FINANCIAL MANAGEMENT IN CONSTRUCTION PROJECT PDF

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TERM PAPER FINANCIAL MANAGEMENT IN CONSTRUCTION PROJECT COURSE ACCOUNTING & FINANCIAL MANAGEMENT EM-502 PREPARED BY: USMAN ALI AHMED (CM-WK-34) COURSE INSTRUCTOR DR. RAZA ALI KHAN DEPARTMENT OF CIVIL ENGINEERING NED UNIVERSITY OF ENGINEERING AND TECHNOLOGY UNIVERSITY ROAD, KARACHI TABLE OF CONTE...

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TERM PAPER FINANCIAL MANAGEMENT IN CONSTRUCTION PROJECT

COURSE ACCOUNTING & FINANCIAL MANAGEMENT EM-502

PREPARED BY: USMAN ALI AHMED

(CM-WK-34)

COURSE INSTRUCTOR

DR. RAZA ALI KHAN

DEPARTMENT OF CIVIL ENGINEERING NED UNIVERSITY OF ENGINEERING AND TECHNOLOGY UNIVERSITY ROAD, KARACHI

TABLE OF CONTENTS ABSTRACT…………………………………………………………………………………..2 CHAPTER 1: INTRODUCTION 1.1 1.2 1.3 1.4 1.5

Background………………………………………………………………………........3 Significance……………………………………………………………………………4 Study Scope……………………………………………………………………………4 Objective………………………………………………………………………………5 Methodology ………………………………………………………………………….5

CHAPTER 2: LITERATURE REVIEW Literature Review……………………………………………………………………………6-9

CHAPTER 3: METHODOLOGY 3.1

Research Design……………………………………………………………………..10

CHAPTER 4: STUDY DESIGN………………………………………………………..11-12

CHAPTER 5: DATA AMALYSIS……………………………………………………..13-20

CHAPTER 6: CONCLUSION…………………………………………………………….21

REFERENES……………………………………………………………………………….22

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ABSTRACT The scope of this paper is to discuss the financial management of a construction project. This paper attempts to approach this subject in a logical and systematic way. It communicates the importance of financial analysis and planning along with cash planning. This report is not intended to be an all-inclusive discussion of financial management in construction. The research is undertaken to discuss; how much effective financial management is necessary for the construction project and overall which factor mostly affect the financial status of the project and where we have to be more alert to maintain the financial status in the industry. Whereas to evaluate the study different expertise present in construction industry locally are interviewed. The discoveries of this study can be utilized for enhancing general money related administration practices of customers in neighborhood development division through mindfulness crusades, preparing workshops and ability advancement programs.

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CHAPTER 1 INTRODUCTION The construction activity includes gathering and assembling materials which are produced by a group of suppliers, working in a diversity of technologies and discipline, to create a ―built environment‖. These activities consist of construction, manufacture, regulation, design, maintenance and decommissioning of various structures and buildings. Their scale and complexity usually varies on the basis of the work undertaken, whether they are small jobbing builders or internationally renowned companies undertaking high cost and complex projects. Moreover, every construction project requires financial management, and to arrange for finance various factors are needed to be studied, whether the project is a public, private or a public-private venture. The company‘s financial resources include cash and assets of the firm and this is deriving from the term financial management. Decisions that are made on the basis of financial management affect a company‘s financial future and therefore the decision made by the personnel is very important regarding the company‘s benefits and industries image in future. The decision to bid on a large project has great impact on the finances of a company. “Thoughtful financial planning can easily take a backseat to daily life”.- (Suze Orman)

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Background Financial management may be defined as the use of a company‘s financial resources and encompasses all decisions that affect a company‘s financial health. Many everyday decisions affect a company‘s financial health. The difference between a marginally profitable and a very profitable company is good financial management. Business schools teach the fundamental principles of financial management; however, because of the many unique characteristics of the construction industry, the usefulness of these financial principles as taught by business schools is limited. To be useful, these principles must be adapted specifically to the construction industry.

Significance Financial management of your small business encompasses more than keeping an accurate set of books and balancing your business checking account. You must manage your finances so you don‘t overspend and so you remain prepared for all expenditures, as well as profit distributions. Your financial management responsibilities affect all aspects of your business. A company that sells well but has poor financial management can fail. Some of the authoritative definitions are given below: 1.

―Financial Management is concerned with the efficient use of an important economic resource, namely, Capital Funds‖ —Solomon

2. ―Financial Management is concerned with the managerial decisions that result in the acquisition and financing of short-term and long-term credits for the firm‖ — Phillioppatus 3. ―Business finance is that business activity which is concerned with the conservation and acquisition of capital funds in meeting financial needs and overall objectives of a business enterprise‖ —Wheeler

Scope Financial Management is worried for ideal use about assets. Assets need aid. Limited, especially clinched alongside creating nations. So, the focus, everywhere, will be should make. Most extreme benefit, in the manifestation from claiming output, starts with those set inputs. Financial management is necessary over each sort of organization, a chance to be it state funded or private segment. Equally, its importance exists to both benefit situated furthermore non-profit associations. Financial management will be that's only tip of the iceberg clinched alongside loss-making associations to transform them with gainful ventures.

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Study uncovers a number associations have maintained losses, because of nonattendance for proficient financial management.

Objective The objective of the study is to research on the theoretical and practical developments and innovative strategies in the financial management of construction project, through all its stages including the initial concept, decision making, investment, planning and financial return. We will further discuss different ideas with respect to cost implications of sustainability issues which are involved in construction development.

Methodology The methodology used to achieve our goal will be based mainly on interviews through contractors and owners; who are the major victims of the conflicts. At some points, site investigations will be done and issues will be discus face by face to solve these issues and also to discuss those issues which are faced during the mitigation process. In the end, statistical analysis will be done through respondents‘ results and conclusions will be dawn along with future recommendations.

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CHAPTER 2 LITRATURE REVIEW INTRODUCTION Financial management is part of the decision-making, planning and control subsystems of an enterprise. It incorporates the: • • • • •

treasury function, which includes the management of working capital and the implications arising from exchange rate mechanisms due to international competition evaluation, selection, management and control of new capital investment opportunities raising and management of the long-term financing of an entity need to understand the scope and effects of the capital markets for a company need to understand the strategic planning processes necessary to manage the long and short term financial activities of a firm.( L. Fung. 2015. Pg1)

1) Investment choices incorporates investment done settled possessions (called

Concerning illustration money budgeting). Venture On current stakes would likewise and only financing choices called working capital decision. 2) Financial decisions - they identify with those raising of particular fund from different assets which will rely on choice for sort for source, time for financing, expense about financing and the returns thereby. 3) Dividend decision-the fund administration faculty need with take choice with views of the net benefit distribution. Net profits are generally divided into two: a. Dividend for shareholders- Dividend and the rate of it has to be decided. b. Retained profits-Amount of retained profits has to be finalized which will depend upon expansion and diversification plans of the enterprise.

FINANCIAL MANAGEMENT Financial management is the effective control of all monetary related issues associated with a project. The areas include ―controlling expenditure, advising on cash flow and payments‖ (Ashworth, 2004, p. 514). Similarly Burtonshaw-Gunn (2009) described financial management to be understanding what, when and why costs will be incurred before the project commences and then during the project knowing ―what costs have been incurred... 6

when this expenditure happened and what future costs are planned.‖ (Grant Bryan Jackson. 2011. Pg 14) I always say…share the financial information with your team – and anyone of importance charging time to your project. The more they see real numbers, the more likely they will be accountable for an accurate reporting of their time and effort to your project. What do I really mean by this? At the end of the week, that last 5-10 hours of time that project team members know they worked but really can't account for have to go somewhere. And that somewhere is going to be the project whose project manager is NOT watching the financials like a hawk. If you discuss financials and any concerns with them regularly, then your project will not be the one to get those "grey" hours charged to it. Trust me on this one. Better yet, try it, and see for yourself.(Brad Egeland. 2014. Pg 1) Financial Management should be considered from the outset of setting up a new business, but understandably in reality this isn‘t always the case. There are however a number of ‗trigger‘ points which can point towards a need for proper financial management practices as your business grows, including: 

Missing important deadlines such as payment of bills or VAT return submission;



You have less time to spend generating sales and new business, or completing orders, as administration becomes a burden;



Invoicing not being completed in a timely manner and outstanding debts not being chased;



You may be suffering from stress and work may be taking over personal time. (Burgess Hudgson. Blog)

The interview of D. Hugh Taylor by Mel Hensey addresses four financial issues that engineering managers must understand and address through their accounting staff to collaboratively provide for effective financial management of their consulting engineering or design firm. These areas are: basic financial data, accounting reports and support, other financial management essentials, and acquisitions of other firms. The paper provides basic background and parameters for successful financial management (D. Hugh Taylor, Melville Hensey, 1990).(Dr. Raza Ali Khan. Pg 4)

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Financial risk and construction goes hand-in-hand, and the further away a company is from the project developer, the more risk it shoulders. The scope of financial risk on a construction project is a huge topic contemplating under-funded or underbid projects, contractor default problems, misappropriation of project funds and more. Following are five ways companies can reduce or manage these financial risks. I. II.

Lean for lien rights Contract and credit agreements

III.

Credit checks and monitoring

IV.

Joint check agreements

V.

Consistency (Scott Wolfe. 2013)

A closer understanding of the relationship between the two inter-related topics of risk management and finance on construction projects, it is becoming increasingly crucial to achieve the objectives of the investor, the owner (end – user) and the constructor and its supply chain. Financial risk have broadly be classified as Bankruptcy of project partner, Fluctuation of inflation rate, Fluctuation of interest rate, Fluctuation of exchange rate, Rise in fuel prices, Insurance risk , Currency exchange risk, Liquidity Risk . Financial risk are one of the critical risk faced by any construction industry as financial failures may lead to complete closer

of

the

company

leading

to

huge

losses

and

legal

suits.

(Dr. M. J. Kolhatkar. 2013. Pg 5)

Maturity of Project Financial Management Financial management includes the processes of acquiring and managing the financial resources for the project. Compared to project cost management, project financial management is more concerned with revenue sources and monitoring net cash flows for the construction project than with managing day-to-day costs. The major processes involved in financial management are Financial Planning, Financial Control, Administration and Records. (Abadir H. Yimam. 2011. Pg 134)

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Benefits of Good Financial Management Good financial management will help your organization to: 

Make effective and efficient use of resources



Achieve objectives and fulfill commitments to stakeholders



Become more accountable to donors and other stakeholders



Gain the respect and confidence of funding agencies, partners and beneficiaries



Gain advantage in competition for increasingly scarce resources



Prepare for long-term financial sustainability.

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CHAPTER 3 METHODOLOGY 3.1 Research Design First of all initial data that is also termed as secondary data and is very necessary to conduct the research work was gathered from different sources. The source of secondary data collection includes previous research articles, books and blogs related to risk management. Although in research papers this kind of data is regarded as secondary data but it is very useful and provides a lot of guidance in preparing interview questions, it also helps in broadening your horizon and gives you different aspects of the topic to think about. After previewing many research articles and books, some articles and topics (that I found the most reasonable) were selected for review. Those cherry picked articles were reviewed in detail and preliminary data was prepared. After preparing the secondary data, different professionals from construction field are contacted and are requested for interview. People from both the side that is consultant and contractor side are interviewed, in order to obtain a comprehensive outcome. In interviews first the whole background and nature of the research study was conveyed to the interviewee, than they are asked to give their on potential risk that could occur in different risk categories during planning or construction phase, they are also asked to suggest the impact of risk and remedial measure that must be taken to avert the

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CHAPTER 4 STUDY DESIGN Questionnaire Description The questionnaire was compiled merely in two portions based on the requirement of the research. However second Portion further sub divided in eight parts. Each question is asked to mark on scale from 1 to 5, where 1 represents the least while 5 represent the most. The main reason for such questionnaire is to get maximum response without irritating the interviewee. The actual questionnaire is attached in appendix II  

Phase 1: Personal Information Phase 2: Interviewed Section

Firstly, phase 1 consist of personal information of the expertise which includes there experience, designation and their organizational details.The interviewee section was subdivided in five(5) portions with significant to the research study. This section includes the main objective of the questionnaire which involves the particular questions to be interviewed by the expertise of the construction industry. These sections are enlisted according to the major construction phases which are required to build up the finance of construction project. The sections are as follows;

I. II. III. IV. V.

Potential Entrants – the threat of new entrants; Industry Competitors – rivalry among existing firms; Substitutes – the threat of substitute products or services; Buyers – the bargaining power of buyers; Suppliers – the bargaining power of suppliers.

After conducting the survey the suggestions which were suggested by the expertise are examined and there results are analyzed to achieve the outcomes of the research study.

Data Collection Methodology There can be various ways of how data can be collected; it can be via personal interview, telephonic interviews, post mails, and online, but due to time constraints and availability of resources and to ensure proper collection of data, we went for some personal interviews and online questionnaire through mail or by Google forms.

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The responses are set on a scale of 1 to 5 (where 5 refers to the highest significance and 1 refers to the less significant)

Targeted Audience The targeted audience was construction industries professional practicing for more than ten years. Special attention given to the project managers, Resident Engineers, site staffs, contract administrators other managerial staff of targeted companies who have significant experience of finance issues. The data collected from all the three stakeholders of the construction industry but more focused on the contractors as they are more likely to encounter with the finance issues.

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CHAPTER 5 DATA ANALYSIS

Analyses of Responses: The interviews were conducted to consultants and clients in order to obtain the more comprehensive point of view. Table below shows the categories and number of respondents.

S.No Respondents

Interviews Conducted

1.

Contractor

4

2.

Client

4

3.

Consultant

4

Total

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The below charts describe the section 1 of the questionnaire as it‘s comprises of personal information of the interviewer whereas these charts shows the cumulative frequency of the section under the following headings: 

Type (Table 1)



Experience (Table 2)



Qualification (Table 3)

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Table: 1

Table: 2

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Table: 3

Evaluation of Potential Entrants: According to the survey, respondents believes that new entrants does effect the performance, as well as the resources and switching cost compare to the organization itself. The new entrants give the organizations threats as well as opportunity to perform better. In order to gain advantage, 75% respondents think that the company uses more resources to compete against them. Additionally 67% believes that switching cost effects on company project.

Table: 4

POTENTIAL ENTRANTS 80 70 60

Is a new entrant affect company's performance on the project?

50

Is company requiring more cash or assets resources to compete against the new entrants?

40 30

Does switching cost is the main factor of new entrants faced by the company?

20

10 0 1

2

3

4

15

5

Evaluation of Industrial Competitors: Diversification is s risk management technique that mixes a wide variety of investment within a portfolio. According to the response, 50% believes that the project diversification is generate through competition and 25% believes that it is not n...