Project Finance for Construction

414 Pages·2016·4.55 MB·English

by  Anthony Higham

Project Finance for Construction
The world of construction is intrinsically linked with that of finance, from the pro-
curement and tendering stage of projects right through to valuation of buildings.
In addition to this, things like administrations, liquidations, mergers, take-overs,
buy-outs and floatations affect construction firms as they do all other companies.
This book is a rare explanation of common construction management activities
from a financial point of view. Whilst the practical side of the industry is illustrated
here with case studies, the authors also take the time to build up an understanding
of balance sheets and P&L accounts before explaining how common tasks like
estimating or valuation work from this perspective.
Readers of this book will not only learn how to carry out the tasks of a construc-
tion cost manager, quantity surveyor or estimator, they will also understand the
financial logic behind them, and the motivations that drive senior management.
This is an essential book for students of quantity surveying or construction man-
agement, and all ambitious practitioners.
Anthony Higham is a Senior Lecturer and Chartered Quantity Surveyor at the
University of Salford, UK. He has delivered both undergraduate and postgraduate
modules in quantity surveying and commercial management for the last 10 years.
Carl Bridge is a Chartered Management Accountant at the University of Bolton,
UK, and Head of Accounting within the university’s Business School. He joined
the university in 1989 as a Senior Management Accountant within the central
finance office and moved into an academic management role in 2008.
Peter Farrell is a Reader in Construction Management at the University of Bol-
ton, UK, and Programme Leader for the university’s MSc degree in construction
project management. He has delivered undergraduate and postgraduate modules
in construction management, commercial management and quantity surveying for
20 years.

Project Finance for
Construction
Anthony Higham, Carl Bridge
and Peter Farrell
First published 2017
by Routledge
2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN
and by Routledge
711 Third Avenue, New York, NY 10017
Routledge is an imprint of the Taylor & Francis Group, an informa
business
© 2017 Anthony Higham, Carl Bridge and Peter Farrell
The right of Anthony Higham, Carl Bridge and Peter Farrell to be
identified as author of this work has been asserted by them in accordance
with sections 77 and 78 of the Copyright, Designs and Patents Act 1988.
All rights reserved. No part of this book may be reprinted or reproduced or
utilised in any form or by any electronic, mechanical, or other means, now
known or hereafter invented, including photocopying and recording, or in
any information storage or retrieval system, without permission in writing
from the publishers.
Trademark notice: Product or corporate names may be trademarks or
registered trademarks, and are used only for identification and explanation
without intent to infringe.
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloging in Publication Data
Names: Higham, Anthony, author. | Bridge, Carl, 1963– author. |
Farrell, Peter, 1955 – author.
Title: Project finance for construction / Anthony Higham, Carl Bridge and
Peter Farrell.
Description: Abingdon, Oxon; New York, NY : Routledge is an imprint
of the Taylor & Francis Group, an Informa Business, [2017] | Includes
bibliographical references and index.
Identifiers: LCCN 2016028249 | ISBN 9781138941298 (hardback : alk.
paper) | ISBN 9781138941304 (pbk. : alk. paper) | ISBN 9781315673769
(ebook)
Subjects: LCSH: Construction industry—Great Britain—Finance. |
Construction industry—Great Britain—Management. | Construction
industry—Finance. | Construction industry—Management.
Classification: LCC HD9715.G72 H525 2017 | DDC 690.068/1—dc23
LC record available at https://lccn.loc.gov/2016028249
ISBN: 978-1-138-94129-8 (hbk)
ISBN: 978-1-138-94130-4 (pbk)
ISBN: 978-1-315-67376-9 (ebk)
Typeset in Times New Roman
by Apex CoVantage, LLC
Contents
List of figures ix
List of tables xi
Preface xiv
 1  Pre-contract financial management  1
1.1 Project appraisal and developing the business case 1
1.2 Introduction 3
1.3 Order of cost estimate 4
1.4 Cost planning 12
1.5 Preparing and pricing bid documents 36
1.6 Chapter summary 48
1.7 Model answers to discussion points 48
1.8 Model answers to exercises 52
References 58
2 Procurement systems 60
2.1 Introduction 60
2.2 Risks 62
2.3 Employer objectives 63
2.4 Four pragmatic high risks in procurement systems 65
2.5 Costs that arise if projects are completed late; who pays? 67
2.6 Other risks 69
2.7 Integrated or separated teams 72
2.8 Methods of agreeing prices; inviting bids and
e-tendering 75
2.9 Procurement categorisation 77
2.10 Lump sum methods of procurement 79
2.11 Management contracts 88
2.12 Partnering and frameworks 92
2.13 Prime contracting and the private finance initiative
(PFI or PF2) 93
vi Contents
2.14 Chapter summary 96
2.15 Model answers to discussion points 97
References 98
3 Elements of a contractor’s bid 100
3.1 The decision to bid 100
3.2 Performance bonds 104
3.3 Project insurance 107
3.4 Collateral warranties in construction 116
3.5 Pricing other risks 119
3.6 Contingency sums 124
3.7 Provisional sums 126
3.8 Prime cost or PC sums; nominated subcontractors and
suppliers 127
3.9 Daywork in tender bids 129
3.10 Fixed/firm price or fluctuation 132
3.11 Subcontractors 137
3.12 Preliminaries and the tender programme 143
3.13 Plant; hire, buy or subcontract 146
3.14 Discounts 147
3.15 Company head office overheads 150
3.16 Company profits 154
3.17 Model answers to discussion points 156
3.18 Model answers to exercises 162
3.19 Model answers to tasks 165
References 165
 4  Design and consultancy teams managing finance and risk 
for employers 167
4.1 Introduction 167
4.2 Cost prediction accuracy 167
4.3 Value management and value engineering 169
4.4 Risk management 183
4.5 Establishing project cashflow – the perspective of
employers 205
4.6 Managing consultancy income and contracts with
employers 210
4.7 Chapter summary 213
4.8 Model answers to discussion points 213
4.9 Model answers to exercises 217
References 219
Contents vii
5 Valuations and interim payments 221
5.1 Introduction to interim payments 221
5.2 Elements of the valuation (employer to main contractor) 227
5.3 Retention 235
5.4 Example interim payment valuation 238
5.5 Model answers to discussion points 241
5.6 Model answers to exercises 242
References 246
6 Post-contract 247
6.1 Contractors’ cashflow introduction 247
6.2 Assuring payments on time 249
6.3 Predicting the cashflow of projects 250
6.4 Multiple project cashflows 257
6.5 Cashflow in private housebuilding 259
6.6 Using cashflow projections to forecast turnover 261
6.7 Employment of labour; direct, indirect (self-employed) and
subcontracting 265
6.8 Incentive schemes or fixed pay? 268
6.9 Cost control 270
6.10 Dayworks 276
6.11 Combining the effect of cashflow and profits/losses 285
6.12 Model answers to discussion points 290
6.13 Model answer to exercise 295
6.14 Model answers to tasks 295
References 296
7 Financial management post practical completion 298
7.1 Introduction 298
7.2 Final accounts 298
7.3 Budgets for life cycle and maintenance 306
7.4 Chapter summary 328
7.5 Model answers to discussion points 330
7.6 Model answers to exercises 333
References 335
8 Capital investment appraisal 337
8.1 Introduction 337
8.2 Non-discounting methods for simple projects 340
8.3 Discounting methods of appraising capital investment
projects 340
viii Contents
8.4 The time value of money 341
8.5 Conclusions 346
8.6 Present value table 347
8.7 Model answers to activities 348
9 Capital investment appraisal – further considerations 351
9.1 Introduction 351
9.2 Relevant costs and revenues 352
9.3 Projects with unequal lives 353
9.4 Inflation 354
9.5 Taxation 355
9.6 Conclusions 355
9.7 Model answers to questions 356
10 Corporate accounts 359
10.1 Interpretation of accounts 359
10.2 Income statement (pro forma) 370
10.3 The statement of financial position (balance sheet) 371
10.4 Equity and liabilities 371
11 Raising capital and managing liquidity 373
11.1 Capital for small- and medium-sized enterprises 373
11.2 Equity finance 375
11.3 Raising capital for larger organisations (PLCs) 376
11.4 Working capital – liquidity management 383
11.5 Acquisitions and mergers 387
Index 390
Figures
1.1 Project/business interface considerations at strategic definition 2
1.2 Major project milestones 12
1.3 Formal cost plan reporting stages mapped to RIBA plan of work 15
1.4 Line diagram indicating Tender Price and General Building
Cost Indices 23
1.5 Unit rate constituent parts 39
2.1 The construction supply chain 61
2.2 Project objectives 64
2.3 Traditional procurement structure 80
2.4 Design and build structure; contractors using consultants 84
2.5 Design and build structure; in-house 84
2.6 The employer pays 86
2.7 Management contracting structure 89
2.8 Construction management structure 89
3.1 Contractual and collateral warranty links for a traditionally
procured construction project 117
3.2 Risk allowance for weather – Method 1 122
3.3 Risk allowance for weather – Method 2 123
3.4 Risk allowance for liquidated or delay damages 124
3.5 Example of a bill of quantities daywork section 133
3.6 Sample enquiry letter to subcontract bidder 141
4.1 Value management hierarchy 174
4.2 SAVE Value Work Plan Framework 176
4.3 Value management – cost of implementation 177
4.4 Value opportunity points during the project life cycle 178
4.5 Simple value decision tree for the hotel project 179
4.6 Simple scoring matrix 179
4.7 Value processes mapped against RIBA plan of work 183
4.8 Risk management process 186
4.9 Balancing risk and control 186
4.10 Risk impact matrix 193