MODELLING TIMING FOR

CONSTRUCTION END
Introduction
This tutorial demonstrates the way to model the timing for
construction in a project finance transaction, when it does not
end in calendar period. Two methods are presented to suit
project requirements.
In a project finance transaction, it is often required to model
construction period monthly and operations quarterly. For reasons
explained in this document, it is usually modelled such that the
construction ends in a calendar quarter, i.e. March, June, September
or December. In reality, the construction period does not necessarily
end in calendar period.
How are we going to set up the model in this case? In this tutorial we
demonstrate two ways of modelling the construction timing.
Method 1
We have prepared an example with the following assumptions.
Construction commences 01 Jan 11
10 months of construction
Construction ends 31 Oct 11
Debt facility is available for drawdown until 31 Dec 11
In this case, actual construction ends 31 Oct (two months away from
31 Dec). For modelling purposes, the construction period should be
set up so that it is extended to 31 Dec 11 for the following reasons.
The construction debt facility is commonly structured to end in a
calendar quarter (31 Dec 11)
Repayment of debt can be calculated quarterly, which results in ease
of computation and avoidance of complex formulas
Modelling depreciation, debt service reserve account targets, debt
repayment and ratios become complicated when there is a mix of
monthly and quarterly timing
Interest payments are usually aligned to be end of quarter
The companys financial statements usually end in a calendar
quarter, resulting in clearer presentation of information

Screenshot 1: Construction inputs (Method 1)








Refer to Screenshot 1 to see how the model should be set up.
Cell D11 (construction duration) : The input for construction duration
is set up on a quarterly basis so that it always ends in a calendar
period
Cell E10 (operations start) : The Operations will always start at the
beginning of calendar period because it is formulated as Construction
end plus 1 day
Row 21 (capex disbursement) : Note that the last construction capex
disbursement is on 31-Oct-11 (month 10)
Calculation page
The calculation page is simple and clean. Refer to the snapshot
below showing how the construction funding calculated on monthly
basis and the operations on quarterly basis.
In this method, although the construction ends 31-Oct-11, the debt is
assumed to be available until 31-Dec-11 so there is interest during
construction calculated until then.

Screenshot 2 : Construction funding calculation (Method 1)


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Method 2
Method 1 is simpler and straight-forward for modelling purposes.
However, there could be cases when we need to model construction
to end exactly on the construction end date which is on 31-Oct-11 in
this case study. Perhaps the construction debt facility is only
available up to the construction end date (31-Oct-11) and cannot be
extended until the end of calendar period.
How are we going to set up the model to suit the above requirement
but at the same time ensure that Operations are modelled in
calendar quarters? One way to address this is to set up a model in
the manner of Screenshot 3 below.
Screenshot 3 : Model timing (Method 2)
Method 2 is structured as follows
Cell D11 (construction duration) : The duration is set up on monthly
basis which is 10 months in this case
Cell E11 (monthly operations duration) : The monthly period is
extended during operations until it ends at a calendar period
Cell F10 (quarterly operations duration) : The model reverts to
quarterly at the beginning of a calendar period
In Method 2, we set up monthly inputs during the monthly operations
duration before it reverts to quarterly inputs. Refer to Screenshot 4 &
5 and the Excel workbook for details.

Screenshot 4: Construction and Operations inputs (Method 2)
Screenshot 5 : Model timing calculation (Method 2)
Calculation page
Here are a few tips on modelling under Method 2 to avoid errors due
to the switch from monthly to quarterly during operations.
Clearly set up the model timing refer to Screenshot 3
Clearly set up the flags / counters for model timing such as shown in
Screenshot 5, i.e. number of days (row 9), monthly operation counter
(row 14), quarterly operations counter (row 10)
To avoid long formulas, some of the calculations can be separated
between monthly and quarterly, e.g. production calculation in
Screenshot 6 (row 79:81)
All calculations should be calculated based on the number of days in
the period, e.g. interest, fixed costs and production numbers
Do not model quarterly period to start from non calendar quarter
periods because calculating annual summaries will not be accurate

Screenshot 6 : Production / Revenue calculation (Method 2)