ASSIGNMENT

NICMAR / SODE OFFICE

1. Course - NCP 29

2. Course Title - Construction Finance Management & Cost

Accounting

3. Assignment No.

4. Last date of receipt -

Of Assignment at SODE office

Submitted By;

Name : Registration No. :

Construction Finance Management & Cost Accounting – NCP 29

Project Scope

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 5,000 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 the developers as a cost of
development

Cost of Land is Rs. 10,000/- sq.m

Flooring specifications for flooring:

- 10% Granite

- 40% Kota stone

- 50% Mosaic cement tiles

Developers would like to have minimum 18% net profit on their investment. Developer can
invest only Rs. 10 lakhs as his own funds and can raise not more than Rs. 50 lakhs as bank loan.

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).

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.

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:

 Land acquisition, including assembly, holding and improvement

 Planning and feasibility studies

 Architectural and engineering design

 Construction, including materials, equipment and labor

 Field supervision of construction

 Construction financing

 Insurance and taxes during construction

 Equipment and furnishings not included in construction

 Inspection and testing

The operation and maintenance cost in subsequent years over the project life cycle includes the
following expenses:

 Land rent, if applicable

 Operating staff

 Labor and material for maintenance and repairs

 Periodic renovations

 Insurance and taxes

 Financing costs

 Utilities

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.

The total cost of the project is calculated as below:

Particulars Rs./sq.ft Amount

Cost of Superstructure 450 24219000

Cost of Brick work, plaster etc 90 4843800
Cost of Electric work 108 5812560
Cost of Plumbing 90 4843800
Cost of Finishing 54 2906280
Cost of Granite Flooring 130 6996600
Cost of Kota Flooring 40 2152800
Cost of Mosaic Flooring 40 2152800

TOTAL COST 53927640

Work Schedule represents the necessary framework to permit scheduling of construction

activities, along with estimating the resources required by the individual work tasks, and any
necessary precedences or required sequence among the tasks. The terms work "tasks" or
"activities" are often used interchangeably in construction plans to refer to specific, defined
items of work. The scheduling problem is to determine an appropriate set of activity start time,
resource allocations and completion times that will result in completion of the project in a
timely and efficient fashion. Construction planning is the necessary fore-runner to scheduling.
In this planning, defining work tasks, technology and construction method is typically done
either simultaneously or in a series of iterations.

The definition of appropriate work scheduling can be a laborious and tedious process, yet it
represents the necessary information for application of formal scheduling procedures. Since
construction projects can involve thousands of individual work tasks, this definition phase can
also be expensive and time consuming. Fortunately, many tasks may be repeated in different
parts of the facility or past facility construction plans can be used as general models for new
 projects. For example, the tasks involved in the construction of a building floor may be
repeated with only minor differences for each of the floors in the building.

The work schedule on quarterly basis for the project is given below:

Outline
ID Name Duration Start Finish
Number
         
1 1.0 Contracts   QUARTER 1  
2 1.1 __Supply Lot Sale Agreement 0.00d 1-May-2010 1-May-2010
3 1.2 __Supply Construction Agreement 0.00d 1-May-2010 1-May-2010
4 1.3 __Supply Contract Plans 0.00d 1-May-2010 1-May-2010
5 1.4 __Supply Contract Specifications 0.00d 1-May-2010 1-May-2010
6 1.5 __Supply Contract Site Plan 0.00d 1-May-2010 1-May-2010
7 1.6 __Secure Financing 0.00d 1-May-2010 1-May-2010
8 1.7 __Construction Loan Settlement 0.00d 1-May-2010 1-May-2010
9 2.0 Document Review & Revision      
10 2.1 __Review & Finalize Plans 15.00d 2-May-2010 26-May-2010
11 2.2 __Review & Finalize Specifications 20.00d 27-May-2010 15-Jun-2010
12 2.3 __Review & Finalize Site Plan 1.00d 16-Jun-2010 17-Jun-2010
13 2.4 __Print Construction Drawings 5.00d 18-Jun-2010 22-Jun-2010
14 2.5 __Approve Revised Plans 0.00d 23-Jun-2010 23-Jun-2010
15 2.6 __Approve Revised Specifications 0.00d 23-Jun-2010 23-Jun-2010
16 2.7 __Approve Revised Site Plan 0.00d 23-Jun-2010 23-Jun-2010
17 3.0 Site Work      
18 3.1 __Clear Lot 3.00d 24-Jun-2010 26-Jun-2010
19 3.2 __Strip Topsoil & Stockpile 1.00d 27-Jun-2010 27-Jun-2010
20 3.3 __Stake Lot for Excavation 1.00d 28-Jun-2010 28-Jun-2010
21 3.4 __Rough grade lot 1.00d 29-Jun-2010 29-Jun-2010
22 3.5 __Excavate for foundation 2.00d 30-Jun-2010 1-Jul-2010
23 4.0 Foundation   QUARTER 2  
24 4.1 __Layout footings 1.00d 2-Jul-2010 2-Jul-2010
25 4.2 __Dig Footings & Install Reinforcing 1.00d 3-Jul-2010 3-Jul-2010
26 4.3 __Footing Inspection 0.00d 4-Jul-2010 4-Jul-2010
27 4.4 __Pour footings 1.00d 5-Jul-2010 5-Jul-2010
28 4.5 __Pin Footings 1.00d 6-Jul-2010 6-Jul-2010
29 4.6 __Stock Block, Mortar, Sand 1.00d 7-Jul-2010 7-Jul-2010
30 4.7 __Build Block Foundation 15.00d 8-Jul-2010 22-Jul-2010
31 4.8 __Foundation Certification 0.00d 22-Jul-2010 22-Jul-2010
32 4.9 __Fill Block Cores w/ Concrete 1.00d 22-Jul-2010 22-Jul-2010
33 4.1 __Steel Delivery 1.00d 23-Jul-2010 23-Jul-2010
34 4.1 __Set Lintels, Bolts, Cap Block 2.00d 24-Jul-2010 25-Jul-2010
35 4.1 __Lumber Delivery 1.00d 26-Jul-2010 26-Jul-2010
36 4.1 __Waterproofing and Drain Tile 1.00d 27-Jul-2010 27-Jul-2010
37 5.0 Rough Carpentry      
38 5.1 __Set Steel 1.00d 28-Jul-2010 28-Jul-2010
39 5.2 __1st Floor Deck Framing 4.00d 29-Jul-2010 1-Aug-2010
40 5.3 __1st Floor Wall Framing 4.00d 2-Aug-2010 5-Aug-2010
41 5.4 __2nd Floor Deck Framing 2.00d 6-Aug-2010 7-Aug-2010
42 5.5 __2nd Floor Wall Framing 3.00d 8-Aug-2010 10-Aug-2010
43 5.6 __Set Roof Trusses 2.00d 10-Aug-2010 10-Aug-2010
44 5.7 __Frame Roof 7.00d 11-Aug-2010 17-Aug-2010
45 5.8 __Install Roof Plywood 5.00d 18-Aug-2010 22-Aug-2010
46 5.9 __Install Windows & Doors 2.00d 23-Aug-2010 24-Aug-2010
47 5.1 __Frame Basement 3.00d 25-Aug-2010 27-Aug-2010
48 5.1 __Frame Basement Bulkheads 2.00d 10-Aug-2010 11-Aug-2010
49 6.0 Concrete Slabs      
50 6.1 __Basement Slab Preparation 2.00d 12-Aug-2010 13-Aug-2010
51 6.2 __Termite Treatment Basement Slab 1.00d 14-Aug-2010 14-Aug-2010
52 6.3 __Slab Inspection 1.00d 15-Aug-2010 15-Aug-2010
53 6.4 __Pour Basement Slab 1.00d 16-Aug-2010 16-Aug-2010
54 6.5 __Prep Garage Slab 1.00d 17-Aug-2010 17-Aug-2010
55 6.6 __Termite Treatment Garage Slab 1.00d 18-Aug-2010 18-Aug-2010
56 6.7 __Pour Garage Slab 1.00d 19-Aug-2010 19-Aug-2010
57 7.0 Plumbing Rough-in      
58 7.1 __Plumbing Sub-slab 2.00d 20-Aug-2010 21-Aug-2010
59 7.2 __Plumbing Layout 1.00d 22-Aug-2010 22-Aug-2010
60 7.3 __Plumbing rough-in 5.00d 23-Aug-2010 27-Aug-2010
61 8.0 Electric Rough-in      
62 8.1 __Set Electric Boxes 2.00d 28-Aug-2010 29-Aug-2010
63 8.2 __Install Electric Service Panel 2.00d 30-Aug-2010 31-Aug-2010
64 8.3 __Electrical Walk-through 1.00d 1-Sep-2010 1-Sep-2010
65 8.4 __Electrical Rough-wire 14.00d 2-Sep-2010 15-Sep-2010
66 9.0 Specialty Rough-ins      
67 9.1 __Central Vacuum Rough-in 5.00d 16-Sep-2010 20-Sep-2010
68 9.2 __Alarm System Rough-in 5.00d 21-Sep-2010 25-Sep-2010
69 9.3 __Telephone System Rough-in 5.00d 26-Sep-2010 30-Sep-2010
70 9.4 __Television System Rough-in 5.00d 1-Oct-2010 5-Oct-2010
71 9.5 __Audio Visual Rough-in 5.00d 6-Oct-2010 10-Oct-2010
72 10.0 Electrical inspection 0.00d 10-Oct-2010 10-Oct-2010
73 11.0 Framing Inspection 0.00d 10-Oct-2010 10-Oct-2010
74 12.0 Roofing      
75 12.1 __Roofing Paper Installed 3.00d 10-Oct-2010 12-Oct-2010
76 12.2 __Stock Roof Shingles 1.00d 12-Oct-2010 13-Oct-2010
77 12.3 __Install Roof Shingles 7.00d 14-Oct-2010 20-Oct-2010
78 13.0 Exterior Finishes      
79 13.1 __Siding 3.00d 20-Oct-2010 20-Oct-2010
80 13.2 __Exterior Trim 7.00d 20-Oct-2010 20-Oct-2010
81 13.3 __Brick Arch Forms 1.00d 20-Oct-2010 20-Oct-2010
82 13.4 __Brick Veneer 45.00d 20-Oct-2010 20-Oct-2010
83 14.0 Insulation      
84 14.1 __Caulk & Air Seal 1.00d 20-Oct-2010 21-Oct-2010
85 14.2 __Draft & Fire Stop 1.00d 22-Oct-2010 23-Oct-2010
86 14.3 __Insulation 3.00d 24-Oct-2010 26-Oct-2010
87 15.0 Floor Finishes   QUARTER 3  
88 15.1 __Ceramic Tile 15.00d 27-Oct-2010 10-Nov-2010
89 15.2 __Install Hardwood Floor 4.00d 11-Nov-2010 14-Nov-2010
90 15.3 __Sand, Stain, Seal Hardwood 5.00d 15-Nov-2010 19-Nov-2010
91 15.4 __Install Carpet 4.00d 20-Nov-2010 23-Nov-2010
92 15.5 __Final Coat Hardwood 2.00d 24-Nov-2010 25-Nov-2010
93 16.0 Paint      
94 16.1 __Prep Drywall for Prime Coat 2.00d 26-Nov-2010 27-Nov-2010
95 16.2 __Prime Paint Drywall 2.00d 28-Nov-2010 29-Nov-2010
96 16.3 __Prep Trim for Prime Coat 2.00d 30-Nov-2010 1-Dec-2010
97 16.4 __Prime Trim 2.00d 2-Dec-2010 3-Dec-2010
98 16.5 __Finish Coat Trim 10.00d 4-Dec-2010 13-Dec-2010
99 16.6 __Finish Coat Drywall 14.00d 14-Dec-2010 27-Dec-2010
10
0 16.7 __Caulk Exterior Windows & Doors 1.00d 28-Dec-2010 29-Dec-2010
10
1 16.8 __Finish Coat Exterior Trim & Siding 1.00d 30-Dec-2010 31-Dec-2010
10
2 17.0 Exterior Landscaping   QUARTER 4  
10
3 17.1 __Rough Final Grade 1.00d 1-Jan-2011 1-Jan-2011
10
4 17.2 __Patios 7.00d 2-Jan-2011 8-Jan-2011
10
5 17.3 __Porches 5.00d 9-Jan-2011 13-Jan-2011
10
6 17.4 __Sidewalks 7.00d 14-Jan-2011 20-Jan-2011
10
7 17.5 __Decks 7.00d 21-Jan-2011 27-Jan-2011
10
8 17.6 __Driveways 2.00d 28-Jan-2011 29-Jan-2011
10
9 17.7 __Final Grade and Seed 3.00d 30-Jan-2011 1-Feb-2011
11
0 18.0 Hardware      
11
1 18.1 __Door Hardware 2.00d 1-Feb-2011 2-Feb-2011
11 18.2 __Bath Hardware 2.00d 3-Feb-2011 4-Feb-2011
 2
11
3 18.3 __Mirrors 5.00d 5-Feb-2011 9-Feb-2011
11
4 18.4 __Shower Doors 10.00d 10-Feb-2011 19-Feb-2011
11
5 18.5 Final Building Inspection 0.00d 19-Feb-2011 19-Feb-2011
11
6 19.0 Cleaning      
11
7 19.1 __Windows 3.00d 19-Feb-2011 21-Feb-2011
11
8 19.2 __Rough Clean 3.00d 22-Feb-2011 24-Feb-2011
11
9 19.3 __Final Clean 2.00d 25-Feb-2011 26-Feb-2011
12
0 20.0 Final Walk-through      
12
1 21.0 Move-in      
Financial and economic Evaluation

Capital - Business requires capital. The term capital is used differently in different contexts. It is
used in the sense of means of production, usually the assets held by the firm. It is also used in
the sense of finance obtained by a firm. In accounting, capital is used in the second sense. A
part of the finance obtained by a firm is in the form of interest free credit, such as credit
allowed by suppliers of materials or services and advance payment received by customers. The
interest free credit is settled in the normal operating cycle of the business and is not included in
the capital.

Revenue – Revenue is the income that arises from exchange transactions with customers in the
course of ordinary activities of an enterprise. An entity’s revenue earning activities include
selling of goods, rendering of services, and allowing others to use entity’s resources yielding
interest, royalties and dividends. Revenue increases the equity of the enterprise. As a general
principle, an enterprise recognizes revenue when it receives cash, receivables or other
consideration in its own account. For example, in an agency relationship, the agent recognizes
the commission as revenue.

Finance Resource mobilization – Resource mobilization can facilitate the flow of resources
from various sources and catalyze the flow of additional resources from official and private
institutions. For projects and programs that are too large to be handled by one funding agency,
mobilizing co financing from various funding sources can help meet these large resource
requirements. Resources can be in any form such as finances, technology, manpower both
skilled and labor, knowledge, information, etc

Financial accounting - Financial accounting consists of recording, classifying and analyzing the
business transactions so as to facilitate the preparation of Profit and loss account for a period
and also the position statement (i.e. Balance Sheet) as on a particular day. Thus, the emphasis
of financial accounting is on the ascertainment of profit and loss of the concern and not on the
more important aspects of the business i.e. planning, control and decision-making.

Cost accounting - Cost accounting analyses the transactions in an objective manner for the
purposes of planning, control and decision making. Cost accountancy is the application of
costing and Cost accounting principle, methods and techniques to the science, art and practice
of cost control and the ascertainment of profitability. It includes the presentation of
information derived there from for the purpose of managerial decision making. Cost accounting
is also defined as the process of accounting for cost from the point at which expenditure is
incurred or committed to the establishment of its ultimate relationship with cost centers and
cost units.

Management accounting - Management accounting is another aspect of accounting which has

developed in recent years and is being employed in many concerns as an informative
mechanism to aid the management in decision making by providing various information they
need for the purpose. Both cost and management accounting working together can keep the
management well informed about what is going on in the business and what changes, if any, is
required to be given effect to.

Capital budgeting or investment appraisal is the planning process used to determine whether a
firm's long term investments such as new machinery, replacement machinery, new plants, new
products, and research development projects are worth pursuing. It is budget for major capital,
or investment, expenditures.
Many formal methods are used in capital budgeting, including the techniques such as
Accounting rate of return, Net present value, Profitability index, Internal rate of return,
Modified internal rate of return, Equivalent annuity etc. These methods use the incremental
cash flows from each potential investment, or project Techniques based on accounting earnings
and accounting rules are sometimes used - though economists consider this to be improper -
such as the accounting rate of return, and "return on investment." Simplified and hybrid
methods are used as well, such as payback period and discounted payback period

Cash flow forecasting is in a corporate finance sense, the modeling of a company or asset’s
future financial liquidity over a specific timeframe. Cash usually refers to the company’s total
bank balances, but often what is forecast is treasury position which is cash plus short-term
investments minus short-term debt. Cash flow is the change in cash or treasury position from
one period to the next; in the context of the entrepreneur or manager, forecasting what cash
will come into the business or business unit in order to ensure that outgoing can be managed to
as to avoid them exceeding cash flow coming in. If there is one thing entrepreneurs learn fast, it
is to become very good at cash flow forecasting.

Proposed Project Financing

Capital structure refers to the way a corporation finances its assets through some combination
of equity, debt, or hybrid securities. A firm's capital structure is then the composition or
'structure' of its liabilities. The proposed capital structure for the project is as below:

Capital Structure

Asset 50,000,000.00

Equity 1,000,000.00

Debt 4,000,000.00
The debt raised by the promoter is Rs 40 lacs. The total debt would not be taken all at once
rather it would be disbursed in 4 equal quarterly installments. This debt will carry a fixed
interest expense as follows:

Month Amount Int. Payable Int. Payable Closing Loan bal

(Rs.) Monthly Quarterly
Apr-10 1000000 10000   1000000
May-10   10000   1000000
Jun-10   10000 30000 1000000
Jul-10 1000000 20000   2000000
Aug-10   20000   2000000
Sep-10   20000 60000 2000000
Oct-10 1000000 30000   3000000
Nov-10   30000   3000000
Dec-10   30000 90000 3000000
Jan-11 1000000 40000   4000000
Feb-11   40000   4000000
Mar-11   40000 120000 4000000

*Loan disbursed in 4 equal quarterly installments

**Assuming interest @ 12% p.a.

Profit Measures

A profit measure is defined as an indicator of the desirability of a project from the standpoint of
a decision maker. A profit measure may or may not be used as the basis for project selection.
Since various profit measures are used by decision makers for different purposes, the
advantages and restrictions for using these profit measures should be fully understood.

There are several profit measures that are commonly used by decision makers in both private
corporations and public construction projects. Each of these measures is intended to be an
indicator of profit or net benefit for a project under consideration. Some of these measures
indicate the size of the profit at a specific point in time; others give the rate of return per period
when the capital is in use or when reinvestments of the early profits are also included. Some of
the most frequently used profit measures are as follows:

1. Net Future Value and Net Present Value. When an organization makes an investment, the
decision maker looks forward to the gain over a planning horizon, against what might be gained
if the money were invested elsewhere. A minimum attractive rate of return (MARR) is adopted
to reflect this opportunity cost of capital. The MARR is used for compounding the estimated
cash flows to the end of the planning horizon, or for discounting the cash flow to the present.
The profitability is measured by the net future value (NFV) which is the net return at the end of
the planning horizon above what might have been gained by investing elsewhere at the MARR.
The net present value (NPV) of the estimated cash flows over the planning horizon is the
discounted value of the NFV to the present. A positive NPV for a project indicates the present
value of the net gain corresponding to the project cash flows.

2. Internal Rate of Return. The internal rate of return (IRR) is defined as the discount rate which
sets the net present value of a series of cash flows over the planning horizon equal to zero. It is
used as a profit measure since it has been identified as the "marginal efficiency of capital" or
the "rate of return over cost". The IRR gives the return of an investment when the capital is in
use as if the investment consists of a single outlay at the beginning and generates a stream of
net benefits afterwards. However, the IRR does not take into consideration the reinvestment
opportunities related to the timing and intensity of the outlays and returns at the intermediate
points over the planning horizon. For cash flows with two or more sign reversals of the cash
flows in any period, there may exist multiple values of IRR; in such cases, the multiple values are
subject to various interpretations.

3. Adjusted Internal Rate of Return. If the financing and reinvestment policies are incorporated
into the evaluation of a project, an adjusted internal rate of return (AIRR) which reflects such
policies may be a useful indicator of profitability under restricted circumstances. Because of the
complexity of financing and reinvestment policies used by an organization over the life of a
project, the AIRR seldom can reflect the reality of actual cash flows. However, it offers an
approximate value of the yield on an investment for which two or more sign reversals in the
cash flows would result in multiple values of IRR. The adjusted internal rate of return is usually
calculated as the internal rate of return on the project cash flow modified so that all costs are
discounted to the present and all benefits are compounded to the end of the planning horizon.

4. Return on Investment. When an accountant reports income in each year of a multi-year

project, the stream of cash flows must be broken up into annual rates of return for those years.
The return on investment (ROI) as used by accountants usually means the accountant's rate of
return for each year of the project duration based on the ratio of the income (revenue less
depreciation) for each year and the un-depreciated asset value (investment) for that same year.
Hence, the ROI is different from year to year, with a very low value at the early years and a high
value in the later years of the project.

5. Payback Period. The payback period (PBP) refers to the length of time within which the
benefits received from an investment can repay the costs incurred during the time in question
while ignoring the remaining time periods in the planning horizon. Even the discounted payback
period indicating the "capital recovery period" does not reflect the magnitude or direction of
the cash flows in the remaining periods. However, if a project is found to be profitable by other
measures, the payback period can be used as a secondary measure of the financing
requirements for a project.