construction industry strategy

1. WORK PRICING
CVL 775
CONSTRUCTION ECONOMICS
AND FINANCE
PROF. K.C. IYER

2. Inflationary Consideration in Bid
Estimation
• In preparing an estimate, the estimator first costs
the project as if it were to be built entirely today.
• He then projects current costs of each of the
activities to the time that they occur on the
schedule using an inflationary rate based on
his/her best judgment. The cost of this activity
then becomes the inflated cost and will be used in
the estimate.
• This is repeated for all activities or group of
activities at a particular time.
• The sum of all these costs becomes the bid.

3. Example of Activity Schedule
YEAR
1 2 3 4 5 6 7
A ₹ 2 Million
B ₹10 Million
C ₹ 8 Million
D ₹ 3 Million
E ₹ 20 Million

4. ₹ Million
Activity Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7
A 0.5 1.5
B 4.0 6.0
C 3.0 5.0
D 0.5 1.0 1.0 0.5
E 3.0 7.0 7.0 3.0
Total 0.5 5.5 9.5 9.0 8.0 7.5 3.0
Example of Activity Schedule

5. Calculation of Bid Price
• Year 1: (₹ 0.5M)(1.09)1/2 = 0.52 million
• Year 2: (₹ 5.5M)(1.09)3/2 = 6.26 million
• Year 3: (₹ 9.5M)(1.09)5/2 = 11.78 million
• Year 4: (₹ 9.0M)(1.09)7/2 = 12.17 million
• Year 5: (₹ 8.0M)(1.09)9/2 = 11.79 million
• Year 6: (₹ 7.5M)(1.09)11/2 = 12.05 million
• Year 7: (₹ 3.0M)(1.09)13/2 = 5.25 million
Bid Price = ₹ 59.82 million
Say rate inflation = 9%

6. Project - Cash Flow Estimation
• In construction companies the most appropriate
approach is to calculate cash flows on a project basis
and aggregate the cash flows from all projects at the
head office to form the overall company cash flow.
• This can be structured into divisions or areas for
larger companies. The data required for a project are:
1.A graph of value versus time, value being the monies a
contractor will eventually receive for doing the work.
2.The measurement and certification interval.
3.The payment delay between certification and the
contractor receiving the cash.
4.The retention conditions and retention repayment
arrangement.

7. Project - Cash Flow Estimation
5. A graph of cost versus time, the contractors cost liability
arising from labor, plant, materials, subcontractors and
other cost headings as necessary.
6. The project costs broken down into the above items.
7. The delay between incurring a cost liability under the
above headings and meeting the liability.
The data required for the company’s head office are:
8. The head office outgoings and time of their occurrence.
9. The head office incomings and time of their occurrence

8. 1 3 12
1
Excavate
0.5 2
Conc. Foundations
0.5
GF slab
2 0.5
Cols G fl. to 1st fl.
2 0.5
Floor 1
2 0.5
Cols 1st fl. to 2nd fl.
2 0.5
Floor 2
1 1
Cols 2nd Fl. to roof
1 0.5
Roof structure
0.5
Cladding
0.5
Services
0.3 0.5
Finishes
Value in each month 1 2.5 0.5
Cumulative value at
end of month 1 5 27.5
All values in rupees in million
Activity
Time (month)
2 4 5 6 7 8 9 10 11
1
0.5
2.5
3.5 1 0.1
2 0.1
ACTIVITY BARCHART SHOWING FINANCIAL PROGRESS OF THE PROJECT
0.5
2.5 7.5 10 12.5 15
1.5 2.5 2.5
20 25 27
2.5 5 5 1.5
26.5

9. Cost = 92% of the value
Labour = 30% of the total cost, but there is no
delay in payment
Material = 20% of the total cost, but there is
one month delay in payment
Plant and
machinery
= 30% of the total cost but there is one
month delay in payment
Subcontractor’s
cost
= 20% of the total cost but there is one
month delay in payment
Retention = 10% of billed amount in every bill :
50% payable after one month of
practical completion, other 50% six
month later
Contract conditions and assumptions

10. 1 2 3 4 5 6 7 8 9 10 11 12 13 18
1.Cumulative value 1.00 2.50 5.00 7.50 10.00 12.50 15.00 20.00 25.00 26.50 27.00 27.50 27.50 27.50
2.cumulative Value
less retention 0.90 2.25 4.50 6.75 9.00 11.25 13.50 18.00 22.50 23.85 24.30 24.75 24.75 24.75
3.cum.payment
received from
certification 0.90 2.25 4.50 6.75 9.00 11.25 13.50 18.00 22.50 23.85 24.30 24.75 24.75
4.cumulative
retention payment 1.38 2.75
5.cumulative cost 0.92 2.30 4.60 6.90 9.20 11.50 13.80 18.40 23.00 24.38 24.84 25.30 25.30 25.30
6.cumulative labour
cost(30%) 0.28 0.69 1.38 2.07 2.76 3.45 4.14 5.52 6.90 7.31 7.45 7.59 7.59 7.59
7.cumulative labour
payment 0.28 0.69 1.38 2.07 2.76 3.45 4.14 5.52 6.90 7.31 7.45 7.59 7.59 7.59
8.cumulative
material cost(20%) 0.18 0.46 0.92 1.38 1.84 2.30 2.76 3.68 4.60 4.88 4.97 5.06 5.06 5.06
9.cumulative
material payment 0.18 0.46 0.92 1.38 1.84 2.30 2.76 3.68 4.60 4.88 4.97 5.06 5.06
10.cumulative plant
cost(30%) 0.28 0.69 1.38 2.07 2.76 3.45 4.14 5.52 6.90 7.31 7.45 7.59 7.59 7.59
11.cumulative plant
payment 0.28 0.69 1.38 2.07 2.76 3.45 4.14 5.52 6.90 7.31 7.45 7.59 7.59
12.cumulative
subcontract
cost(20%) 0.18 0.46 0.92 1.38 1.84 2.30 2.76 3.68 4.60 4.88 4.97 5.06 5.06 5.06
13.cumulative
subcontract
payment 0.18 0.46 0.92 1.38 1.84 2.30 2.76 3.68 4.60 4.88 4.97 5.06 5.06
14.cumulative cash
out (7)+(9)+(11)+(13) 0.28 1.33 2.99 5.29 7.59 9.89 12.19 15.18 19.78 23.41 24.52 24.98 25.30 25.30
15.cumulaive cash
flow (3)+(4)-(14) (0.28) (0.43) (0.74) (0.79) (0.84) (0.89) (0.94) (1.68) (1.78) (0.91) (0.67) (0.68) 0.82 2.20
Time(in months)

11. S-curves (Cumulative values versus time)
-5
0
5
10
15
20
25
30
1 2 3 4 5 6 7 8 9 10 11 12 13 18
Time(in months)
cumulative
value
in
crore
Rs
1.Cumulative value 5.cumulative cost
14.cumulative cash out (7)+(9)+(11)+(13) 15.cumulaive cash flow (3)+(4)-(14)

14. Capital Lock-up
• The negative cash flows experienced in the
early stages of projects represent locked up
capital that is supplied from the company’s cash
reserves or borrowed.
• If the company borrows the cash it will have to
pay interest charged to the project; if the
company uses its own cash reserves it is being
deprived of the interest – earning capability of
the cash and should therefore charge the project
for this interest lost.
• A measure of the interest payable can be
obtained by calculating area between the cash-
out and cash-in.

15. Effect of capital lock up
• Capital lock up is measured in terms of
captim (CAPItal x Month) – it is the
cumulative cash flow area below the
time-axis.
If the rate of interest on the capital = i
Amount of interest lost
price
contract
the
of
million
Rs
x
x
month
million
Rs
i
x
month
amount
Area
%
42
.
0
116
.
0
.
100
12
%
12
625
.
11
.
100
%
12
)
(







16. Factors affecting capital lock-up
• Margin
• Retention
• Claims
• Front end rate loading and Back end rate loading
• Over measurement and under measurement
• Delay in receiving cash payment from the client
• Delay in paying Labor, Plant Hires, Materials
Suppliers and Sub Contractors
• Timing of contract starts

17. Illustration
Develop a performance budget as viewed by owner whose scheme
of outgoes are indicated below. The common budget curve is drawn.
Activity
Duration
(days)
Total Direct
Cost in ₹
Patterns of Outgoings of Direct Cost in Resources
A 0-7 14,000 Equally at the beginning of each day of work
B 7-10 8,000 Equal halves in the beginning and end of work
C 12-22 10,000 Equal halves by end of 18th and 24th day
D 8-12 8,000 Single payment at end of 6th day
E 13-16 6,000 Single payment at end of 24th day
F 13-21 6,000 Equal one third at end of 16th, 20th and 27th day
G 22-24 8,000 Equally at the beginning of each day of work
H 24-26 1,000 Equally at the beginning of each day of work
K 27-30 1,500 Equally at the beginning of each day of work
L 22-25 4,500 Equally at the beginning of each day of work
M 22-30 8,000 Equally at the beginning of each day of work
N 25-28 6,000 Equally at the beginning of each day of work
P 10-18 4,000 Equally at the beginning of each day of work
Q 30-32 1,000 Equally at the beginning of each day of work 17

18. • Total Duration = 32 days
• Indirect cost at ₹4,000 for each of 3-days block
payable at the end of each block till 27th day and
then single payment of ₹13,000 at the end of 34th
day.
• If funds have been arranged by equal amounts at
the end of 0th, 10th and 20th days and if IDC
(Interest During Construction) is ½ percent per day
on the quantum of borrowed money not utilized till
end of every respective day. Determine total IDC
at the end of 34th day.
18
Illustration…

19. ACT 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34
A
2 2 2 2 2 2 2
B
4 4
C
5 5
D
8
E
6
F
2 2 2
G
4 4
H
½ ½
K
½ ½ ½
L
1½ 1½ 1½
M
1 1 1 1 1 1 1 1
N
2 2 2
P
½ ½ ½ ½ ½ ½ ½ ½
Q
½ ½
DC 2 2 2 2 2 2 2 12 4½ ½ ½ ½ ½ ½ ½ 2½ 5 2 6½ 6½ 14 3½ 3 3½ 3½ 1½ ½ ½ Σ= 86000
IDC 4 4 4 4 4 4 4 4 4 13 Σ=49000
TC 2 3 4 6 2 2 6 12 4 4½ ½ 4½ ½ ½ 4½ ½ 2½ 9 2 4 6½ 6½ 18 3½ 3 7½ 3½ 1½ ½ ½ 13 Σ=135000
6000
4000
1000
DURATION IN DAYS
8000
10000
8000
6000
6000
8000
1000
1500
4500
8000
14000
19
Illustration…

20. Day Expenses Borrowings Unused money
IDC
@0.5%/day
0 2,000 45,000 43,000 215.00
1 2,000 41,000 205.00
2 2,000 39,000 195.00
3 6,000 33,000 165.00
4 2,000 31,000 155.00
5 2,000 29,000 145.00
6 6,000 23,000 115.00
7 12,000 11,000 55.00
8 0 11,000 55.00
9 4,000 7,000 35.00
10 4,500 45,000 47,500 237.50
11 500 47,000 235.00
12 4,500 42,500 212.50
13 500 42,000 210.00
14 500 41,500 207.50
15 4,500 37,000 185.00
16 500 36,500 182.50
17 2,500 34,000 170.00
18 9,000 25,000 125.00
19 0 25,000 125.00
20 2,000 45,000 68,000 340.00
21 4,000 64,000 320.00
22 6,500 57,500 287.50
23 6,500 51,000 255.00
24 18,000 33,000 165.00
25 3,500 29,500 147.50
26 3,000 26,500 132.50
27 7,500 19,000 95.00
28 3,500 15,500 77.50
29 1,500 14,000 70.00
30 500 13,500 67.50
31 500 13,000 65.00
32 0 13,000 65.00
33 0 13,000 65.00
34 13,000 0 0.00
Total: 135,000 5,382.50
Answer:
Total IDC at the end of
34th day = ₹ 5,382.50
Average interest paid on
₹45,000 for 10 days =
₹180 {(134+189+216)/3}
i.e.,
= 14.6% p.a.
20
Illustration…
`180*10*100
45000*365
180*365*100
45000*10

21. 21