest significance is design bid build
method and construction phase possess maximum affect in the change of finance in the
project whereas this all depends upon the engineer which can either safe the money of the
project or get it to another peak.

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 REFRENCES
1. https://www.ashgate.com/pdf/SamplePages/Risk_Financial_Management_Constructio
n_Intro.pdf
2. Journal of Financial Management of Property and Construction Emerald Article:
Component ratios of new building costs in Nairobi: a contractors' perspective S. Masu,
H. Gichunge, O.A. K'Akumu
3. THE USE OF SCHEDULES OF QUANTITIES IN PROVIDING FINANCIAL
MANAGEMENT IN CONSTRUCTION PROJECTS Grant Bryan Jackson 2011
4. Project management maturity in the construction industry of developing countries by
Abadir H Yimam 2011
5. Burtonshaw-Gunn, S. A. (2009). Risk and financial management in construction.
Surrey, England: Grower Publishing Limited.
6. Ashworth, A. (2004). Cost studies of buildings (4th ed.). Harlow, England:
Pearson/Prentice Hall.
7. 21 Sep 2014 6 Steps to Turning Around a Financially Failing Project Part 1 ~ By
Brad Egeland
8. http://burgesshodgson.co.uk/blog-details.asp?ArticleID=355#.VkjC5nYrLIU
9. Benchmarking of Clients Financial Management Practices in the Construction
Sector of Pakistan by Raza Ali Khan (Associate Professor,Department of Civil
Engineering, NED University of Engg. & Technology, rakhan@neduet.edu.pk
10. Five Ways to Reduce Financial Risk on a Construction Project By Scott Wolfe Jr.
Thursday, November 7, 2013
11. FINANCIAL RISKS AND CONSTRUCTION PROJECTS (Dr. M. J. Kolhatkar1, Er.
Amit Bijon Dutta 2013), IJAIEM.
12. Financial management L. Fung AC3059(2015)

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 Appendix I

NED UNIVERSITY OF ENGINEERING &

TECHNOLOGY
Department Of Civil Engineering

QUESTIONNAIRE
Topic:
Financial Management in Construction Project

Research Supervisor

Dr. Raza Ali Khan

For Further details please contact
Email: rakhan@neduet.edu.pk
Usman Ali Ahmed

Usmanalii.1992@gmail.com

The foremost purpose of this research is to

develop the responsive environment in construction industry through awareness
about issues regarding Claims which ultimately help the industry to flourish high.

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 QUESTIONNAIRE
TOPIC: FINANCIAL MANAGEMENT IN
CONSTRUCTION PROJECT
Personal Information
Name (optional)
Qualification Diploma Bachelors Masters Doctorate
Designation
Working Experience
Contact no. / Email
(optional)
Organization Name
Best Describe as Client Consultant Contractor

S.N

Please mark the following. (1 refer to least frequent and 5 refer to most frequent)
Potential Entrants
1 Is a new entrant affect company's performance on the
project?
2 Is company requiring more cash or assets resources to
compete against the new entrants?
3 Does switching cost is the main factor of new entrants faced
by the company?
Industry Competitors
1 Does competition gives the project a diversification?
2 Does competition effects the cost of the project?

Substitutes
1 Does the substitute product or services gives high impact on
the financial management?
2 Does substitute effects on the performance of the project?

Buyers
1 Does bargain switching cost relative to firm switching cost
effects the project?
2 Does buyer information and profit improves the cost
efficiency and relationship in construction industry?
3 Does many consultant involves in a project gives the client
less communication or control on the project?
Supplier
1 Does the bargaining power of supplier encourage the
competition by differentiation of input in project?

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According to the experience what is the frequency of funds stability in following type of delivery
system
1 Design Bid Build
2 Design Build
4 EPC / Turn key
5 Construction Management

Which phase brings maximum change in finance of project?

1 Planning
2 Design
3 Construction
4 Evaluation
5 Finishes

Which is more responsible for the maintaining finance/funds balanced in project

1 Client
2 Engineers
3 Contractor
2 Does the bargaining power of suppliers helps to improve the
threat of forward integration relative to the threat of
backward integration of the firm?

Thank you for your time!!!

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