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CONSTRUCTION OF A CONCRETE WAREHOUSE AND OFFICE

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 Introduction

Management of construction projects is a professional service which requires specialized skills, knowledge and project management expertise. The motive behind construction management is to prepare and execute a plan in such a way that it controls the time, quality and costs of the project. A construction project involves various costs such as, material, labour, factory cost and many others and these costs must be managed efficiently for successful completion of the project. In the following study, Global Construction Services Limited (GCS), an Australian construction giant, is considered for analyses of a construction project. Global Construction Services ltd is one of the leading construction companies in Australia. GCS has a very strong industrial existence due to its national reach and local area network. GCS provides a wide variety of services which includes on-site workforce, plant & equipment, formwork and concreting, site accommodation and expert site services.

Overview of construction project

The following study focuses on the quotation made by GCS ltd to carry out the construction of a precast concrete warehouse and office. The study focuses on analyses of various Primary and Secondary costs, and its treatment in the project. Analyses will also be made on the demolition cost of the existing structure and cost of removing large steel framed shed from the structure.    

Analyses of negative expenditure and its treatment:

After analysing the weekly actual and estimated costs of the construction project, it has been observed that GCS limited has a negative expenditure after 26 months. This negative expenditure has occurred in the 19th and 22nd week. The budget for the project is $835950 and the actual budget is $838113 after 26th week. Therefore, total negative expenditure after 26th week is $838113. Steps must be taken to cover this negative expenditure by GCS limited. According to Votano & Sunindijo (2014, p.147), there are various techniques available with the help of which the company can cover its negative expenditure. One of the techniques is Bridging finance. With the help of this technique, the company can satisfy its negative expenditure as it provides immediate cash flow when required. Bridging finance will help to bifurcate the costs and get a bridging loan for a fix period, in which fund is given to complete the project.  

Total expected cost of finance:

Cost of finance refers to the cost of accumulating funds to run the operation. Bridge financing helps in removing obligation by providing necessary fund required to complete the project. If bridge financing is a long-term or short-term loan, the rate of interest will be relatively high between 12 to 15%. However, payment can also be made in the form of equity. Love & Gunasekaran (2013, p.247) has commended that there are several other ways too to finance the project such as, if a company needs to issue bonds or IPO, but capital is needed before that, it may be arranged by bridge financing. There are many banks which provide bridge financing at different cost of finance. The cost of finance also depends on the type of loan that the construction project requires. For instance, if the project requires short-term loan, then the cost of finance will be relatively lower and if it requires long-term loan, the cost of finance will be higher. In case of GCS limited, the project requires $838113 to complete the project. Now, if the company accepts bridge financing to finance its project then the cost of finance to the company  will be (rate of interest*fund amount*period of loan) i.e.,

=12%*838113*6/12 =   $50286.78

Rate of interest may vary according to the terms and conditions of the institutions providing the finance. The company also needs to provide some security to the institutions and a fixed percentage of loans as Reserve.

Contactors Expenses and Incomes:

There are various expenses and incomes the contractor needs to recognise as and when it is occurred. According to Yeung, Chan & Chan (2017, p.78), the contractor, before placing its quotation, estimates all the expenses that may incur before and during the construction process. In case of GCS limited, the quotation involves a clause known as “Estimation Clause”. Estimation clause covers all the uncertain expenses that may occur during the construction period. According to this clause, if any expense arises in the middle of the project, then the price of the contract will increased accordingly. The Income and loss statement relating to construction project of GCS limited is shown below:

 From the above Income and loss statement, it is easily observable that GCS limited, despite having negative expenditure in the 19th and 22th week, is enjoying a profit of $478745 on the completion of the project. The major direct costs are materials and labour and the major costs in indirect costs are Tooling & supplies, Insurance, Equipment and Management. In the opinion of Manley (2016, p.367), there are various expenses shown as Others in Direct cost such as, Demolition cost i.e., cost for demolishing an existing structure and Removal cost i.e., cost for removing a large steel framed shed from the structure. Taxes as shown in Payroll, taxes and benefits represents various taxes such as, interstate taxes for importing equipments and specialized labours from other states, direct tax for providing construction services to the clients and other governmental taxes. 

Contractor’s cumulative cash flow:

Cash flow statement represents the cash position of the company. It is the cash summary of the company which shows all the cash inflows and outflows during the construction period. A cash flow statement of the company is shown below which shows all cash outflows and inflows of GCS limited.

From the above cash flow statement, it can be understood that there is no sudden cash outflows in the project. It indicates that the financial position of the company is stable. It is also observed that there is no need to curtail the operations of the company materially. However, finance cost i.e., interest payment is a matter of little concern for the company.

In the opinion of Love (2013, p.187), high interest payments show that debt portion is increasing in the project. Higher debt shows that company is trying to maximize its profit by increasing the debt element as capital. It will lead to more profit earning as the cost of finance is cheaper, but at the same time, it also shows that the company’s financial leverage is more. The higher the financial leverage of the company, the higher will be its financial position.  

Conclusion

After analyzing the Income & loss statement and Cash flow statement of GCS limited, it can be concluded that quotation presented to carry out the construction work need to be re-quoted. The company needs to re-estimate the cost of demolishing the existing house and cost of removing large steel framed shed. The project manager of GCS limited also need to consult with the top management of the company regarding the Estimation clause of the company. The terms of Estimation clause should be managed in such a way that it covers all the variation that may arise in future. From the above study, it can also be concluded that the company should increase its mark-up for allowances, contingency and profit margin. The recent changes in the governmental policies regarding taxes and refunds in the construction sector may also affect the cash position of the company.  The management of GCS limited should also make provisions for contingent events. These are the events which may or may not arise, but it is important for the company to make provision to be on the safer side.  

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