CONSTRUCTION MANAGEMENT

BUILDING ECONOMICS
REPORT ON FINANCAL MANAGEMENT

SUBMITTED BY :
ANKIT VERMA B.ARCH., B.C.M. FINAL YEAR B.B.D.N.I.T.M.

FINANCIAL MANAGEMENT :
Financial management is that management activity which is concerned with the planning and controlling of the firms financial resources. SCOPE OF FINANCE A firm creates manufacturing capacities for production of goods; some provides service to the customers. They sell their goods or services to earn profit. They raise funds to acquire manufacturing and other facilities. Thus, the three most important activities of a business firms are: Production Marketing Finance FINANCE FUNCTIONS The functions of raising funds, investing them in assets and distributing returns earned from assets to shareholders are respectively known as financing, investment, and dividend decisions. Finance functions or decisions include: Investment or long term asset-mix decision Financing or capital-mix decision Dividend or profit allocated decisions Short term asset-mix decisions A firm performs finance simultaneously and continuously in the normal course of the business. Finance functions call for skilful planning, control and execution of firms activities. TYPES OF FINANCING 1.SHORT TERM BORROWING This type of financing is usually obtained from a bank or commercial finance company. It can be handled through several different avenues, most commonly via borrowing on and unsecured loans. While borrowing in short-term system the expiration date is usually after 30 day period. 2.LONG TERM BORROWING This is a long term financing bond. This is usually done by a combination of lending money and investing money or lending funds against a percentage of ownership in the company. 3. LEASING some contractors have formed separate corporations to lease equipment to their own construction company on a day to day basis. BUDGET Budgeted Cost The budgeted cost is derived from the detailed cost estimate prepared at the start of the project. The factors of cost would be referenced by cost account and by a prose description. Estimated total cost The estimated or forecast total cost in each category is the current best estimate of costs based on progress and any changes since the budget was formed. Estimated total costs are the sum of cost to date, commitments and exposure. Methods for estimating total costs are described below. The Project Budget 1. For cost control on a project, the construction plan and the associated cash flow estimates can provide the baseline reference for subsequent project monitoring and control. The final or detailed cost estimate provides a baseline for the assessment of financial performance during the project. To the extent that costs are within the detailed cost estimate, then the project is thought to be under financial control. For control and monitoring purposes, the original detailed cost estimate is typically converted to a project budget, and the project budget is used subsequently as a guide for management. Specific items in the detailed cost estimate become job cost elements. Expenses incurred during the course of a project are recorded in specific job cost accounts to be compared with the original cost estimates in each category. Thus, individual job cost accounts generally represent the basic unit for cost control. In addition to cost amounts, information on material quantities and labor inputs within each job account is also typically retained in the project budget. With this information, actual materials usage and labour employed can be compared to the expected requirements.

2. 3.

4.

5.

The number of cost accounts associated with a particular project can vary considerably. For constructors, on the order of four hundred separate cost accounts might be used on a small project. These accounts record all the transactions associated with a project. Thus, separate accounts might exist for different types of materials, equipment use, payroll, project office, etc.

The Cost Control Problem During the execution of a project, procedures for project control and record keeping become indispensable tools to managers and other participants in the construction process. These tools serve the dual purpose of 1. recording the financial transactions 2. giving managers an indication of the progress and problems associated with a project. The task is to give a fair indication of the existence and the extent of such problems. The time at which major cost savings can be achieved is during planning and design for the project Forecasting for Activity Cost Control Good managers should focus upon future revenues, future costs and technical problems. Generally, past expenditures represent sunk costs that cannot be altered in the future and may or may not be relevant in the future. For example, after the completion of some activity, it may be discovered that some quality flaw renders the work useless. Unfortunately, the resources expended on the flawed construction will generally be sunk and cannot be recovered for re-construction

An example of forecasting used to assess the project status is shown in Table 12-4. In this example, costs are reported in five categories, representing the sum of all the various cost accounts associated with each category: Methods for estimating total costs are described below.

1. Cost Committed and Cost Exposure!! Estimated cost to completion in each category in divided into
firm commitments and estimated additional cost or exposure. Commitments may represent material orders or subcontracts for which firm dollar amounts have been committed. 2. Cost to Date The actual cost incurred to date is recorded in column 6 and can be derived from the financial record keeping accounts. 3. Over or (Under) A final column in Table 12-4 indicates the amount over or under the budget for each category.. Note that variance is used in the terminology of project control to indicate a difference between budgeted and actual expenditures.. In Table 12-4, labour costs are running higher than expected, whereas subcontracts are less than expected.

Next step - to look in greater detail at the various components of these categories. Overruns in cost might be due to lower than expected productivity, higher than expected wage rates, higher than expected material costs, or other factors.

Even further, low productivity might be caused by inadequate training, lack of required resources such as equipment or tools, or inordinate amounts of re-work to correct quality problems. Review of a job status report is only the first step in project control. In addition to changes in productivities, other components of the estimating formula can be adjusted or more detailed estimates substituted. For example, the change in unit prices due to new labour contracts or material supplier's prices might be reflected in estimating future expenditures. Each of the estimating methods described above require current information on the state of work accomplishment for particular activities. There are several possible methods to develop such estimates, including : Units of Work Completed For easily measured quantities the actual proportion of completed work amounts can be measured. For example, the linear feet of piping installed can be compared to the required amount of piping to estimate the percentage of piping work completed.

Incremental Milestones Particular activities can be sub-divided or "decomposed" into a series of milestones, and the milestones can be used to indicate the percentage of work complete based on historical averages. For example, the work effort involved with installation of standard piping might be divided into four milestones: o Spool in place: 20% of work and 20% of cumulative work. o Ends welded: 40% of work and 60% of cumulative work. o Hangars and Trim Complete: 30% of work and 90% of cumulative work. o Hydrotested and Complete: 10% of work and 100% of cumulative work. Thus, a pipe section for which the ends have been welded would be reported as 60% complete.

Opinion Subjective judgments of the percentage complete can be prepared by the project managers themselves. Cost Ratio The cost incurred to date can also be used to estimate the work progress. For example, if an activity was budgeted to cost $20,000 and the cost incurred at a particular date was $10,000, then the estimated percentage complete under the cost ratio method would be 10,000/20,000 = 0.5 or fifty percent. This method provides no independent information on the actual percentage complete or any possible errors in the activity budget: the cost forecast will always be the budgeted amount.

Example 12-3: Estimated Total Cost to Complete an Activity Suppose that we wish to estimate the total cost to complete piping construction activities on a project. The piping construction involves 1,000 linear feet of piping which has been divided into 50 sections for management convenience. At this time, 400 linear feet of piping has been installed at a cost of $40,000 and 500 man-hours of labour. The original budget estimate was $90,000 with a productivity of one foot per man-hour, a unit cost of $60 per man hour and a total material cost of $ 30,000. Firm commitments of material delivery for the $30,000 estimated cost have been received. The first task is to estimate the proportion of work completed. Two estimates are readily available. First, 400 linear feet of pipe is in place out of a total of 1000 linear feet, so the proportion of work completed is 400/1000 = 0.4 or 40%. This is the "units of work completed" estimation method. Second, the cost ratio method would estimate the work complete as the cost-to-date divided by the cost estimate or $40,000/$ 90,000 = 0.44 or 44%. Third, the "incremental milestones" method would be applied by examining each pipe section and estimating a percentage complete and then aggregating to determine the total percentage complete. For example, suppose the following quantities of piping fell into four categories of completeness:

Then using the incremental milestones shown above, the estimate of completed work would be 380 + (20) (0.9) + (5)(0.6) + 0 = 401 ft and the proportion complete would be 401 ft/1,000 ft = 0.401 or 40% after rounding. Once an estimate of work completed is available, then the estimated cost to complete the activity can be calculated. Control of Project Cash Flows Project managers also are involved with assessment of the overall status of the project, including : status of activities, financing, payments and receipts.

These various items comprise the project and financing cash flows. These components include costs incurred (as described above), billings and receipts for billings to owners (for contractors), payable amounts to suppliers and contractors, financing plan cash flows (for bonds or other financial instruments), etc.

Costs This is a summary of charges as reflected by the job cost accounts, including expenditures and estimated costs. This row provides an aggregate summary of the detailed activity cost information described in the previous section. For this example, the total costs as of July 2 (7/02) were $ 8,754,516, and the original cost estimate was $65,863,092, so the approximate percentage complete was 8,754,516/65,863,092 or 13.292%. However, the project manager now projects a cost of $66,545,263 for the project, representing an increase of $682,171 over the original estimate. This new estimate would reflect the actual percentage of work completed as well as other effects such as changes in unit prices for labor or materials.

Billings This row summarizes the state of cash flows with respect to the owner of the facility; this row would not be included for reports to owners. The contract amount was $67,511,602, and a total of $9,276,621 or 13.741% of the contract has been billed. The amount of allowable billing is specified under the terms of the contract between an owner and an engineering, architect, or constructor. In this case, total billings have exceeded the estimated project completion proportion. The final column includes the currently projected net earnings of $966,339. This figure is calculated as the contract amount less projected costs: 67,511,602 - 66,545,263 = $966,339. Note that this profit figure does not reflect the time value of money or discounting. Payables The Payables row summarizes the amount owed by the contractor to material suppliers, labor or subcontractors. At the time of this report, $6,719,103 had been paid to subcontractors, material suppliers, and others. Invoices of $1,300,089 have accumulated but have not yet been paid. A retention of $391,671 has been imposed on subcontractors, and $343,653 in direct labor expenses have been occurred. The total of payables is equal to the total project expenses shown in the first row of costs. Receivables This row summarizes the cash flow of receipts from the owner. Note that the actual receipts from the owner may differ from the amounts billed due to delayed payments or retainage on the part of the owner. The net-billed equals the gross billed less retention by the owner. In this case, gross billed is $9,276,621 (as shown in the billings row), the net billed is $8,761,673 and the retention is $514,948. Unfortunately, only $7,209,344 has been received from the owner, so the open receivable amount is a (substantial!) $2,067,277 due from the owner. Cash Position This row summarizes the cash position of the project as if all expenses and receipts for the project were combined in a single account. The actual expenditures have been $7,062,756 (calculated as the total costs of $8,754,516 less subcontractor retentions of $391,671 and unpaid bills of $1,300,089) and $ 7,209,344 has been received from the owner. As a result, a net cash balance of $146,588 exists which can be used in an interest earning bank account or to finance deficits on other projects.

Different reports with varying amounts of detail and item reports would be prepared for different individuals involved in a project. Reports to upper management would be summaries, Reports to particular staff individuals would emphasize their responsibilities (eg. purchasing, payroll, etc.), and Detailed reports would be provided to the individual project managers.

LIABILITY In financial accounting, a liability is defined as an obligation of an entity arising from past transactions or events, the settlement of which may result in the transfer or use of assets, provision of services or other yielding of economic benefits in the future. Individual or group must adopt corporate charter and file it with the state.

They embody a duty or responsibility to others that entails settlement by future transfer or use of assets, provision of services or
other yielding of economic benefits, at a specified or determinable date, on occurrence of a specified event, or on demand; The duty or responsibility obligates the entity leaving it little or no discretion to avoid it; and, The transaction or event obligating the entity has already occurred.

Liabilities in financial accounting need not be legally enforceable; but can be based on equitable obligations or constructive obligations. What about a business liability? How is this different from a personal liability? Not really that much different, except that often these liabilities are for much greater amounts of money, and very few items purchased for a business will be acquired without the funding from borrowed money.

Liabilities are not just loans. When you operate a business, and you have employees you will be responsible for payroll taxes that must be paid on that employee. These are known as payroll liabilities. Credit issued to your customer for defective products or services is a liability until the customer uses the credit. Accounts payable in a business are a liability. Theyre not loans in the traditional sense, but accounts payable are accounts for which the vendor has extended your business credit purchasing terms. In other words, you can purchase the products, goods or services based on your credit rating, and pay for them in 30, 60, 90 day terms. Can you begin to see how your credit history, developed through your repayment of long term liabilities, can affect your ability to obtain future liabilities? It is a continual circle of a relationship. Assets, liabilities, and credit all affect and change each other. As you can see, liabilities are like assets in that they are not simple, cut and dried objects. The only variant from a comparison of assets and liabilities is in the intangible area. Generally, a liability is not included in the intangible sense of the word. LOAN A loan is a type of debt. This article focuses exclusively on monetary loans, although, in practice, any material object might be lent. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower. The borrower initially does receive an amount of money from the lender, which they pay back, usually but not always in regular installments, to the lender. This service is generally provided at a cost, referred to as interest on the debt. A loan is of the annuity type if the amount paid periodically (for paying off and interest together) is fixed. A borrower may be subject to certain restrictions known as loan covenants under the terms of the loan.Acting as a provider of loans is one of the principal tasks for financial institutions. For other institutions, issuing of debt contracts such as bonds is a typical source of funding.Legally, a loan is a contractual promise of a debtor to repay a sum of money in exchange for the promise of a creditor to give another sum of money. ASSET In business and accounting, assets are everything of value that is owned by a person or company. [1]. The Balance Sheet of a firm records the monetary[1] value of the assets owned by the firm. The 2 major Asset Classes are Tangible Assets and Intangible Assets. Tangible Assets contain various subclasses, including Financial Assets and Fixed Assets.[2] Financial Assets include such items as Accounts Receivable, Bonds, Stocks and Cash; while Fixed Assets include such items as Buildings and Equipment.[3] Intangible Assets are nonphysical resources and rights that have a value to the firm because they give the firm some kind of advantage in the Market Place. Examples of Intangible Assets are Goodwill, Copyrights, Trademarks, Patents and Computer Programs.[3] FINANCIAL CLOSURE Definition Financial closure is the process of completing all project-related financial transactions, finalizing and closing the project financial accounts, disposing of project assets and releasing the work site. Why is this important? Financial closure is a prerequisite to project closure and the Post Implementation Review (PIR). A project cannot be closed until all financial transactions are complete, otherwise there may not be funds or authority to pay outstanding invoices and charges. Financial closure establishes final project costs for comparison against budgeted costs as part of the PIR. Financial closure also ensures that there is a proper disposition of all project assets including the work site. How to do it well

Establish, in advance, and publish to all project staff and vendors the deadline date for the completion of all financial transactions and closing of financial accounts. Verify that all acceptance criteria in the Statement of Work have been met prior to payments to vendors and consultants, if applicable. Annotate "Final Payment" on all vouchers. Verify that there are no outstanding invoices or unresolved financial obligations. Close financial accounts according to applicable agency, state and federal accounting procedures. Comply with all applicable funding source requirements for records retention. Comply with all applicable funding source requirements for financial reporting. Notify agency contracts office that final payments have been processed for all project related contracts. Transfer or dispose of assets according to the Acquisition Plan. Release the work site according to agreements with facilities management.