Construction Material & Equipment Management

Persevering the Scope across projects: Global Perspective

Presented by
Gautam Arora

Gautam Arora

PRESENT SCENARIO

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THE PROJECT CHARTER

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Project Implementation Unit / PMO / Portfolio Management

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Designers Architects Engineers

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. General Contractor / Management Contractor

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Contract Administration Sub-contractors / Specialist Contractors

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Procurement Management

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THE PROJECT LIFE - CYCLE

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One Kiosk to Integrate

Feasibility Studies Environmental & Social Studies Due Diligence Master Planning Detailed Engineering

Delivery Management

Knowledge Area

Value Engineering

Quality Management

Proof Checking

Construction Management Contract Management Bid Management

Risk Management

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MATERIAL MANAGEMENT

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MATERIAL MANAGEMENT
Materials management is a coordinating function responsible for planning and controlling materials flow. Its objectives are as follows:

Maximize the use of the firm's resources. Provide the required level of customer service.

Materials management can do much to improve a company's profit. If the right materials in the right quantities are not available at the right time the process can not produce what it should. Labour and machinery will be poorly utilized. The profitability and even the existence of the company will be threatened.
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PRELIMINARIES
Pre Construction Feasibility Studies Technical Design Competitive Authority Approvals Risk Evaluation Commercial Tender Selection of Contractor / Vendors / Consultants Award of Work Financial Resources Internal / External (FDI / Equity) Market / Investors IRR Delivery of Product Statutory Approvals
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During Construction Statutory Approvals Construction Management Schedule / Time Lines / Milestones Procurement Buffer Manpower Assurance of Financial Planning Assurance of Drawings Budgetary Compliances Risk Mitigation

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Post Construction Statutory Approvals Consumers /Stake holders / Investors Delivery of Product Risk Analysis Study Evaluation of Pre & Post Construction Methodology Evaluation of Budget Learnings & basis for the next Projects Balance Sheet

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Planning of Material
Basics Objectives Nature of the Project Who all are Involved Challenges What do we do Quantum of Work / Material required to be clearly defined Drawings & Designs to be available BOQ - Specifications Software Rate Analysis Conditions of the Contract to be clearly defined & followed GCC SCC EMD, BG, Defect Liability Period, Insurance
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Vendors to be short listed & informed about the Project requirement Categorization as per Projects Completed, In-hand & In future Expected Response period in the same scenario, with in company or from outside - Source & Destination Analysis. Quality of delivered Product - Variation from the requirement Check for the requisite Compliances Supply / Supply & Installation available with Vendor. Payments & issuance of Purchase Order Methodology freezed. Risk Assessment: Seasonal effect over the availability of Material also effect on Cost. Cement Steel Sand Aggregates FOS & FOR Analysis Buffer maintenance Develop Methodology for the events to follow Checklist Quality & Quantity Methodology Upon delivery - Variation from the requirement Gautam Arora

Procurement Management

What do we do Review Methodology / availability of front as per the Chronology of the events / Milestones reference to Construction Schedule Review for any Procurement to be delayed for the Scope of Work involving Management perspective. Review of the Market Demands / change in requirement of Stake holders.

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 Contracting Plan Contract statement of work Review Contractual obligation of Client & Vendor Confirmation of the order to be delivered as per Schedule Review for the Supply & Installation Scope of Work. FOS & FOR Analysis Review Bid management Review of the short listed Vendors & information of the current scenario about the Project requirement. Review the current scenario in Market Bulk / by-parts Final negotiation
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 Contract Administration Inspection & audit Special task team to be appointed Method Statement to be reviewed Review for Change in Drawing / design / specifications Review - Check for the requisite Compliances Supply / Supply & Installation. Performance reporting Source & Destination Analysis Review the expected Response time in which Vendor has facilitated the service. Review for Change in Specs after delivery at Project Corrective actions Plan for Issuance of NCR / NCN, Payment Certificate Review Rate Analysis Reviews of the budgetary compliances with the Material to be procured.
Review of the availability of Manpower with reference to the procurement. Management MIS Review of the Vendor
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Claim administration
Interpersonal / Hospitality Management - Obligations provide to the Client in case of Delays in the Construction Schedule, provision of additional facilities (Category, Budget, Availability, and Satisfaction. Review with the Auditor / arbitrator. Review BGs, Contract Period, Conditions of Contract, Services to be offered with reference to Defect Liability Period.

Contract Closure final inspections tests Plan Methodology for Joint evaluation ( Client / Consultant / Architect / Contractor) Plan Methodology for Sign-off on the Payment Certificate. As build inspection & submission of records Plan Methodology for Joint evaluation with the competitive authority / Client / Contractor / Consultant.
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Closure of contract Plan Methodology for Handing over & taking over of Records Plan Methodology for Compliances to be recorded & maintained Information assurance from the representative for not sharing the records except with in the company. Plan Methodology for Certificate for final Sign-off perceiving no obligations in future except to what have been agreed in the Contract for a certain period of time.

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Delivery Management

What do we do Review the availability of Storage / Buffer Maintainaied at the Project. Review the Project condition with reference to the Construction Milestone Develop Methodology for the events Checklist Quality & Quantity Methodology Upon delivery - Variation from the requirement Plan review from the prepared As-Built Drawings Plan review from the prepared Operation & Maintenance Hand-over, Manuals Plan for timely Payments & review the planned conditions of Contract Closure. Plan review from the Achieving ( what has been done) Finally Hand-over to Stakeholders
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 Contracting Plan Contract statement of work Confirm the facilitation of Contractual obligation of Client & Vendor Confirmation of the order delivered as per Schedule Confirmation of the Start as per Schedule for the Supply & Installation Scope of Work.

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 Contract Administration Inspection & audit Perform the Analysis as expected by Special task team appointed at the Project. Follow the Method Statement Review/ Confirm for Change in Drawing / design / specifications with reference to the product delivered. Maintain the requisite Compliances Supply / Supply & Installation & correspondingly inform the requisite authority. Performance reporting Confirm the movement of Material as per Schedule - Source & Destination Analysis. Confirm the final Response time in which Vendor has facilitated the service. Confirm for Change in Specs after delivery at Project
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Corrective actions Issue NCR / NCN, Payment Certificate

Confirm the present Rate Analysis Confirm the effect on the budgetary compliances with the Material procured. Confirm the available Manpower to initiate the work accordingly. Management MIS Review of the Vendor Confirm for the additional resources required in the same pretext. Confirm for the additional Material required which says the calculation done earlier is matching or not. Claim administration Facilitate with the Interpersonal / Hospitality Management - Obligations provide to the Client in case of Delays in the Construction Schedule, provision of additional facilities (Category, Budget, Availability, and Satisfaction). Record the decision taken with the Auditor / arbitrator & work in future to be carried out accordingly. Confirm the viability / remaining duration BGs, Contract Period, Conditions of Contract, Services to be offered with reference to Defect Liability Period.

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 Contract Closure final inspections tests Joint evaluation ( Client / Consultant / Architect / Contractor) Sign-off on the Payment Certificate. As build inspection & submission of records Joint evaluation with the competitive authority / Client / Contractor / Consultant. Closure of contract Confirmation of Handing over & taking over of Records Compliances to be recorded & maintained Information assurance from the representative for not sharing the records except with in the company. Certificate for final Sign-off perceiving no obligations in future except to what have been agreed in the Contract for a certain period of time.

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CODIFICATION

ADVANTAGES OF CODIFICATION The role of the warehousing and inventory controller is to serve the user promptly Unless the warehouse manager is able to identify instantaneously the users requirement, he will not be able to render good service. Delays lead to the building of queues at the service stations and consequent delays in the production line. In the case of finished goods warehouse, the customer will go to another company, thereby affecting the image and profits of the organization. The starting point is the consumer, who has to unambiguously identify his requirements, through proper nomenclature
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The advantages of unique identification and disadvantages of ambiguous nomenclature can never be overstated. Long description by tongue twisting long names must be avoided. Systematic grouping of similar items is facilitated by codification. Codification automatically leads to the process of standardization Ordering becomes more economical as like items are ordered together. Price advantage can be availed out of the resultant bulk ordering with discounts. The procured item may have a trade name of its own, and the stores executive has to correlate the two names, with the problem going out of hand if the number of items is very large. Codification helps to uniquely identify the item by having one-to-one correspondence.
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Location problems of items in bins are reduced by codification. Service levels can be improved for the same level of investment. Servicing time is less due to easy identification. Stock levels are less as duplication has been eliminated by codification. Obsolescence is less as the number of items is less. Codification facilitates computerization. The records, entries and transactions are less as less number of items are handled per person. The overall efficiency of warehouse staff is much better with higher level of motivation. Logical grouping of items 'facilitates variety reduction easily.
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Procurement operations become easy as the purchase people, even if they are non-technical, can understand the requirements easily. Communication between different departments is smoother by process of codification as they know what they are talking about. The simplicity of codification enables even unskilled workers to distinguish one item from another and trace where the wanted item is kept. Codification introduces discipline and reduces inventory by removing non-stock items and reducing items on temporary codes. After all we live in a coded world consisting of permanent account number of income tax, telephone number, postal index number, ration card number etc. Codification aims at maximum service to users with minimum input resources, after identifying items uniquely and classifying them into major class, subclass group, subgroup and minor groups.
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Standardisation:
In product design, a standard is a carefully established specification covering the products material, configuration, measurements etc. Therefore, all products made to a given specification will be alike and interchangeable. A range of standard specifications can be established so that it covers most uses for the item. A smaller variety of components is needed, as the product standardization allows parts to be interchangeable. Standardisation is the orderly and systematic formulation, adoption, application and review of industrial standard which leads to simplification or variety reduction. There are a large number of benefits of standardisation.

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BENEFITS OF STANDARDISATION
The warehousing and inventory manager must have an unambiguous nomenclature for identifying the items, in order to serve the customer promptly. In this process, standardization which reduces the variety plays a vital role by reducing the number of varieties of the same item held in the warehouse. More than any other executive, the stores-incharge comes into direct contact with a variety of materials. He can gain knowledge on the uses of the material in the store and can contribute significantly to achieve standardisation. Standardisation enables one to concentrate on large quantity of fewer items. It is possible to place economic order quantity or orders of staggered deliveries with bulk discount. Economic lot size at manufacturing will not be a problem as items-can be manufactured with the same set up timings for standard items.

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Since the inventory is likely to be less, the working capital commitment of the organisation will also be less. The items can be easily identified by all persons in stores as the bin location can also be standardised. Standardisation reduces the time involved in negotiation process with the suppliers as communication is better with prompt delivery schedules. The procurement lead time gets reduced as everyone knows the item clearly. The buyer-seller relations can be improved as all dimensions including price analysis, specifications lead time etc., are standardised without scope for disputes. Standardisation promotes healthy competition amongst vendors as standard items can be bought by several companies. Standardisation minimizes obsolescence. It is possible to have rate/running contracts for standard items.
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Standardisation reduces design time by concentrating on fewer parts. It minimises drafting time through repetitive use of standard drawings. It expands the engineers list of known and proven items. It reduces specification writing by repetitive use of standard speci-fication. Interchangeability of parts is assured through standardisation. Standardisation enables reduced inspection and quality control burden. Since methods are standardised, it ensures safety to all. Standardisation directly reduces the variety and improves the information system of the warehouse manager.

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Lower cost of production through continuous manufacturing run with material handling problems and increased capacity utilisation is achieved by standardisation. The workers at all levels and departments become more efficient by repeated handling of items and it is possible to utilise less skilled workers for standard operations. Standardisation enables reduced number of maintenance tools and improves maintenance practices. Standardisation aims at maximum variety of finished products with minimum categories of assemblies, subassemblies and components. In general, standardisation results in simple operations, minimum paper work, improved inter departmental coordination, ease of computer application and pinpoints areas involving inefficiency. In short, standardisation is a means to faster and better understood communication, with fewer mistakes and hence smoother life.
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INVENTORY

Inventories are the materials and supplies that a business or institution carries either for sale or to provide inputs or supplies to the production process. All businesses and institutions require inventories. Often, they are a substantial part of total assets. Inventories are very important to manufacturing companies and construction sites. As inventories are used their value is converted into cash which improves cash flow and return on the investment. There is a cost for carrying inventories which increases operating costs and decreases profits. Good inventory management is, therefore, essential. Inventory management is responsible for planning and controlling inventory from the raw material stage to the customer.

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Inventory and Flow of Material

Raw Materials Work-in-process (WIP) Finished goods Distribution inventories Maintenance, repair, and operational supplies (MROs)

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Function of inventories
In batch manufacturing, the basic purpose of inventories is to decouple supply and demand. Inventory serves as a buffer between: Supply and demand. Customer demand and finished goods. Finished goods and component availability. Requirements for an operation and the output from the preceding operations. Parts and materials to begin production and the suppliers of materials.

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Based on this, inventories can be classified according to the function they perform. These are: Anticipation Inventory Fluctuation Inventory Lot-size Inventory Transportation Inventory Hedge Inventory

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Safety Stock (Fluctuation Inventory)

Fluctuation inventory is held to cover random unpredictable fluctuations in supply and demand or lead time. If demand or lead time is greater than forecast, a stockout will occur. Safety stock is carried to protect against this possibility. Its purpose is to prevent disruptions in manufacturing or deliveries to customers. Safety stock is also called buffer stock or reserve stock. Safety stock is a calculated extra amount of stock carried and is generally used to protect against quantity uncertainty.

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ABC Inventory control

Control of inventory is exercised by controlling individual items called stockkeeping units (SKUs). In controlling inventory, four questions must be answered: 1. What is the importance of the inventory item? 2. How are they to be controlled? 3. How much should be ordered at one time? 4. When should an order be placed?

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Control Based on ABC Classification Using the ABC approach, there are two general rules to follow: 1. Have plenty of low-value items.
C items represent about 50% of the

items but account for only about 5% percent of the total inventory value. Carrying stock of C items adds little to the total value of the inventory. C items are really only important if there is a shortage of one of them-when they become extremely important-so a supply should always be on hand. For example, order a year's supply at a time and carry plenty of safety stock. That way there is only once a year when a stockout is even possible.

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2. Use the money and control effort saved to reduce the inventory of highvalue items. An item represents about 20% of the items and account for about
80% of the -value. They are extremely important and deserve the tightest control and the most frequent review.

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ABC Curve: Percentage of Value versus Percentage of Items

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Different controls used with different classifications might be the following: A Items: high priority. Tight control including complete accurate records,
regular and frequent review by management, frequent review of demand forecasts, and close follow-up and expediting to reduce lead time.

B Items: medium priority. Normal controls with good records, regular attention,
and normal processing.

C Items: lowest priority. Simplest possible controls-make sure there are plenty.
Simple or no records; perhaps use a two-bin system or periodic review system. Order large quantities and carry safety stock.

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ECONOMIC - ORDER QUANTITY (EOQ)

In the demand-certain situation, the total ordering charges are a direct function of the number of orders. Demand from consuming centres is fairly well established. The demand can be met by either having a few orders resulting in a large inventory, or by holding low inventories and correspondingly increasing the orders. Since ordering and carrying charges move in opposite directions, we have to balance the two costs in order to get the optimum or economic order quantity.

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Assumptions

The assumptions on which the EOQ is based are as follows: 1. Demand is relatively constant and is known. 2. The item is produced or purchased in lots or batches and not continuously. 3. Order preparation costs and inventory-carrying costs are constant and known. 4. Replacement occurs all at once.

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Reorder point:
The reorder point is the sum of buffer, safety & reserve stock. When this order point is reached, a prudent materials manager will go on for ordering Economic Order Quantity.

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LEAD TIME
It is the span of time needed to perform a process. In manufacturing it includes time for order preparation, queuing, processing, moving, receiving and inspecting, and any expected delays. From the view point of the supplier this is the time, from the receipt of an order to the delivery of the product whereas from customers view point it may also include time for the order preparation and transmission. The customer will always want shortest possible delivery lead time and the manufacturer/ supplier must design a strategy to achieve this. The following are the four basic strategies:

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Engineer-to-order

Make- to-order Assemble-to-order Make- to-stock One can also define Lead Time as the duration that lapses between the recognition of the need for an item and its fulfillment

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Service Level:
The efficiency of a warehouse is normally measured on a negative scale i.e. in terms of stock outs. The only time it is possible for a stockout to occur is when the stock is running low, and this happens every time an order is to be placed.

The service level is directly related to the number of standard deviations provided as safety stock and is usually called the safety factor. A service level is a statement of the percentage of time there is no stock out. If a higher service level is needed, safety stock must be provided to protect against those times when the actual demand is greater than the average.

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STORES MANAGEMENT

The objective of the store/ warehouse is to minimize cost and maximize customer service. For doing this, efficient stores operations perform the following: Provide timely customer service. Keep track of items so that they can be found readily and correctly. Minimize total physical effort to reduce cost of moving goods in and out of the stores. Provide communication links with the customers.

The cost of operating a warehouse consists of the following:

Capital Cost Operating Cost
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STORES ACTIVITIES
Efficient operation of a store (warehouse) depends on how well the following activities are performed.
1. Receive goods Check the goods against an order and BL (Bill of Lading) Check the quantities Check for damage Inspect goods, if required.

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2. Identify the goods: Identification with appropriate stock keeping unit (SKU) No. (Part No.) and the quantity received recorded. 3. Dispatch goods to storage 4. Hold the goods 5. Pickup the goods 6. Bring all the goods required as per single order together 7. Dispatch the segment 8. Operate an efficient information system

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Principles of Stores Organisations The following principles should be followed by the stores manager to create a effective stores organisations
Define and clearly spell out responsibilities to each manager according to the company objectives and the managers specialisation. Responsibility should be commensurate with authority. There should be no change in the scope and responsibility of a position without prior discussion. No employee should be subjected to orders from more than a single source of authority so that unity of command is preserved.

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Orders should never be given to subordinates superseding a responsible executive.

Criticism should be done privately and not in open meetings. All major/minor disputes between departments should be sorted out in coordination meetings.

The immediate superior should approve promotion, disciplinary action, increments, etc.

No employee should be the assistant as well as critic at the same time.

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The quality of the assistant's work should be periodically checked and mistakes pointed out so that corrective action can be taken at once.

For carrying out the above tasks effectively, the span of control or number of employees reporting to an executive should not be too large.

Adequate delegation of powers commensurate with the responsibility must be given.

It is advantageous to develop an organisation warehousing manual describing all aspects of the storage function.

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REASONS OF FAILURE
The primary purpose of stock verification is to check that the physical stock agrees with book balance. If these fail to match, as often is the case, then it could be due to the following reasons:

Failure of the system because the paper system is in error. The item may be incorrectly labelled due to mistakes in packing or inspection as the wrong issue could lead to less stock.

Stock could have been binned in the wrong location. Poor warehousing as boxes containing items may be in gangways. Items may have been mislaid or lodged between shelves and dislocated later on.

Regular theft of valuable items in collusion with the stores personnel

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Bad handwriting and figures copied incorrectly account for a majority of errors. Loss of documentation and elimination of the number of copies to be made. Deteriorating accuracy of records. Transferring the paper work from first shift to the second shift has not been proper. Receiving by weight and issuing by number, in the case of items like nuts, bolts, screw etc. could cause discrepancies.

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Inaccuracy of weighing scales at receiving or issuing or both. If the scales indicate 1 kg less every time and if there are 100 issues in a period, but with one receipt only - then the differences will be (100- 1) = 99 kg in the actual quantity. Issuing machinery spares without authorisation or indents or issue vouchers when the mechanics claim that the machines are idle. Urgent issues made when the store is closed, without posting entries. Delays in inspection, posting the goods receipt note and other receipt documents.

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Using rejected material during emergency and not accounting properly. Improper communication with user/indentor, inspection, external vendors etc. Each bin containing more than one item leading to mixing and confusion at issue. Indentor using suppliers part numbers and not internal codification, leading to confusion. Stores personnel unable to identify the item and issuing wrong material. Too many users coming to take material particularly in the morning creating confusion at the issue counter.

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Issuing without documentation as al1 the users are in a hurry. Direct delivered items and bulk items are received and removed without adequate documentation. Understaffed stores and presence of unskilled stores personnel. Improper records on the transfer from one store to another, lead to discrepancies. Lorries with materials are received when the store is closed, resulting in delays in posting. In spite of the above difficulties, the warehouse manager should ensure the proper receipt, issue and accounting of the items adequately by placing the items in their proper location.

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MATERIALS AUDIT

Two basic methods of checking of the inventory records:

Periodic (usually annual) Cyclic (usually daily)

It may be important to audit record accuracy but it is more important to audit the system to ensure the causes of record inaccuracy and eliminate them.

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Periodic Inventory

The primary purpose of this is to satisfy the financial auditors that the inventory records represent the value of the inventory. The planner would like to correct any inaccuracy in the records. The process of taking a physical inventory is as under:

Counting of the items and recording the same on a ticket left on the item. Verifying the count by recounting or by sampling. On completion of the verification, collect the tickets and list the items in each department.

Reconciliation of the inventory records for difference between physical count and the inventory. This is to enable the material personnel to check in case of any major discrepancy.
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Cyclic Inventory
Some items are counted frequently throughout the year depending on their importance.

Timely detection leads to finding the cause of error and to ensure that the error is less likely to happen again.

Compete or partial reduction or lost production.

Use of personnel trained and dedicated to do cyclic counting

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EQUIPMENT MANAGEMENT

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EQUIPMENT MANAGEMENT

Construction is the ultimate objective of a design. Machines make accomplishment of that objective possible. Fundamental concept of machine utilization is to match machine capability to specific project requirements. Equipment is an economic investment. Contractors must be able to apply the appropriate time value analytical formula to the decision process of machine purchase and utilization. The bottom line on completion of the project is-at a profit or loss! The planner must understand the work and coordinate use of the companys equipment to get a profit
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The most important aspect of planning & building a construction project is determining production & cost, and controlling both during the progress of the work. The ability to win contracts and to perform them at a profit is determined for the construction contractor by two vital assets: people and equipments. Therefore, it is most essential to have effective management policies for effective manpower and equipments required for the project. To be economically competitive, a contractors equipment must be competitive, both mechanically and technologically. New machines have lower repair costs and give higher production rates. In comparison, old/used machines require costly repairs and there is down time so they cannot compete with new machines.

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A piece of equipment cannot work as a stand- alone as equipments work in groups. As such even for small works, a large equipment spread may be required. That means a large investment.

Individual projects must be planned and executed so that each machine complements the production capabilities of all other pieces of equipments.

In some case the value of the equipment may be more than the contract value.

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The successful contractor is one who accomplishes a continuing series of jobs and completes each individual job at the least possible cost.

People & equipments along with the materials are the most important ingredients, the first two are very important assets.

Optimization in the management of an equipment spread is critical for contractor, both in achieving a competitive pricing position and in accumulating the corporate operating capital required to finance the expansion of project performance capability.

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There are no unique solutions to the problem of selecting a machine to work on a particular construction project.

The construction contractor works under a unique set of production conditions that directly affect equipment management. If the construction gets completed on time as planned, the contractor makes a profit. A construction company carries its factory from job to job.

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The construction contractor has only a limited number of projects at a given time. This limits the companys ability to spread the risk by volume and, thereby, protect itself from that one bad project that can send the company into bankruptcy. On the other hand, a manufacturing company can spread the cost of production mistakes across the volume of individual pieces produced and can adjust and fine tune the production line manufacturing process when the product does not meet specifications.

Equipment-intensive projects are usually the ones that present the greatest financial hazard. Such projects require an equipment commitment that is greater than the amount a contractor will be paid for completing a single project. Such a situation forces a contractor into a continuing sequence of jobs in order to support the long-term equipment payments. The profit margins get reduced.
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Additional risk factors facing equipment-intensive work are as under: Financing structure Construction activity levels Labor legislation and agreements Safety regulations.

Cash flow is the critical factor in any equipment purchase decision. The contractor, by being in the direct chain of action used by government to control economic cycles, gets affected, in whatever manner the cycle is moving. During inflation periods, funds are withheld. In case of slow or stagnant times, funds are pumped into projects to stimulate the economy.

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During such swings, a company with long-term equipment notes may be forced to bid for projects at a low price or sometimes with no margin even Almost all the work in heavy equipment-intensive fields is awarded on tender basis, either through open bid basis or on selective basis. Recently, the method of design-build method of bidding has also been resorted to. In this the contractor has a control on the project design. Each construction project represents a custom-built situation that is subject to a new set of governing cost conditions, and a typical estimating situation. There are no accurate cost records available. In most cases, the systems fail to allocate expenses to the proper sources, and therefore cause false conclusions when used as the historical database for estimating future works.

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A contractor who, with the same contract volume as the competition, is able to achieve a more rapid project completion, and therefore a higher turnover rate while maintaining the revenue-to-expense ratio will be able to increase the firms profits. If the contractor can improve production and increase turnover he has a very effective construction management.

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EVALUATING INVESTMENT ALTERNATIVES

An analysis should be made of each financial-investment alternative to determine how to best use a companys assets.

Cost of capital: The interest rate a company experiences is usually a weighted average rate resulting from the combined cost associated with all external and internal sources of capital funds. These are as under: Debt or borrowing Equity (sale of stock) Internally generated (retained earnings)

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In addition, the cost of capital interest rate is also affected by the risk associated with its business type. To work out discounted present worth analysis, the rate that the banks charge for borrowings cannot be the only factor for the cost-of-capital interest rate. Discounted Present Worth Analysis: This type of analysis involves calculating the equivalent present worth or present value of all the amounts involved in each of the individual alternates to determine the present worth of the proposed alternatives. The present worth is discounted at a predetermined rate of interest. This is often termed as the minimum attractive rate of return (MARR).The MARR is usually equal to the current cost-of-capital rate for the company.

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EQUIPMENT -INTENSIVE OPERATIONS & RISKS

Construction project is entirely different from a manufacturing facility. Manufacturing company has a permanent factory. Construction Company carries its factory from job to job. At each construction site, a factory is setup to produce one of a kind project. A manufacturing company can spread the cost of production mistakes across the volume of production. It can also analyze and rectify the problem within the closed environment of the factory. Construction Company on the other hand will have only a limited number of projects at any given time, and therefore can not spread the risk. Equipment intensive projects like highways, dams, irrigation canals etc. present the biggest financial hazards.
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The cost of equipment for certain projects is very high and unless there are repeated projects of the same nature the contractor will go bankrupt.

Control and management of equipments become very difficult, if the project is spread over a large area/ length.

Cash flow is the critical factor in any equipment decisions. Construction activity level variations are another risk factor. In a Construction Contract, Contract Volume (value of work awarded to a contractor) is a guide to the magnitude of resources a company has committed at a particular time.
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If a contractor is able to complete the project fast he will make money.

o o Data collection and analysis of machine utilization helps in having better idea about equipment procurement for future projects. This should be based on following: 1. 2. Fuel consumption Spare parts - availability and price Fast moving Slow moving Down time Tyres Oil and lubricants

3. 4. 5.

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Upkeep of accurate record of the equipments for evaluating performance, establishing operating cost, analyzing replacement options, and managing projects.

Whether the machine has useful working on a particular day or was idle? Reasons for its being idle?

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PLANNING AND ESTIMATING EQUIPMENT UTILIZATION

Must match the right machine or group of machines to the job at hand. First determine the machine productivity. It is not always obvious which machine/ equipment is best for a particular project task. The equipment planner must keep in mind the following before Planning / Selecting any equipment 1. 2. 3. Study the plans and specs Visit the project site Perform a quantity take off

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4.

Visualize how to best utilize specific pieces of equipments:

The type of equipment that has a lowest total cost should be selected. No two projects are alike. Begin each project with an open mind and review all possible options. New machine enables greater economics. Good planner will match to project situations.

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EQUIPMENT COST

The process of selecting particular equipment requires knowledge of the cost associated with operating the machine. Economic life of a machine is of paramount importance. Reasons for purchasing equipment are to perform work that will generate profit to the company. Basic methods for securing equipment at the project site. 1. Purchase 2. Rent 3. Lease The equipment owner must analyse 1. What is operating cost? 2. What is optimum economic life?

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OWNERSHIP COST

Purchase value Salvage value Depreciation allowable Major repairs/ overhauls Taxes on holdings if any Insurance Storage etc

Operating cost includes Fuel Lubricants, lube oils, filters, grease Repairs Tyres Spare parts Operator wages

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Therefore, the decision to induct a particular machine is based on the cost of operating the machine in the field. Decision to buy, rent or lease is based on thorough study analysis of the advantages and disadvantages of the options. Even though ownership guarantees control of machine availability and mechanical condition, some time an obsolete machine may be used. With rental, a machine which is exactly required may be picked up. Rental charges are however higher. Lease is alternative to ownership. It is a long term agreement to use the assets.

Gautam Arora

GENERAL

No contractor can afford to own all types or sizes of equipments. Selection of equipments varies from project to project. Money spent for an equipment is an investment which the owner expects to recover with profit during its useful life. A contractor doesn't pay for equipment; it pays for itself and in turn earns something for the contractor/ owner. The basic theme is that if an equipment earns less than the cost, do not buy it.

Two types of equipments Standard equipment Special equipment

Gautam Arora

Alternatives for investment evaluation

It is always good economic sense to make analysis of each financial investment alternative. Money has value. This is forgotten most of the time. The cost of capital should be worked out by weighted average rate -by taking into account borrowings, equities and retained earnings. A discounted present worth analysis - to calculate equivalent present worth should be carried out to determine the present worth of the proposed alternative. Rate of return analysis gives an indication of the interest rate that makes the discounted present worth of the investment equal to zero.

Gautam Arora

Thank you

Gautam Arora