1 Construction Finance Management

Reg. No. –

ASSIGNMENT

ON

Construction Finance Management

NCP 29

ASSIGNMENT
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NICMAR / CODE OFFICE

1. Course No. - PGPM 12

2. Course Title. -

Construction Finance

Management

3. Assignment No. - 2

4. Date of Dispatch -

5. Last date of receipt. -

of Assignment at CODE

ASSIGNMENT
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An offer has been given by a Charitable Trust to develop and build a

facility on a 10,000 sq.m. of plot in a prime locality of Pune where 5000 sq.m.

of area will be used by the trust for housing, health facilities for senior citizens .

5000 sq.m. will be given free to developer as a cost of development.

Cost of land is Rs. 10,000/ sq.m.

Specifications of flooring:

10% Granite

40% Kota stone

50% Mosaic cement tiles

R.C.C Framed structure

Aluminium sliding windows – Class A.

Rest Specifications as used for Class A. constructions.

Discuss the financial viability of the project and the financial planning of the

project. Developer would like to have minimum 18% of net profit on his

investment. Developer can invest only Rs. 10 lakhs as his own funds and can

raise not more than Rs. 50 lakhs as bank loan.

ABSTRACT:
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This Project Report is about managing finance in developing and building a

construction facility in a land of area 10,000 sq m. Then above mentioned

construction project is divided in two no. of stages:-

• Developing facility on a 5,000 sq.m. for a charitable trust

comprising of housing and health facilities.

• Developing 5,000 sq.m. of area as a cost of development

Succeeding report highlights the financial viability of the construction project.

Extracting profit from the project through financial planning is the main feature of

this project report.

INTRODUCTION:
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Construction Project is a mission, undertaken to create a unique facility, product or

service within the specified scope, quality, time and costs. Project can also be

defined as organisation and performance of resources such as men, money,

machinery, materials, space and technology into logical sequence of activities

Finance management in a construction project is mainly related with planning

various activities in the project right from the start to the end of the project. A

developer must be fully aware about all the key financial aspects of construction..

He must be able to control financial flows in an orderly manner for reaping the

results in form of profits..

Profit from the project can be harvested by considering, implementing and

following the points stated as under:-

• Reducing the cost of construction.

• Minimising any kind of wastage whether in term of material or in

the form of people time.

• Planning the activities prior they actually start at the site.

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• Scheduling tasks.

• Planning and controlling the project.

• Arranging fianaces at right time when requires.

• Closely monitoring the expenses of the project.

Al though the main aim of a developer is to earn profit from the project by it

should be remembered that profit should not be earned at the cost of quality,

durability and aesthetics values of construction.

FIANCIAL VIABILITY OF PROJECT

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Most construction projects start with a need to have a new facility long before

designers start designs and drawing of the projects and certainly before field

construction work can commence. Elements of this phase include:

- Conceptual analysis.

- Technical and feasibility studies and

- Environmental impact reports.

Here the project is divided in two stages first developing & building facility for a

charitable trust and using 5,000 sq. m area of land free as a cost of production.

As the developer has to earn profit by investing in the land of 5,000 sq. m area the

best investment feasible is by building a housing society.

As developer can invest only Rs 10 lakhs from his own fund and loan of maximum

Rs 50 lakhs can me taken from bank there is a financial constrain in developing the

above mentioned construction project.

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So keeping in mind the financial constrain constructing, housing building in only

half of the available land i.e. 2500 sq. m of land is the most suited economical

option. As the land is located at prime location of Pune, so flat of the purposed

residential building can be sell at higher prices earning a good profit margin for the

developer.

The residential building will be three storey building to be built on a space on an

area of 500 sq.m X 500sq.m. Ground floor of the building will be meant for two

wheeler and four wheeler parking.

The Proposed residential building will comprise of:-

S.No. ITEMS QANTITY

1. 3 BHK Flats 3 , one on each floor
2. 2 BHK Flats 6 , two on each floor

3. Balcony 3, one for each floor

4. Lobby 3, one for each floor
5. staircase -----------
6. Parking lot At ground level
7. Guard room 1 at ground level adjacent to
entrance gate

All 3 BHK flats will be front facing and linked with the other two no. 2 BHK

flat via. a lobby. Balcony will be provided at all three no. 3 BHK flats. Flats
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will be constructed and then will be fully furnished. Fully furnished flats will

then be ready for selling to the costumers with ready to move option

Conclusion: - As flats to be constructed are spacious, parking facilities along

with security is also been provided so flat will going to attract the potential

buyers easily. Posh location will also add to the amount on which flats can be

sell. So developing a residential building on a free of cost land and selling the

flats of the building is a sure sort assurance of profit. So this investment on this

construction project is a totally win – win situation for the developer and

positively promises the profit.

PROJECT SCOPE
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As it is a Housing project the specifications in general for the residential dwellings

will be as follows.

• Structure: R.C.C. Framed structure. As per design of Architect and

Engineer.

• Reinforcement: The reinforcement used will be Anti Corrosive

TMT Steel.

• Masonry: All Masonry will be of Concrete Block and internal

partition with first class wire cut bricks.

• Plastering: Internal/External plaster of walls will be executed with

necessary admixtures added to the Cement Mortar in order to

minimize shrinkage cracks. Internal walls will be neeru finished

and External walls will be Sponge finished.

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• Flooring: Granite on Floor in Living Room and remaining area

Mosaic cement tiles and Kota stone in Bathrooms and Kitchen

area.

• Framework: Door frames of Sal wood, Main door of Teak Wood

with French polish, Internal Doors Marine Flush Door with Oil

paint.

• Windows : Aluminium sliding Windows 3 track anodized

• Painting and Polishing: Internal Walls will be painted with Oil

Bound Distemper, External Walls with Apex Weather Shield paint.

• Kitchen: Granite platform with Stainless steel sink with drain

board and Ceramic tiles on dado up to height of 0.6m above

platform.
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• Plumbing: All plumbing in the Bathrooms / Toilets will be

concealed and CPVC pipes will be used. All External piping and

SWR pipes used will be of Finolex.

• Sanitary ware: All Sanitary ware will be of Standard range of Hind

ware or equivalent and fittings of Jaguar standard range.

• Water Storage: Underground sump and overhead tank.

• Electricals: All wires used will be Finolex or equivalent with

fixtures of Crabtree or equivalent.

TECHNICAL STUDIES
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a.) Cost of construction

Now a day the rates of all Basic Materials used in Construction is increasing

at a high pace, and hence the cost of Construction is always on the rise.

Since all materials used for construction are in high demand and supply is

correspondingly low there is always a point where material is priced higher

by the retailer in order to increase his margin. Therefore in the planning

stage itself the quantities have to be worked out and materials have to be

ordered early in order to avoid the loss by spending higher amounts at

various stage of Construction. Hence the Finance Manager needs to foresee

such circumstances before the commencement of the project, in order to

achieve the projected Profit Margin set up at the initial stage or at least try to

be as close as possible.
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Calculating the cost of construction is also helpful in the financial

management and planning as it gives the idea that how much finance will

probably will required for developing the project.

Break-Up of Cost of Construction is listed in the table given below:-

S. NO. ITEMS TOTAL COST

(Rs.)
1. R.C.C. 2,000,000
2. Reinforcement 1,000,000
3. Masonry 80,0000
4. Plastering 1,000,000
5. Flooring 1,000,000
6. Framework 30,0000
7. Painting and Polishing 30,0000
8. Plumbing 20,0000
9. Sanitary ware 30,0000
10. Water Storage 30,0000
11. Electricals 80,0000
Grand Total 8,000,000

b.) Manpower requirements/costs

For the execution of such a project, the Manpower requirement is very high

and hence the whole project needs to be analysed and phased out in order to

obtain maximum output from the labour and planning the area of work
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without much hindrance throughout the site, and easy flow of labour and

material stacking accessible in order to reduce the work force and in turn

make the project cost effective.

Also the cost of labour force i.e. both skilled and unskilled has increased

drastically since few years now. The main drawback for the projects which

suffer on account of delay etc. is due to lack of Manpower which is in acute

shortage. Hence the planning needs to be done accordingly.

• Manpower Requirement For R.C.C & Structural Works

S. NO. MANPOWER No. TIME COST

PERIOD
1. Mason 10-15 4 months 3,50,000
2. Carpenters 8-10 3 months 2,50,000
3. Painters 8-10 2.5 months 2,00,000
4. Blacksmiths 5-8 2.5 months 2,00,000
5. Mazdoors 20-25 5 months 5,00,000
Grand Total 1,500,000
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• Manpower Requirement For Finishing, Plumbing & Electrical Work

S. NO. MANPOWER TIME PERIOD COST

1. Mason 4 months 2,50,000
2. Electricians 1.5 months 1,50,000
3. Plumbers 1.5 months 1,00,000
Grand Total 5,00,000

c.) Design adequacy and alternatives

The project Design is the main criteria on which the whole budget as well as

the end profit depends. So the design of the structure always needs to be

handled at the highest priority and enough time given to the designer to

make use of all the objectives to maximize the profit by using as much of the

Permissible F.A.R. possible.

Also care needs to be taken during designing that the whole project should

be very impressive and should be able to suit the conditions comfortably in

order to find buyers very easily in terms of looks as well as funds both and

apartments so designed should suit the requirements of the buyer.

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The Design should be in such a manner that the buyers can also relate and be

able to comfortably alter a few things in such a way so as to not disturb the

structure or its elevations etc.

d.) Work schedule on quarterly basis

Working out the Task & Time schedule of a project in preliminary stages is

must for the accurate financial planning. Main motive of a work schedule is

to break down the construction activities to be carried out for a project in the

form of various tasks, stating the specific time to be consumed for the

planned tasks.

For this project a total time period of 2 years has been considered and all the

construction activities will be carried out in this tenure. Project start date is

fixed on 15/08/11 and commissioning of project is scheduled on 15/08/13.

So Project activities is divided in to four quarterly phases namely Phase-I,

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Phase-II, Phase-III & Phase-IV, each phase covers a period of 8 to 4 months

depending on the activities carried in the respective phase.

Break-Up of Work Schedule is listed in the table given below:-

PHASE-I
S. NO. ACTIVITIES START TIME FINISH TIME
1. R.C.C. Foundation 15/08/11 10/11/11
2. Reinforcement Work 11/11/11 20/01/12
3. Masonry Work 21/01/12 28/02/12
4. Plastering 01/03/12 15/4/12
Total Time Elapsed 8 months

PHASE-II
S. NO. ACTIVITIES START TIME FINISH TIME
1. Flooring 15/04/12 31/07/12
2. Framework 01/08/12 15/10/12
3. Painting and 16/10/12 15/12/12

Polishing
Total Time Elapsed 8 months
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PHASE-III
S. NO. ACTIVITIES START TIME FINISH TIME
1. Plumbing 16/12/12 15/02/13
2. Sanitary ware 16/02/13 20/04/13
Total Time Elapsed 4 months

PHASE-IV
S. NO. ACTIVITIES START TIME FINISH TIME
1. Water Storage 21/04/13 20/06/13
2. Electricals 21/06/13 15/08/13
Total Time Elapsed 4 months

* Note: All Task durations are tentative and can be changed as

per construction planning and site conditions.

FINANCIAL AND ECONOMICS EVALUATION:

Financial management is mainly concerned with management of funds i.e.

management of monetary issues. There are two basic aspects of financial
management viz procurement of funds and an effective use of these funds.

a.) Total Investments cost

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Primary step in financial planning of a project is to estimate total investment

cost involved in the development of project. Investment cost of project is the

sum of following costs stated as under:-

 Land Cost - It involves the cost required to acquire the land on

which construction of housing colony is to be carried out.

 Raw Material Cost - It comprises cost of raw material required for

construction like cement, TMT bars for reinforcement, aluminum

& wooden frames, tiles, electrics, sanitary wares etc.

 Construction Cost - All money spend for carrying construction

activities add on to form this cost.

 Manpower Cost - Cost of recruiting skilled and non-skilled

employees contribute to this type of cost.

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S. NO. COST BREAK-UP REMARKS INVOLVED COST

(Rs.)
1. Land Cost Not Applicable As 0

Land Was Free

2. Raw Material Cost 8,000,000
3. Construction Cost 2,000,000
4. Man Power Cost 2,000,000
Grand Total 12,000,000

Hence the total investment for this Housing Colony Construction Project is

one crore and twenty lakhs i.e. 12,000,000.

b.) Project Financing

Proposed Capital Structure / Loan requirements

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One of the major problems facing any business enterprise is that of

obtaining finance and ascertaining the cost of project. Finance can be

obtained from different sources and since finance arranged from different

sources have different characteristics in terms of risk, cost and control.

Sources of finance depend upon the business structure. There are several

sources of finance available for a construction project like:-

• Long Term Finance.

• Middle Term Finance

• Short Term Finance.

As in this Construction Project there are some restrictions in the investment

like:-

• Developer can invest only Rs 10 lakhs as his own fund.

• Only Rs 50lakhs can be raise as bank loan.

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So the rest finance for project i.e. Rs 60 lakhs is to be managed / procure. As

the project duration is of 2 years and developer seeks early and quick profit

Middle term and Short Term Finance seems to be the feasible options.

Types of finance considered for the Construction project are stated as

under:-

• Middle Term Finance

 Loans from Banks - Primary role of banks is to cater to the

finance requirement of a project. Usually bank charges 15 % of

interest rate in financing such type of construction project. So

amount of Rs. 50 lakhs will be managed from the bank in the

form of loan for a period of 2 years.

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 Lease Financing – Leasing is a general contract between the

owner and user of the asset over a specified period of time. The

asset is purchased initially by the lessor and thereafter leased to

the lersco company. As for this project total available land is

5000 sq m and only 2500 sq m of land has been used to develop

the project the remaining land of 2500 sq m can be use as a

lease item and finance can be managed from that. So after

giving the land on lease for 5 years Rs 40 lakhs can be

generated.

• Short Term Finance

 Advance From Customers – As this Construction Project

comprises a housing colony in which flats are to be constructed

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for selling to the costumer, money can be generated from the

potential costumers in the form of advance down payment for

booking the flats. Hence remaining fund for the Project i.e. Rs

20 lakhs can be generated.

Interest Calculations

As only Rs 50 lakhs is been taken loan from banks on 15 % of interest for 5

years so only this amount is subjected to the interest

Total amount - Rs. 5.000,000

Rate of interest - 15 %

Years -2

Total; interest amount to be paid = (5,000,000 x 15 x 2 ) / 100

= 15,00,000

So total amount paid to the bank as interest is Rs 15 lakhs

c.) Cash Flow Management

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Cash Flow management basically deals with inflow and outflow of cash
during a particular time.

• Quarterly Break Up of Cash Outflow

S. NO. PHASES Amount Sink

1. Phase I 4,800,000 Foundations Work
2. Phase II 1,600,000 Flooring & Frame work
3. Phase III 5,00,000 Pipe Fitting Work
4. Phase IV 1,100,000 Electrical & Finishing work
5. Cumulative Construction cost 2,000,000

for all 4 phases

6. Cumulative Man Power cost for 2,000,000

all 4 phases
7. Interest amount payable to bank 1,500,000
Grand Total 13,500,000

• Quarterly Break Up of Cash Inflow

S. NO. PHASES Amount Source

1. Phase I 4,800,000 25 lakhs(Bank) + 5 lakhs(own fund) + 18

lakhs(lease amount)
2. Phase II 1,600,000 5 lakhs(own fund) + 11 lakhs(lease amount)

3. Phase III 5,00,000 5 lakhs(Bank)

4. Phase IV 1,100,000 11 lakhs(lease amount)
5. Bank Loan 2,000,000 20 lakhs()
6. Costumer advance 2,000,000
7. Flat selling amount 18,000,000
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Conclusion

As the total investment for this Construction Project is Rs 1 crore 35 lakhs and by

selling the flats amount of Rs 1crore 18 lakhs has been earned so this project is

fully financially feasible and have potential to reap high profit for the developer.

• Profit calculation

A. Total cost of project = Rs 13,500,000

B. Total amount earned from the project = I + II = 18,000,000

I. Selling price of 3 no’s of 3 BHK flats = 3,000,000 x

= 9,000,000.
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II. Selling price of 6 no’s of 2 BHK flats = 1,500,000 x

= 9,000,000

C. Net Profit = B –A = 18,000,000-13,500,000 =

4,500,000

D. Profit Percentage = (C x 100) / A = (4,500,000 x 100)/

13,500,000

= 33.33 %

of Profit Earned

References:
1) Course Material, NICMAR