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PGP CM(PGCM24)

ASSIGNMENT
ON

“CONSTRUCTION FINANCE MANAGEMENT &


COST ACCOUNTING”

(PGCM – 24)

NATIONAL INSTITUTE OF CONTRUCTION


MANAGEMENT & RESEARCH (NICMAR)
PUNE.

SCHOOL OF DISTANCE EDUCATION (SODE)

Submitted By:
Mr. Nilesh Sondigala
(PGP CM)
Reg.no.-217-03-11-50899-2193

Reg.no.-217-03-11-50899-2193 Page 1
PGP CM(PGCM24)

ASSIGNMENT:
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. 5,000 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
Aluminum 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.

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ABSTRACT:
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:

Financial management is dealing with the procurement of


funds to meet financial needs. Finance and capital are seen as a
considerable problem for cooperative, the sources being the
members and loans from banks or other institutions and
individuals. The sources of capital available to any firm are
quite numerous but as noted public limited companies have the
greatest variety of sources available for their use and the single
person enterprise.

The capital structure of any firm is related to the form of


the enterprise, its objectives, and the cost of capital. The cost of
capital is subject to and governed by many variables, which
often operate independently of each other. The firm must
consider these influence and their effects on the cost of the
individual types of capital to determine the most suitable capital
structure.

Cash budgeting will play an important role in any type of


construction project also capital revenue, finance resource

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PGP CM(PGCM24)

mobilization, cost accounting; management accounting will give


proper planning of inflow as well as outflow resources in
project.

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
organization 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:-

a) Reducing the cost of construction.


b) Minimizing any kind of wastage whether in term
of material or in the form of people time.
c) Planning the activities prior they actually start at
the site.
d) Scheduling tasks.
e) Planning and controlling the project.
f) Arranging finances at right time when requires.
g) Closely monitoring the expenses of the project.

Although 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.

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PGP CM(PGCM24)

FINANCIAL VIABILITY OF PROJECT:

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.

STAGE 1: Development and Building of Charitable Trust:

To develop a commercial site 10,000sqmt and in that


5,000 m2 developed area will be used by the owner and the
balance 5,000 m2 area will be utilized by the developer to get
back investment and a profit on his investment.
 The cost of land is Rs. 10,000/ m2
 Developer is going to get 5,000sqmt at the rate of 10,000/
m2, which will give him an asset of 5000 x 10000 =
50000000 (Rs 5 crore)
 Developer will get the area to develop for the trust is
5000 square meter at the rate of 10000/ m2. Within this
area total construction area will be 85%. Thus developer
has to develop the total area is 5000 X 0.85 = 4250 m2.
 Generally construction rate is varying with area to area.
We can assume the construction cost at this prime locality
is 750 Rs/ ft2 i.e. 7000/ m2.

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Thus total cost of construction will be 4250X7000= 29750000


Rs. (say Rs 3 crore)

As developer can invest only Rs 10 lakhs from his own


fund and loan of maximum Rs 50 lakhs can be taken from bank
there is a financial constraint in developing the above mentioned
construction project. This total Rs 60 Lakhs is not at all
sufficient to develop the proposed development therefore he is
going to use the land which he got as a development cost for
generate the amount.

The developer can generate the amount by giving half of


his share of land i.e. 2500 sq.m. Of land for rents to private
authorities. Developer is going to get the rent of 800Rs/
m2/month, which will generate the amount for the year as 800 X
2500 X 12 = 24000000 Rs.

Thus the Developer is going to generate the total amount


of Rs 3 Crores and break even the cost of development of the
charitable trust.

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

This 15 Lakhs is taken into account while working out the


Economic Feasibility study of the Housing Society in Stage 2.

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STAGE 2: Development of Housing Society on land given free as


cost of Development:

As the developer has to earn profit by investing in the


balance land of 2500 sq. m area the best investment feasible is
by building a housing society. So keeping in mind the financial
constraint constructing, housing building in only half of the
available land i.e. 2500 sq. m of land in the first phase 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 sold at higher prices earning a good profit margin for the
developer. Also he can take the booking amount for the initial
launch of project from customer and use it for launching the
project.

The residential building will be six 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 QUANTITY


1. 3 BHK Flats 6 , one on each floor
2. 2 BHK Flats 12 , two on each floor
3. Balcony 6, one for each floor
4. Lobby 6, 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

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at all three no. 3 BHK flats. Flats 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.

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 selling. 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:
As it is a Housing project the specifications in general for
the residential dwellings will be as follows.

a) Structure: R.C.C. Framed structure. as per design


of Architect and Engineer.
b) Reinforcement: The reinforcement used will be
Anti Corrosive TMT Steel.
c) Masonry: All Masonry will be of Concrete Block
and internal partition with first class wire cut bricks.
d) 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 neat finished and
External walls will be Sponge finished.
e) Flooring: Granite on Floor in Living Room and
remaining area Mosaic cement tiles and Kota stone
in Bathrooms and Kitchen area.

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f) Framework: Door frames of Sal wood, Main door


of Teak Wood with French polish, Internal Doors
Marine Flush Door with Oil paint.
g) Windows: Aluminum sliding Windows 3 track
anodized
h) Painting and Polishing: Internal Walls will be
painted with Oil Bound Distemper, External Walls
with Apex Weather Shield paint.
i) Kitchen: Granite platform with Stainless steel sink
with drain board and Ceramic tiles on dado up to
height of 0.6m above platform.
j) 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.
k) Sanitary ware: All Sanitary ware will be of
Standard range of Hind ware or equivalent and
fittings of Jaguar standard range.
l) Water Storage: Underground sump and overhead
tank.
m) Electricals: All wires used will be Finolex or
equivalent with fixtures of Crabtree or equivalent.

TECHNICAL STUDIES:
The technical study is to determine the needs for material
and human means necessary to achieve the objectives. These
take account of the market (availability of raw material, there is
a demand, customer requirement), regulatory and standards-
related product and also the financial (amount to invest and
returns expected).

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The study focuses on two general areas: study of supply


and the study of transformation. To carry out critical analysis of
technical feasibility, there must be enough knowledge of
technical, economic and regulatory environment

A) Cost of construction:

The cost of construction includes both the initial capital


cost and the subsequent operation and maintenance costs. Each
of these major cost categories consists of a number of cost
components.
The capital cost for a construction project includes the
expenses related to the initial establishment of the facility:
i) Land acquisition, including assembly, holding and
improvement.
ii) Planning and feasibility studies.
iii) Architectural and engineering design.
iv) Construction, including materials, equipment and labor.
v) Field supervision of construction.
vi) Construction financing.
vii) Insurance and taxes during construction.
viii) Equipment and furnishings not included in
construction
ix) Inspection and testing
The operation and maintenance cost in subsequent years over
the project life cycle includes the following expenses:
i) Land rent, if applicable
ii) Operating staff
iii) Labor and material for maintenance and repairs
iv) Periodic renovations
v) Insurance and taxes
vi) Financing costs
vii) Utilities

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The magnitude of each of these cost components depends


on the nature, size and location of the project as well as the
management organization, among many considerations. The
owner is interested in achieving the lowest possible overall
project cost that is consistent with its investment objectives.

It is important for design professionals and construction


managers to realize that while the construction cost may be the
single largest component of the capital cost, other cost
components are not insignificant. For example, land acquisition
costs are a major expenditure for building construction in high-
density urban areas, and construction financing costs can reach
the same order of magnitude as the construction cost in large
projects such as the construction of nuclear power plants.

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 for the Housing
Project is listed in the table given below:-

S.NO. ITEMS TOTAL COST


(Rs.)
1. Cost of R.C.C. 40,00,000
2. Cost of Reinforcement 20,00,000
3. Cost of Masonry 16,00,000
4. Cost of Plastering 20,00,000
5. Cost of Flooring 20,00,000
6. Cost of Framework 6,00,000
7. Cost of Painting and 6,00,000
Polishing
8. Cost of Plumbing 4,00,000
9. Cost of Sanitary ware 6,00,000
10. Cost of Water Storage 6,00,000
11. Cost of Electricals 16,00,000
Grand Total 1,60,00,000

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(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 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 8 months 7,00,000
2. Carpenters 8-10 6 months 5,00,000
3. Painters 8-10 5 months 4,00,000
4. Blacksmiths 5-8 5 months 4,00,000
5. Mazdoors 20-25 10 months 10,00,000
Grand Total 30,00,000

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 Manpower Requirement For Finishing, Plumbing &


Electrical Work

S.NO. MANPOWER TIME COST


PERIOD
1. Mason 8 months 5,00,000
2. Electricians 3 months 3,00,000
3. Plumbers 3 months 2,00,000
Grand Total 10,00,000

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.

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

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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 15/01/13 and
commissioning of project is scheduled on 15/01/15. So Project
activities is divided in to four quarterly phases namely Phase-I,
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 15/01/13 10/04/13
2. Reinforcement Work 11/04/13 20/06/13
3. Masonry Work 21/06/13 31/07/13
4. Plastering 01/08/13 15/9/13
Total Time Elapsed 8 months
PHASE-II
S.NO. ACTIVITIES START TIME FINISH TIME
1. Flooring 15/09/13 31/12/13
2. Framework 01/01/14 15/03/14
3. Painting and 16/03/14 15/05/14
Polishing
Total Time Elapsed 8 months
PHASE-III
S.NO. ACTIVITIES START TIME FINISH TIME
1. Plumbing 16/05/14 15/07/14
2. Sanitary ware 16/07/14 20/09/14

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Total Time Elapsed 4 months


PHASE-IV
S.NO. ACTIVITIES START TIME FINISH TIME
1. Water Storage 21/09/14 20/11/14
2. Electricals 21/11/14 15/01/15
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 FOR


HOUSING SOCIETY:
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


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 0
As Land Was
Free
2. Raw Material Cost 16,000,000
3. Construction Cost 4,000,000
4. Man Power Cost 4,000,000
Grand Total 24,000,000

Hence the total investment for this Housing Colony


Construction Project is two crore and forty lakhs i.e. Rs
24,000,000/

B) Project Financing for Housing Society


Proposed Capital Structure / Loan requirements

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 has already invested his own Rs 10 lakhs in
construction of the Charitable trust and also an amount of
Rs50 lakhs which he has taken as a bank loan. So the
complete finance for the housing project i.e. Rs Two

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Crores and Forty 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.
 Short Term Finance
 Advance From Customers – As this Construction
Project comprises a housing colony in which flats are to
be constructed for selling to the costumer, money can
be generated from the potential costumers in the form
of advance down payment for booking the flats.

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 for Housing Society

Cash Flow management basically deals with inflow and


outflow of cash during a particular time.
 Quarterly Break Up of Cash Outflow
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S.NO. PHASES Amount Sink


1. Phase I 4,800,000 Foundations Work
2. Phase II 8,000,000 Flooring & Frame
work
3. Phase III 10,00,000 Pipe Fitting Work
4. Phase IV 2,200,000 Electrical & Finishing
work
5. Cumulative 4,000,000
Construction cost for
all 4 phases
6. Cumulative Man 4,000,000
Power cost for all 4
phases
7. Interest amount 1,500,000
payable to bank
Grand Total 25,500,000

 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 8,000,000 5 lakhs(own fund) + 11
lakhs(lease amount) + 25%
Customer Advance
3. Phase III 10,00,000 5 lakhs(Bank)
4. Phase IV 2,200,000 22 lakhs(lease amount)
5. Bank Loan 2,000,000 20 lakhs
6. Costumer advance 2,000,000
7. Flat selling amount 36,000,000

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