Construction Personnel Management Assignment

Hi

In this post I will be taking up another one of the assignment given by NICMAR faculty for the students pursuing Post Graduate Program in Project Management. I hope this post will clarify some doubts toward the problem.

Assignment

You are a Project Manager on site where work for 3K.m. long Tunnel has been undertaken. The site is remote and takes about 2 days travel to nearest town. Supervisors, Technicians & Skilled Workers are engaged in dangerous / hazardous work. Absenteeism due to sickness, quarrels, drinking are adding to less output of work and chances of accidents on site are increasing. Management has urged to do something so that time targets can be achieved. Discuss how will you tackle the problem and increase the output of the work.

Understanding the problem

It is a typical problem faced at construction site located in remote regions. Both workforce and management slowly become tired with a life of work and no source of entertainment.  It leads to heightened level of frustration among people working in remote areas.  But the case presented here has worsened, possibly due to lack of basic infrastructure i.e. proper housing and healthcare facilities and easy availability of liquor.
Also it is evident that a safety officer is not present at the work site and work force is not kept motivated by the leadership.  As a result the project is losing both quality and time.

Summarizing the main Problems
1. Absenteeism Due To Sickness
2. Absenteeism Due To Quarrels & Drinking
3. Accidents at site
4. Technical problems 

Possible reasons of various problems
· Lack of Manpower Management (or) Planning
· Un-Hygienic surroundings & Temporary Accommodation
· Lack of Medication
· Consumption of Alcohol
· Availability of Alcohol
· Storage of materials
· Roof Spalling
· Water seepage

Needs and Their Fulfillment on Site: -

Lack of Manpower Management (or) Planning
• Prepare a proper schedule of the Project and Assign Resources to each Task i.e. each Activity, Assigning Resources means Identify manpower required for each Task and what is the availability of manpower and how much work has been done till date and how much work is to be done. Identify Type of manpower required i.e. Skilled (or) unskilled.
• If manpower is in adequate try to get more manpower or Try to use the available manpower Fully so that maximum amount of work to complete and try to complete the Urgent woks such that it does not affect our project duration, reschedule the project and updated schedule to head office and inform them weekly work progress so that they can help you to overcome the manpower problem (or),
• Try to motivate the available manpower by giving extra benefits if they complete the project in time. (Or)
• If manpower is very less than required then immediately inform head office so that they can send some more manpower so that the project can run smoothly.

· Suggestion & Recommendation to Management on Manpower Management (or) Planning

·       

Understand the project in all respects and get all details of the projects i.e.
o Site condition,

o contract conditions,

o technical specifications, 

o construction techniques, and 

o time frame.

Working out the labour component in various parameters of the project .by using constants to workout labour requirement Classifying and categorizing labour requirement and various jobs by level of skill, responsibility, nature of work etc. Determine the duration of each job or task at every stage of project.
Estimate the number of manpower required in view of the anticipated of absenteeism and labour turnover and the stability factor.

  Manpower management has some principles to follow that should be known by the project manager and also the management of the company.

After understanding the factors stated above, following principles should be applied 
o Care and skill should be exercised in the selection of employees.
o Introduction to the job should be friendly, skillful and adequate.
o Each employee should be made to feel that his efforts are really appreciated.
o Consideration should be given to the effect that each rule and instruction may have on the feelings of employees.
o Employees should have apart in planning those things that affect their working conditions.
o Management should be absolutely fair in every policy and every practice.
o Each employee should have a feeling of pride in the importance of his work and his place in the company

Administrative setup

Based on the construction programme and various other norms, the administrative set up is worked out for completion of project.
It is proposed to have two Chief Engineers (Level-1),
o one for head works and
o other for canal & canal structures headed by the Project Manager.

Under the Chief Engineer (Head work) four circle offices will be proposed and under the Chief Engineer (Canal & Canal Structures) three Circle offices will be proposed.
There will also be
o one Director (Administration),
o one Director (Finance),
o one Director (Quality Control) and
o one Director (Technical) under the Project Manager.

There will also be attached Superintending Engineer (Mechanical) under the each Chief Engineer. All these offices will be suitably located for effective monitoring and control over the execution of project.

Un-Hygienic surroundings & Temporary Accommodation 

Before Starting of the project Management has to well plan because this project is long duration so manpower involved will be more it is the one of the preliminary need for the employees & workers.

Suggestion Methods for Hygiene Factors
Management has to well plan for the temporary shelters in such a way that number of workers will be involved in the project and how many shelters are required and for different category of employees will be working at site and different types of shelters should be constructed with different facility what all materials required for construction any how much time required to construct it so that all those thing should be completed before starting of project, Management should built temporary shelters for the workers who will be working at site because the site is at remote area workers cannot be able to say at their home and come for work it is the preliminary requirement for the workers so management has to take extra precautions, A site office also be built with all necessary requirements, drinking water should be good because most of diseases are spread by water so it is important step to taken care by management.

Lack of Medication

Management should send a medical team to site and they should stay there till completion of project. They should be supplied necessary equipments and medical kits so that they can manage any hazardous situation i.e. any sudden accidents they can handle the situation, any epidemic occurred they can over come that situation. By this work will be smoothly progressed and number of workers absenteeism will be reduced. Worker who is sick will be taken care by medical team he will be recovered quickly and he can start doing the work so that manpower problem is solved.

Consumption and Availability of Alcohol

This is the major problem with labour because they drink daily after work so that they get some relief from whole day work and body pains, but management should try to avoid drinking alcohol or try to get them in limited dose so that they have it n just go for sleep if they get it in excess quantities they will be drinking whole night and next day they will be absenteeism and also after excess drinking they start quarreling between themselves it’s a big problem for the project manager while quarreling they may be any accidents that leads to more absenteeism that will also indirectly effects the progress of project. If this quarreling happens regularly then management has to take some precaution steps to handle that problem. Such as try to avoid the availability of alcohol near the site so that the labour cannot consume much alcohol and this problem is solved and the project may continue smoothly 

Storage of Materials
This is also a major problem for such a big project and at remote place materials will be at site well before start of project so store rooms should be properly built well in advance so that it will not create a problem while execution of work for that what all employees required and how many number required should be planned before so that materials are properly handled by this only the cost of project depends.

Roof Spalling
The management should have complete knowledge of what all technical problem may occurs while execution of project and it has to take proper precautions and it should be well planned before so that it would not affect the project duration, what are causes of the problems and how to overcome the problems.
The cause of roof spalling is type of formation of rock, rock with excess of foliations, joint & poor rock mass leads to the rock spalling.

Suggestion & Methods to overcome Roof Spalling Problem
Tunnel should be properly scaling to remove loose rock mass & cement grouting should be done so that the rock will get some extra strength so that it can hold properly it cannot be fallen down easily. Tunnel should be properly provision of steel ribs immediately so that it will be support on the steel rids and work can be progress smoothly and project manager should have all this materials well in advance because these materials are required suddenly.

Water Seepage
The management should have complete knowledge of what all technical problem may occurs while execution of project and it has to take proper precautions and it should be well planned before so that it would not affect the project duration, what are causes of the problems and how to overcome the problems. The cause of water seepage is mainly due to the discontinuous rock formation, Ground water table height etc.

Suggestion & Methods to overcome Water Seepage Problem
While designing the tunnel they should provide proper drainage system so that if the water is accumulating in the tunnel it will affect the progress of work, so drainage system should be such that water accumulated should be quickly drained any from working space so that it does not affect the work progress. Or proper grouting should be done so that the rock will get more strength so that it can stop the water seepage into the tunnel. This is the easy method to overcome the seepage problem, the other method to overcome the seepage problem covering the tunnel section with water proofing membranes it will also not allow the water to seepage into the tunnel so that work can be progress smoothly.

Recommendation to Management
Top Management should be more responsible and it should have to properly monitor the progress of work and if any urgent needs at site should be fulfilled as quickly as possible and it should see that the lower and middle management is working properly are not. If any accidents are hazardous situation then top management has to urge to do some help to lower and middle management so that they can overcome the situation they must send some team so that will help them and work will be progress smoothly. Tunnel project is a very large project it will take lot of time to complete the whole project so management has to be well prepared of all the fore coming situations i.e. labors problems, absenteeism etc. Management has to determine the functions of each level of management it should be clear for all the employees and management has to monitor such that each employee is doing his duty properly are not.

                                                                                                              

FUNCTIONS OF TOP MANAGEMENT:
1. Determining the objectives
2. Framing policies & making plans to carryout the objectives & policies.
3. Setting up the organizational framework to conduct the operation as per plans.
4. Gathering the resources needed to put the plans into effect.
5. Controlling the operations through the organization.

           

Middle management is concerned with the task of implementing the policies & plans chalked out by the top management. Middle management consists of departmental heads exercise the usual functions of management in respect of their own departments. They have top plan the operations, issue instructions to their assistants; collect the resources required & control the work of the men under them.

FUNCTIONS OF MIDDLE MANAGEMENT:
1. Understanding the policies framed by top management.
2. Preparing the organizational set-up in their department.
3. Finding out the suitable operative & supervisory personnel & fixing duties & responsibilities to them.
4. Arranging & issuing instructions to the assistants & operatives.
5. Motivating the personnel for higher productivity.
6. Co-operating with other departments for smooth functioning of organizations.
7. Collecting reports, statistical information & other records about the work turned out in the respective departments & forwarding the same to the top management.
8. Recommending to the top management new or revised policies for their departments to obtain better performance.

LOWER LEVEL MANAGEMENT   It is the lowest level in the administrative framework & actual operations are performed here. Foremen supervisors assisted by a no of workers & clerks carryout the actual operations as per schedule. Their authority & responsibility is limited & they have to follow the lines drawn by the higher levels of management. The foremen or supervisors are responsible for carrying out work orders allotted to their respective departments. They pass on the instructions of middle management to the workers. The quality of the workmanship & quality of output will depend upon the hard labor, discipline & loyalty of the operating personnel.

Motivation of Employees in Construction Project 

  Motivation is the driving force within individuals that drive them physiologically and psychologically to pursue one or more goals to fulfill their needs or expectations. Motivators may be intrinsic or extrinsic. An example of an intrinsic motivator is the self-fulfillment of a worker as a result of performing a task well.

Motivation of labor in Construction Project 

Construction labor can be motivated. This is important because dwindling productivity is a major problem confronting construction today. Productivity has decreased every year for the past decade, in part because of increasing design complexity, more rigorous federal and state regulations and socio-economic changes affecting the work force. Our findings indicate that a highly motivated workforce enhances productivity and project effectiveness. In construction, the work itself— that is, the building of a structure for all to behold is a key motivator for all levels of management and the work force. Therefore, a well-planned project seems to be the first — and most important — step to achieve good productivity. Unfortunately, on large industrial projects, craftsmen often receive only minimal amounts of information about their work. Duplication of effort, numerous modifications to plans, and schedules that consistently slip makes it difficult to maintain a motivated workforce. On large power plant projects, changes in design and problems with material availability are considered the major demotivating factors. With effective pre-planning, the availability of materials will be checked before workers are assigned to an area so workers do not start in one location only to have to be shifted to another location. Care in this respect should improve worker motivation and productivity and help promote a high level of accomplishment. Most foremen and craftsmen take considerable pride in the work they do. Having to rip out their work and redo it can be extremely discomforting. In fact, if it is extensive, redoing parts of a project may be the worst demotivator of all. Craftsmen view overcrowded conditions and crew interference due to extensive rework as demotivating. Worse, such problems can create hostile feelings as a result of the frustration. Design standardization can help to minimize rework and improve morale.

Motivational programs 

  Although some unique motivational programs were found, the vast majority can be grouped into five primary categories: goal setting, incentives, positive reinforcement (i.e., recognition for a job well done), worker participation, and work facilitation. The following presents a dissertation on each of the five categories discussing first their use in other industries and then their application to construction.

Absenteeism and Turnover
The Department of Energy study indicated that the absenteeism and turnover are a relatively minor concern to workmen. Still, they can have a major impact on total project productivity. High rates of absenteeism are a concern, however, to individuals who had to carry extra workloads to compensate for missing crewmembers. The low job satisfaction resulted in high absence from work and high turnover. Thus absenteeism and turnover can be viewed as effects of motivational Activities or demotivational concerns. The cost of motivational programs is often justified by the reduced absenteeism and turnover.

For example, the cost of M2 group Engineering Pvt Ltd. Big Designing & Construction Company On eight projects has been more than paid for by the reduction in absenteeism and the reduced costs associated with hiring fewer workmen. Director indicated that it required some amount per employee to process paper work plus two to three weeks of each new employee's time to learn the job. Again, the figures on attendance and turnover measure the motivational effort that is financially justified. Moreover, awards for good records are perhaps the most effective method to decrease absenteeism.

Bibliography: -

Management in organization by Koontz and Odoneal, McGraw Hill Publication

MANAGEMENT IN ORGANISATION ASSIGNMENT

Assignment - Management in Organization

Hi again

In my second blog, which is after a very long time, i am taking up the subject of Management in organisations. I am encouraged to do so due to the appreciation shown by readers to my first blog. I am going to explain the approach that a person can take towards the problems presented in the Assignment given for Management in organization.

Let us start by listing the problem.

Your company has bagged a lucrative contract to construct a housing colony for an Industrial Group to be located in Western Maharashtra in a coastal belt. You as a Project Manager have been asked by the company to evolve Organization Structure with following conditions.

    i. Organization should be as lean and thin as possible with bare minimum of personnel on company roll upto Junior Engineer level.

    ii. All supervisors to down below will be temporary for project duration only to be recruited locally from 10 km radius.

Suggest and discuss an organization structure denoting responsibility, authority, communication control for all facets of construction work and management functions as visualized by you.

Housing colony consists of 10 Bungalows for senior executives, 20 Apartments in five building, 100 dwellings for white collar workers and 300 dwellings for blue collared workers. Colony will have market and entertainment complex.

Before starting the assignment we need to understand some basic term and their functions of Organization mgmt. such as Business Enterprise, Entrepreneurship, Management and Organization etc because these terms are very important role in Organization Mgmt.

Understanding the project

The project requires developing an organization structure for the work of building a housing colony. Desirables for such project are:

1. Efficient use of resources; of material, personnel, time and money.
2. High level of quality.
3. Safety of workforce and other people
4. Environmental concern, minimum damage to the environment and utilization of efficient and environment friendly processes.

The scope of work includes the following:
i) The organization structure.
ii) Communication system which includes the reporting inside and outside the organization.
iii) Authority and litigation
iv) Motivation of the all employees at different levels of the organization
v) Training of employees, specially the unskilled labour. The different types of training incorporated.
vi) Recruitment ,application and selection of employees
vii) Monitoring and controlling each facet of the organization structure built up.

Selection of an appropriate organizational structure type: 

In the context of present project, it is important to identify an organizational structure which gives highest efficiency and ensures well being of employees at the same time. We shall discuss the following type of organizational structures and evaluate their merits and demerits. 

1. Pre-bureaucratic structures: The strategic leader makes all key decisions and most communication is done by one on one conversations. 

2. Bureaucratic structures: Precision, speed, un-ambiguity, strict subordination, reduction of friction and of material and personal costs- these are raised to the optimum point in the strictly bureaucratic administration.
Characteristics of bureaucracy are:
· Clear defined roles and responsibilities
· A hierarchical structure
· Respect for merit. 

3. Post-bureaucratic: The post-bureaucratic organization, in which decisions are based on dialogue and consensus rather than authority and command, it is used in order to encourage participation and helps to empower people who normally experience oppression in groups. 

4. Functional structure: Employees within the functional divisions of an organization tend to perform a specialized set of tasks, for instance the engineering department would be staffed only with software engineers. This leads to operational efficiencies within that group. However it could also lead to a lack of communication between the functional groups within an organization, making the organization slow and inflexible. 

5. Divisional structure: Also called a "product structure", the divisional structure groups each organizational function into a division. Each division within a divisional structure contains all the necessary resources and functions within it. 

6. Matrix structure: The matrix structure groups employees by both function and product. This structure can combine the best of both separate structures. A matrix organization frequently uses teams of employees to accomplish work, in order to take advantage of the strengths, as well as make up for the weaknesses, of functional and decentralized forms.
· Weak/Functional Matrix: A project manager with only limited authority is assigned to oversee the cross- functional aspects of the project. The functional managers maintain control over their resources and project areas.
· Balanced/Functional Matrix: A project manager is assigned to oversee the project. Power is shared equally between the project manager and the functional managers. It brings the best aspects of functional and projectized organizations. However, this is the most difficult system to maintain as the sharing power is delicate proposition.
· Strong/Project Matrix: A project manager is primarily responsible for the project. Functional managers provide technical expertise and assign resources as needed. 

7. Team: One of the newest organizational structures developed in the 20th century is team. In small businesses, the team structure can define the entire organization. Teams can be both horizontal and vertical. Larger bureaucratic organizations can benefit from the flexibility of teams as well. 

8. Hierarchy-Community Phenotype Model of Organizational Structure: In the 21st century, even though most, if not all, organizations are not of a pure hierarchical structure, many managers are still blind-sided to the existence of the flat community structure within their organizations. The business firm is no longer just a place where people come to work. For most of the employees, the firm confers on them that sense of belonging and identity- the firm has become their “village”, their community. The business firm of the 21st century is not just a hierarchy which ensures maximum efficiency and profit; it is also the community where people belong to and grow together- where their affective and innovative needs are met.

Choosing a proper organizational type is very important, this aspect can be better understood by looking at the character of the construction industry.

CHARACTERISTICS OF CONSTRUCTION INDUSTRY

Below are listed characteristics of the construction industry as it exists today. These characteristics have a meaning to the kind of managerial strategies that could be developed.
i) Construction is large industry of small firms.
ii) Construction industry is client oriented instead of production oriented
iii) Construction industry is primarily contracting. All relationships are contractual and exist during project life only.
iv) Entry into construction industry is easy due to lack of registration/licensing and low initial capital requirement.
v) Construction industry has inter-dependence between many heterogeneous disciplines and professions.
vi) Construction is labor intensive industry(in terms of role of labor)
vii) In construction industry product is first sold and then made.
viii) In construction industry each product made is unique. There is no repetitive work at all.
ix) In construction industry plant and machinery are not fixed. They move from site to site.
x) In construction industry work is seasonal, labor is casual and temporary, sub-contracting is common.
xi) In construction industry production is done at sites under natural/hazardous conditions. Safety is of paramount importance.
xii) In construction industry employment relations are contractual and of short duration and hiring is project based.
xiii) In construction industry unionization is difficult, unions are unstable, and unions are difficult to deal with.
xiv) Participants in construction are contractors, clients, government. They come together around project.
xv) Project-The project is the design and production of construction facility.

Therefore out of the listed types the Hierarchy-community phenotype model can be most beneficial for this project. This is because of the following reason:

• Need of quick decision making: Hierarchy is important so that the decision making powers can be clearly categorized. 
• Need for better communication: Also a flat type of organization leads to better communication. 
• Social involvement: In such projects the people are moved from the Headquarters in metropolitan cities to the project site. It is important for them to have a social life. This will increase the feeling of attachment and motivation. Lack of social life is one of the biggest de-motivator for engineers working on remote sites.

Selection of team size
The team size will depend on size of biggest work package. Therefore the scheduling will have to be done to create work packages of equal size, which will result in better resource leveling and efficiency.
The work performed by the organization involves a number of processes and sub processes,
the process model can be applied iteratively, by means of :
• Identifying inputs (from the output of the previous stage).
• Planning & Scheduling.
• Implementation.
• Monitoring.
• Recording.
• Improving.

Work breakdown structure:

Since habitation pattern of the colony can be predicted with some accuracy therefore the work package can be divided into following packages:
1st phase: Some Blue collar and white color employees will populate the colony: Therefore 50 white color dwelling and 200 blue collar dwelling will be taken up in phase 1.
2nd phase: 5 apartment buildings and 5 bunglows
3rd phas: 50 white color dwellings, 100 blue color dwellings and 5 bunglows.
This phasing will allow the same team to perform 3 similar tasks one after the another, thus reducing employee requirement by at least 66% which would otherwise be needed.

Site Organisation And The Team

Essentially a project for getting success needs a good responsible team. The team works with a goal of completing the project in time within the specified costs and quality specifications. To achieve the aforesaid goal, the work and responsibilities are divided within the team. The work management will be as per the chart showing the site organization team. The brief role and responsibilities of various personals involved in the project are as follows. 

Project Manager
He is appointed by the head office to look after the complete project. He is the head of the project team and is responsible for any act at site. He manages the entire construction process and is accountable to the client. He should get all site and head office related information.
 If any decision is needed the project manager would be the top most authority to give or arrange the answer of the decision. 

Project Co-Ordinator
The decisions at head office and the problems or demands at site are coordinated by the project coordinator. Project coordinator acts as a link between the project manager and site engineer. He should be very well aware of the work happening at site and the decisions taking place at head office. It would be his duty to provide the project information to project manager.

Executive Engineer
The key person and the head of the team working at site, is the Executive Engineer. He operates the complete work at site making use of the available resources and managing the workforce. Executive Engineer would be responsible for any work happening at site so it would be his duty to check and study the execution of work
Junior Engineer
Site engineer needs a proper team composed of engineers, supervisors and skilled and unskilled workforce at site. To share his workload he is accompanied by junior engineers who provide him all the details of the work asked by him. 

Foreman
A foreman is the leader of the workforce.
It would be his responsibility to communicate directly to the workforce. After getting approval of a drawing it would be the duty of the foreman to dictate the workers “what to do” and to check the work progress. In fact the foreman handles the labors.
Other teams
Other teams will also be required onsite such as MEP engineers, HR and recruitment, Design people and finance people.

Disclaimer:
This is just one way of looking at the problem given in the assignement. This example is given to provide clarity to the problem. In no way the given solution given here can be substituted for a formal submission. It is advised to all students to make independent effort to arrive at an innovative solution.

Construction Finance Management Assignment

Hi

I am taking up the subject of Construction Finance Management in my first blog. This is because I have received email from my batch mates to help with this. I am going to explain the approach that a person can take towards solving the particular problem presented in the Construction Finance Management Assignment.

Let us start by listing the problem.


An offer has been given by a Charitable Trust to develop and build a facility on a 10,000 sq.m of plot in a prime locality of Pune where 5,000 sq.m of area will be used by the trust for housing, health facilities for senior citizens. 5,000 sq.m. will be given free to the developers as a cost of development
Cost of Land is Rs. 10,000/- sq.m
Flooring specifications for flooring:
- 10% Granite
- 40% Kota stone
- 50% Mosaic cement tiles
Developers would like to have minimum 18% net profit on their investment. Developer can invest only Rs. 10 lakhs as his own funds and can raise not more than Rs. 50 lakhs as bank loan.


Understanding project and project requirement


The trust wants to build a facility for public welfare. Due to probable lack of resources the trust is willing to pay the developer in kind i.e. through giving 50% of total land.
By making a preliminary survey of land prices of prime locations, it is estimated that the cost of Rs 8,000/- per sq m to Rs 12,000/- per sq m is prevalent. Therefore the given Rs 10,000/- per sq m rate be safely taken to calculate the land price. Thus 10,000 sq m of land will be of Rs 10,00,00,000/- worth .
Therefore in principle the trust is paying Rs 5,00,00,000/- in kind to the developer as development cost.
The objective for this complex:
• To utilize the space provided by charitable trust for a social & noble cause.
• To provide a better place for senior citizens.
• To make the society aware about the responsibly towards our elders.

With the said objective and given ‘A’ Class construction the 5 crore worth of construction would be around 5000 sq m of built area. 
Thus the charitable trust will get what they need through this arrangement.

Developer’s perspective:

This offer gives the developer an opportunity to make profit from the parcel of land given to him by the trust. The challenge here is to generate capital and cash flow during the construction period, in which there will be no revenue generation.

Since the present capacity is restricted to Rs 60,00,000/-, the developer has to look into other sources to finance the project.

Alternatives for Method of financing:

The developer will have to build either housing or a commercial healthcare facility on his parcel of land which can be then sold at a profit. It is assumed here that both housing and healthcare are the approved land-use since the charitable trust is making these facilities on the same parcel of land.

Of the two, housing is more preferable as these can be marketed before the construction starts and sold before the start of project, during the construction phase and at the completion of project. Hence this method will generate cash flow during all stages of the project.

However for making a healthcare facility developer will have to find a financer or go into an alliance with established healthcare leaders in the industry which will finance the project. It is both difficult to find such a financer and it will also reduce profit margin as the developer will be acting as a builder for two clients.

Requirements of funds for the housing developed for commercial purpose by the developer will depend on the amount of permissible FAR (floor area ratio) for such purpose.

By looking again at the proposal of the trust, a preliminary estimate can be made for calculating the area of housing. It is as follows:

Total project cost of 5 crore can be split into 3.5crore for housing for the aged and 1.5 crore for the healthcare facility.

Since the housing is a multi level development and health care will be limited to 2 -3 floors we can estimate that housing and healthcare uses an equal amount of site area, i.e. 

- 2500 sq m of area is used in housing which costs 3.5 crore, and

- 2500 sq m of area is used in healthcare which costs 1.5 crore.

Thus if we require to make housing on 5000 sq m of land, it will cost Rs 7 crore (this we assume includes the marketing cost for the project).

CALCULATING CAPITAL REQUIREMENT:

For trust’s requirement : Rs 5 crore – profit of 10 % i.e. 4.5 crore.

Development  : Rs 7 crore – profit of 10 % i.e. 6.3 crore

Total capital requirement: 10.8 crore. (This is Net Present Value)

The capital requirement would be as follows:

1st year – 2.3 Crore approx

2nd year – 6 crore approx (which will be 6.54 crore based on current inflation)

3rd year – 2.5 crore approx (which will be 2.97 crore based on current inflation)

Therefore at the end of 3 years total of 11.81 crore would have been spent.

On this the developer wants to make a profit of 18% on his investment.

CALCULATING PROFIT:

Typical project of this nature would need 3 years to get finished. At the end of 3 years total of 11.81 crore would have been spent. The profit on this amount would be 2.215 crores.

This profit will be generated from the sales of the housing units and will be generated continually throughout the 3 years.  

 

PROPOSED PROJECT FINANCING

The developer has Rs 10L to invest and can take a loan from bank for Rs 50 L. Therefore based on our initial estimate of capital requirement for First year this is nearly 30 % of total capital needed for year 1.

Also the sale of the proposed housing can be done through CLP (construction Linked plans) but that revenue generation will only happen after some period of time, especially after the first quarter. Therefore the developer will have to look for some other source of long range debt capital.

This he can raise through the mortgage of the land given by trust to him. Since the value of the land is 5 crore, he can easily have a loan against property for around 50-60% of property value. i.e 3 crore.

SUMMARIZING:

Year 1:  

Total capital available        = 3.6 crore

Source of capital:

1.  3 crore long term capital, 

2. 50L short term capital and   [needed for the first quarter]

3. 10L his own investment. [needed immediately for starting of work]

Total requirement for expenditure  = 2.3 crore 

Requirement of revenue from sales = 0.0

Surplus will have to be invested in short term investments.

Year 2:  

Total capital available  = 1.3 crore

Source of capital:

1.  1.3 crore surplus from the “3 crore long term capital loan”, 

2. From booking/sales of housing units.

Total requirement for expenditure  = 6.54 crore 

Payback of loan from bank and personal investment = 0.672 crore

Minimum Requirement of revenue from sales = 7.212 crore

Surplus will have to be invested in short term investments and used to pay back the short term loan raised from bank worth Rs 50L. The payback in this year would be 56L. Also developers own capital investment will be paid back, which will amount to 11.2 L.

Year 3:  

Total capital available  = 0.0

Source of capital:

1. From booking/sales of housing units.

Total requirement for expenditure  = 2.97 crore 

Payback of loan taken against property = 3.36 crore

Minimum Requirement of revenue from sales = 6.33 crore

This is minimum revenue will provide the breakeven for the project. 

Remainder of 2.215 crores can be generated after this period also.

Disclaimer:

This is just one way of looking at the problem. This example is given to provide clarity to the problem. In no way the given solution given here can be substituted for a formal submission. It is advised to all students to make independent effort to solve this problem.