Samuel Pendreigh

Project Management Profit Strategies SARC 362 Samuel Pendreigh 6-9-2017 Contents 1.0 Objectives.................................................................................................................................... 1 2.0 Initial Profit Calculations .............................................................................................................. 1 3.0 Estimation and Scheduling the Job ............................................................................................... 2 3.1 Change Orders ......................................................................................................................... 2 3.2 Construction Phases ................................................................................................................ 2 3.2.1 Application in Project ........................................................................................................ 3 4.0 Workforce Investment ................................................................................................................. 3 4.1 BIM .......................................................................................................................................... 3 5.0 Vendors, Tenders and Key Resources ........................................................................................... 3 5.1 Early Pay Discounts .................................................................................................................. 3 5.1.1 Application in project ........................................................................................................ 3 5.2 Higher Pay Discounts ............................................................................................................... 4 6.0 Managing Equipment and Inventory ............................................................................................ 4 6.1 Buy for the Job, Not for Inventory ............................................................................................ 4 6.1.1 Application in Project ........................................................................................................ 4 7.0 Accounting and Finance ............................................................................................................... 5 7.1 Embezzlement ......................................................................................................................... 5 7.2 Overhead and Profit................................................................................................................. 5 7.2.1 Application in the Project .................................................................................................. 5 7.3 Retention ................................................................................................................................. 5 7.3.1 Application in Project ........................................................................................................ 6 8.0 Sales Analysis............................................................................................................................... 6 9.0 Investment .................................................................................................................................. 6 10.0 Individual Present Value Profit ................................................................................................... 7 11.0 References................................................................................................................................. 7 12.0 Appendices ................................................................................................................................ 9 See brief for improvement examples 1.0 Objectives The following report assess general economic construction strategies in methods In hopes of increasing initial project profit by 20%. Concepts and strategies revolve around the concept of value engineering which looks to increase value by either improving function or lowering the cost. 2.0 Initial Profit Calculations The initial construction calculations and profit of the project are as follows; Description of Sum Income Apartments Penthouses 10 year Retail Lease Final Construction Costs Residential Retail Hospitality General Fees, Tax, Inflation & Site Cost Net Profit Value Amount $47,075,904.34 $28,080,000.00 $5,400,000.00 $10,682,305.51 $43,843,437.25 $16,327,020.00 $2,534,475.00 $1,797,500.00 $3,917,912.35 $20,143,291.75 $3,028,665.24 3.0 Estimation and Scheduling the Job The construction will take 25months. This was concluded after a previous job of a similar construction of 7200m2 took 16months to complete. We can say that this was completed at a rate of 450m2 per month. Our final construction was 11,250m 2. If this same rate is applied we will finish at the end of 25 months. 3.1 Change Orders Charging fees for change orders could potentially be utilized. Doing this would reduce the attractiveness of changing un-important items which would essentially speed up the construction phase. This is due to less time needing to be dedicated to re-scheduling construction phases which would be changed by change orders. Fees would be small enough not to stop essential change orders such as ones relating to structure but large enough to stop orders such as specification of light bulbs (Sage Software). 3.2 Construction Phases During the initial proposal sale of units did not occur during construction which meant that the development was at a negative ROI during the total construction. By adapting the construction phases and starting to sell units during the 25months we were able to generate an average ROI of still only -7.2% due to a NPV of -$15,636,973. However after 10 years of rent and taking account of rising inflation of prices this was increased to 18.69% ROI When planning the construction phases it was decided to complete each module singularly and to not multi-task on any as by doing so average organizations can see a 27.5% drop in productivity and a rise in 32% of labour costs (Realization). Phases were split into the following; CP1 – Marketing CP2 – Carpark CP3 – West Block CP4 – Landscape CP5 – East Block CP6 - Tavern A DCF (discount cash flow) was created to simulate economic performance during the phases and show where possible improvements could be made. CP3 (construction phase 3) – West Block was analysed as having the potential to improve profit through being able to compete construction quicker. This Block held most of the retail stores and 48% of the units. By completing construction earlier the developer would be able to sell and lease the available spaces earlier and hence break even on their investment earlier too. The phase was initially was estimated to take 8 months in total and spend a total of $1,065,942.50 per month. By using a project management strategy such as crashing this process could be reduced to 6 months at best. This process works by reviewing the critical path and seeing which activities can be completed earlier through adding extra resources (Usmani). 3.2.1 Application in Project Through using this method an extra $500,000 was invested over 6 months which increased construction costs over those 6 months to $1,149,275.83. Although this initially increased construction costs it ended up saving $1,631,885.00 which could either be invested elsewhere in the project or invested conservatively. In terms of a percentage this will increase construction profit by 6.8%. On top of this the completion of the block two months early will guarantee 2 extra months of the retail lease income for the 6 stores which are located in that block which will wind up to be $46,704.52 per month, $93,409.05 in total, and 0.4% of the total cost if not chosen to invest back into construction immediately. 4.0 Workforce Investment 4.1 BIM By investing in your work force you can reduce communication delays and hence work force hours (Sage Software). In a past case study the engineering company “GHD” included automated construction systems which eliminated paper hardcopies and 800 staff hours for a 42million USD (58 million NZD) project in Guam (GHD) (Bentley Systems Inc). If this is applied to our project at a similar rate of 1 hour being equal to $72,500 then we could potentially reduce administrative staff hours by 600 hours. A typical hourly rate in NZ is $27.76 (ENZ) which calculates out to being approximately $16,656 or a decrease of 0.07% of initial construction costs. 5.0 Vendors, Tenders and Key Resources 5.1 Early Pay Discounts By finding vendors who offer 1% - 2% early pay discounts for materials the project could potentially generate an “annualized income” of 18% - 36% per year through interest. This concept would work by paying the vendor 10 days in advance compared to 30 meaning that by loaning a vendor your money for 20 days a continuous bonus could be generated every 20 days in terms of interest on the loan as exchange for guaranteeing them purchase of their product and paying before the due date (Sage Software); ((365 days / 20 days) x 1% - 2%) = 18.25% - 36.5% 5.1.1 Application in project Expenses were calculated through use of the elemental costs supplied by Rawlinson’s 2012 (Rawlinsons). Elemental costs work through providing a general percentage of costs of the total cost for certain elements such as structure or drainage. If for the following calculations we say, as general rule of thumb, that 35% of these elemental costs are associated with labour costs and the rest associated with materials will be 65% which is where savings could be seen (Gichui). The following table simulates cost decrease(s) for the most expensive materials used in the development if an early pay discount was utilized for 1 year. The element costs below are the sum of the total of Retail, Hospitality and Residential cost. Material Element Elemental Cost Material Cost Lower Yield Limit Early Pay Discount Roof Exterior Walls Electrical Services Mechanical Services Floor Finishes Sanitary Plumbing $537,133.87 $991,565.16 $1,004,299.23 $349,137.02 $644,517.35 $652,794.50 $63,717.51 $117,624.42 $119,135.00 Higher Yield Limit Early Pay Discount $127,435.01 $235,248.83 $238,269.99 $947,506.39 $615,879.15 $112,397.95 $224,795.89 $779,544.73 $1,897,342.99 $506,704.07 $1,233,272.94 $92,473.49 $225,072.31 $184,946.99 $450,144.62 Total $730,420.67 Total Higher Yield Lower Yield Initial Cost (non-tax and fee inclusive) $23,903,947.35 $23,903,947.35 Cost After Early Pay Discount $22,443,106.01 $23,173,526.68 $1,460,841.34 Percentage Change 6.1% 3.05% Discount on materials, if an early discount is given, will range from 3.05% - 6.1% of the Total Costs (not including inflation or fees). 5.2 Higher Pay Discounts If the above is achieved you may potentially be liable to negotiate higher discount rates with suppliers and subcontractors than the ones stated above in return for earlier pay. The same Method of Pay Discount would be achieved but just at a higher rate such as 3 – 5% per early pay. 6.0 Managing Equipment and Inventory 6.1 Buy for the Job, Not for Inventory Construction companies usually stock inventory with more materials than need. This can prove cost ineffective as if the materials are not used within a certain time period they can depreciate in value and become inoperative during that period due to better versions or options of inventory being released (Sage Software). By employing a QS (quantity surveyor) or someone who is able to monitor your inventory your initial investment will create return from wastage. 6.1.1 Application in Project A QS can decrease wastage and improve the value of a project by approximately 3% (Hiew). In the case of this project our materials cost was 65% of the total elemental cost which works out to be $16,102,285.78. 3% savings of this figure equates to $483,068.57 which is approximately 2% of the total construction costs. 7.0 Accounting and Finance 7.1 Embezzlement Embezzlement or theft, misappropriation of funds is not uncommon to see in construction business and can end up costing investors large amounts of their investment. Buy initially employing someone other than a book keeper to handle deposits you can lower the risk of this occurring (Sage Software). By providing an initial investment in the form of the cost to employee someone to do this you could ensure a positive ROI. Although this is not as common in New Zealand as in other countries it is not an essential strategy to be consider first although would be worth taking action on with clients you are new to dealing with or higher risk projects due to the risk and greater chance of embezzlement occurring. 7.2 Overhead and Profit Ensure that contractors profit and overhead is calculated as one figure instead of calculating overhead and then profit separately. By ensuring this you could save additional 1% per contractor of what you owe them; Situation 1: $100 x 20% (10% Overhead + 10% Profit) = $20 Situation 2: $100 x 10% (10% Overhead) = $10; $110 (Job cost including Overhead) x 10% (Profit) = $11  $11 + $10 = $21 owed to worker. 7.2.1 Application in the Project As stated before 35% of Elemental costs are associated with labour fees. On a project of this magnitude you would expect 260 workers to be involved over the 25month span. This was based off a past case which used 39 workers to complete a project over 4 months to which I added 20 workers to make up for the retail and increased technicality in terms of services (Plumbers). If total construction costs are $23,650,191.32 then 35% of that, $8,277,566, will labour costs. If we assume all workers are paid equally then from this job that should be receiving $31,836.80 which includes mark-up for profit. If overhead and profit is calculated together this would be increased $6,367.36 compared to increases of $9,869.40 which for 260 workers turns out to be $2,566,044.00 for the whole project, or 12% of total construction costs. If Overhead and Profit is not calculated as one figure ensure that contractor keep overhead at a low percentage 7.3 Retention Retention, or a performance bond, of a construction project is normally about 5% and is essentially a down payment held in security to ensure performance of the contractor which is usually returned after the project is complete (Retention in Construction Projects). By reducing this cost on large scale projects from 5% to 0-2% extra money could be freed up during the project. This move would need to me assessed using risk matrixes as it could lead to a risker project due to contractors not ensuring performance. However in some cases collection of retention money does not always happens, therefore by not providing it in the first place it could be seen as a positively economic choice. If Retention is collected it could be held in a separate bank account and used to invest or buy shares in certain products as to then sell after a period of time and then gain profit. 7.3.1 Application in Project Currently the performance bond sits at 5% of the “Total Costs” (See Appendices – Figure 1) which is $1,195,197.36. If this is reduce to 2% the project will be able to gain $717,118.41 or 3% of the total budget. 8.0 Sales Analysis Initially the apartment units were sold at a rate of $520,000. This figure took into consideration distance from the CBD, Floor area, Amenities and Current Competition which were all researched in the initial market research of the area as to create a competitive and affordable product. Currently Wellington region house prices are averaging a value of $600,000 (Stuff). After further analysis this price, $520,000, could essentially be increased to an upper limit of $535,000 and still be competitive and affordable for a couple (See Figure 2) due to the average savings being $65,000 which is more than the average yearly income for an individual of the Wellington region, $49,192 (Wellington facts & figures). Figure 2: Affordability Measure of a Mortgage This increase in price would create a gain in profit of $810,000 which could then be invested in other projects or used to speed up other construction phases close to the critical path through crashing (Usmani). 9.0 Investment Over the course of the construction project these indicated savings will be invested conservatively into a trust account with a minimum credit rating of a BB+. Over a 2 year period a 3.9% return per anum is expected which should increase our savings from $7,778,021.96 to $8,093,294.44 (Term Deposits). Area of Increased Profit Rent Work Force Construction Phases Early Paid Discounts Managing Inventory Over Head Retention Sales Analysis Saving $93,409.05 $16,656.00 $1,631,885.00 $1,460,841.34 $483,068.57 $2,566,044.00 $717,118.00 $810,000.00 Return over 2 Year Investment TOTAL $7,779,021.96 $8,093,294.44 10.0 Individual Present Value Profit By analysing the DCF and then certain profit strategies I have found to increase the profit compared to the previous group profit by 81.5%. What was required initially in terms of increasing profit was 20% of the group profit which ends up being $605,733.05. This situation is based off a positive situation where all profit strategies could be utilized. In more realistic situations you may only be able to utilize 1 – 3 of these methods at best due to constraints of the project which would mean that you may only be able to in fact generate 20% of your initial profit. Profit Comparison $9,000,000.00 $8,093,294.44 $8,000,000.00 $7,000,000.00 $6,000,000.00 $5,000,000.00 $4,000,000.00 $3,028,665.25 $3,000,000.00 $1,176,621.00 $2,000,000.00 $1,000,000.00 $Indiviudal Group Developer 11.0 References Bentley Systems Inc, Tech Talk: 3 Ways to Increase construction Profits, YouTube, 17/02/2017 < https://www.youtube.com/watch?v=nQyg0AXQjIA > ENZ, New Zealand Average Hourly earnings March 2017, Salaries and Wages in New Zealand, 2017 < https://www.enz.org/new-zealand-salaries.html > GHD, Ordot Dump Closure, GHD Inc, Bentley, 2016 < https://www.bentley.com/en/project-profiles/ghd_ordot-dump > Gichuhi. Francis, Percentage of Cost Breakdown Between Labour, Materials and Contractor Profit in Construction, a4architect, 26/04/2013 < http://www.a4architect.com/2013/04/percentage-of-cost-breakdown-between-labour-materialsand-contractor-profit-in-construction/ > Hiew. Hubert, How the QS Can Create Values in the Procurement of Construction Works in Hong Kong, 2007 < https://www.fig.net/resources/proceedings/fig_proceedings/fig2007/papers/ts_5g/ts05g_04_hiew_ lee_1665.pdf > Sage Software, 101 Practical Strategies to Help Make Your Construction Business More Profitable. Sage Master Builder, 2006 < http://www.synergy-group.com.au/downloads-synergy-information-systems/101-Ways-toIncrease-Your-Construction-Profits.pdf > Term deposits 1 to 5 years, interest.co.nz, 2017 < http://www.interest.co.nz/saving/term-deposits-1-to-5-years > Plumbers Disposal Service, The Average Number of Workes Involved on a Construction Site, Plumber Disposal Serivce < http://www.plummersdisposal.com/michigan/pdf/new-loss_revenuAvg_numb_workers_construction_site.aspx > Rawlinson’s, Rawlinson’s New Zealand Construction Handbook, 26th Edition, 2012 Retention in Construction Projects, Designing Buildings Wiki, 06/01/2017 < https://www.designingbuildings.co.uk/wiki/Retention_in_construction_contracts > Realization, The Effects of Multitasking on Organizations < http://www.realization.com/pdf/Effects_of_Multitasking_on_Organizations.pdf > Stuff, Average house price hits $600,000 across Wellington region, Stuff, 03/05/2017 < http://www.stuff.co.nz/dominion-post/news/-/average-house-price-hits-600000-acrosswellington-region > Usmani. Fahad, Fast Tracking and Crashing – Schedule Compression Techniques in Time Management, pmstudycircle, 2012 < https://pmstudycircle.com/2012/09/fast-tracking-crashing-schedule-compression-techniques-intime-management/ > Wellington facts & figures, Wellington, 2017 < https://www.wellingtonnz.com/life-in-wellington/facts-and-figures/ > 12.0 Appendices Figure 1: Detailed Profit Calculation of Project