Home Contact Us
Home
Contact Us
    
  
Contents

Section 1 Cost Benefit Analysis

Section 2 Project Funding

Section 3 Construction Costs

Section 4 Procurement and Tendering

Section 5 Contractual and Payment Arrangements
                                                            
 

Description: This unit introduces the factors which need to be considered with regard to financing a project.

Author:  Nigel Maddern


Section 1 Cost Benefit Analysis




Aims and Objectives

At the end of this section you should be able to: 
  • Explain the factors that relate to the production of a cost benefit financial appraisal for a given project.


A cost benefit analysis (CBA) is a document produced to identify and quantify the costs and benefits of a potential project. It will include both financial and non financial costs and benefits and balance them against each other to the assess viability of the project. 

A full financial appraisal is necessary to determine the full costs and benefits of a project from inception to handover/costs in use. It will also indicate whether a potential project is going to deliver a pay back against any initial investment made. This is likely to be costed over a ten year period and will take account of the reduction in value of money over time. A full Cost/Benefit Analysis (CBA) will need to be produced, presenting a detailed breakdown of costs and benefits over the life of the proposed project. A definition of this together with an explanation of CBA can be found at the links below to support these notes. A discounted cashflow (DCF) over the 10 year period will present a net profit or loss scenario to the client.  

A CBA will need to identify and quantify both financial and non financial costs and benefits including:  
  • Purchase of land
  • Capital construction costs – this includes construction of the building
  • Professional fees – eg payment to the architect/design team
  • Marketing costs – this is for advertising for sale etc
  • Income from letting/sale
  • Void periods – in the event of failure to sell/rent out space
  • Environmental costs – effect on locality/damage to the environment
  • Cost of finance – including interest rate fluctuations



Websites



Publications

  • Lock, Dennis. (2007) Project Management: Gower. [Chapters 4 & 6]
  • Fewings, Peter. (2005) Construction Project Management: Taylor and Francis. [Chapter 3].



Self-Assessment Task

  • Explain the essential elements of a cost benefit analysis outlining its key aims and objectives.
  • Summarize how a project may be considered to be viable or non viable using CBA methodology.




Section 2  Project Funding




Aims and Objectives

At the end of this section you should explain: 
  • The factors that relate to the funding/financing of a project.
  • The sources that finance is available from.


Project funds are the sources of cash potentially available to a client to fund a project. Read the outline below and follow the useful links to read more on project funding. 

Project funding may come from numerous sources including private sector, public sector and private individuals. The availability of grants is also crucial – which of course will be intrinsically linked to the current economic climate. Grants are available often to promote and encourage development and feed the wider economy. Projects are often funded by finance which will of course reduce any potential profit as the cost of borrowing varies according to interest rates and the economic climate in general.  

Sources of funding together with the examples of types of dept that are associated with projects together with funding concepts can be found at the link below. 

Funding options for projects include the following examples: 
  • Central Government (eg. HMP, MOD). – generally funded by tax revenue
  • NHS Trusts
  • Housing associations
  • Pension funds
  • Insurance companies
  • Bank loans for development companies or individuals
  • Budget/cash allocation from existing reserves
  • Re-mortgaging existing assets



Publications

  • Lock, Dennis. (2007) Project Management: Gower. [Chapter 6].
  • Halperin, D. A. Collier, C. A. Collier, N. S. (2002) Construction Funding: The Process of Real Estate Development, Appraisal and Finance, 3rd Edition: Wiley. [Various chapters].



Self-Assessment Task

  • Explain the sources of potential funding for a given project and the effect of the state of the economy/
  • Summarize the range of individuals or organizations/clients that may provide funding to progress a project.





Section 3  Construction Costs




Aims and Objectives

At the end of this section you should be able to explain:
  • The factors that relate to the establishment of project construction costs including professional fees for design and management of the work


Construction costs will be payable to the successful contractor selected to build the new building: Professional fees will be paid to the design team overseeing the work. 

The vast majority of the capital costs required for any new build project will be taken up by purchase of the land and actual construction costs of the new facility. Estimated budget costs will need to be produced at an early stage within the feasibility study in order for the project to be fully appraised. This may then developed into a pre tender estimate as more design work is carried out. Firm construction costs will then be obtained once contactors submit tenders for the work (depending on the procurement method/form of contract). The client will also be liable for professional fees for the design team including disbursements (eg planning and building regulation fees). A useful study of the different types of professional fees that can be incurred are summarized in the RIBA web link below.   

Construction costs will need to be broken down and include the following: 
  • Site set up – including security, welfare etc.
  • Preliminaries – a sum included for non specified work
  • Elemental breakdown of individual building parts including.
  • Overheads
  • Profit
  • VAT
 



Publications

  • Lock, Dennis. (2007) Project Management: Gower.[Chapters 3 & 6]
  • Langdon, Davis. (2008) Spon's Architects' and Builders' Price Book 2009: Spon’s.
  • Johnson, V. P. (2007) Laxton's Building Price Book 2008: Laxton’s.



Self-Assessment Task

  • Explain how project design and construction costs are estimated and verified.
  • Summarize the key individuals inputting to the production of these costs and outline their individual roles.





Section 4  Procurement and Tendering




Aims and Objectives

At the end of this section you should be able to: 
  • Explain the types of procurement and tendering options that are available.


Procurement is the method used for obtaining a contractor and letting a suitable form of building contract to carry out the construction work. There are various methods of procurement which can be used to ensure the clients objectives are delivered within the parameters of time, cost and quality. The most suitable procurement process for any given project will also offer a range of suitable forms of contract available to the client. Tendering is a specific method of obtaining a quotation for a given project using a particular procurement method.   


Further information on Procurement is available in the Construction Industry Management Studies Unit on Procurement which you should visit.  

Popular procurement methods include: 
  • Traditional – this is where full design is completed prior to tendering
  • Design and build – this provides more contractor input
  • Management – this provides more contractor/management input




Publications

  • Lock, Dennis. (2007) Project Management: Gower. [Chapters 22 & 23]
  • Brook, M. (2004) Estimating and Tendering for Construction Work: Butterworth-Heinemann.



Self-Assessment Task

  • State the procurement and tendering options available to deliver a project.
  • Explain the main factors in determining the procurement option chosen.




Section 5  Contractual and Payment Arrangements




Aims and Objectives

At the end of this section you should be able to:
  • Explain the factors that relate to the contractual and payment arrangements of a project.


The contractual and payment arrangements are extremely important to protect both contractual parties (client & contractor). These will be enshrined within a written contract and will ensure that work will be completed to an agreed quality standard - and that payments will me made on agreed dates. 

There are various forms of building contract available to the client to manage and deliver the construction work. The selected form of contract will be the basis of a formal (signed) agreement between the 2 parties to the contract (The Employer/Client and the Contractor). The Joints Contract Tribunal (JCT) suite offers a broad range of options covering all types of construction work likely to be carried out under any given project. There are examples of these typical contracts from their web space link listed below. The form of contract selected will set out in great detail the formal contractual arrangements/specifications including time, cost, quality, payment arrangements etc. 

Disputes can occur on building projects and there is clearly a need for contracts. The article on construction law and construction management provides useful reading on the issues, together with the definition on contract law, follow the links below for more. 

You should ensure you are familiar with the following: 
  • Various forms of contract available suitable for projects
  • Contractual relationships
  • Critical contract clauses – to ensure potential dispute areas are covered
  • Key contract documentation – the paperwork required to be completed
  • Payment arrangements (interim & final) – payments are paid at agreed periods throughout the contract period
  • Final account – the final payment to the contractor post completion
  • Extension of time – required if the project is delayed outside the control of the contractor.
  • Rectification/defects liability period – a period for faults identification after the project is handed over




Websites



Publications

  • Lock, Dennis. (2007) Project Management: Gower. [Chapter 22]
  • Fewings, Peter. (2005) Construction Project Management: Taylor and Francis. [Chapter 4]. 



Self-Assessment Task

  • Explain the procedures within a JCT contract dealing with the payments to the contractor at the different stages.




Site Map