Analysis of a College Construction Project

1.0 Introduction

The following analysis of the college construction programme will show a detailed step-by-step formula of how the entire project will be conducted, with close attention to the financial requirements and how these are funded through and managed over a 45-year period. As not all financial data is available pertaining to the college in terms of how much money is available form the endowment or an indication of the present operating cash flow, estimations have been used to aid budgeting and forecasting. Brook (2016) describes the importance of cash flow as the lifeblood of a construction project, and failure to manage this appropriately may cause a project such as this to collapse.

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The analysis will produce a set of work-packages that will show the different roles and responsibilities of various contractors and sub contractors that will be used in the project.  According to Levy (2010) construction projects have the ability to create endless opportunities for conflicts and disagreement, having clear work-packages will assist in fixing common problems and everyone involved knows what is expected of them. The cash flow of the entire project will be based on a period of 45 years from the start of the project; a clear gantt chart will be produced and will illustrate each stage of the project from start to finish, and will show the key milestones such as the start and finish of construction.

Great detail will be presented on the financial aspects of the project such as budgeting, cash flow and the projects financial return to the college. Charts and spreadsheets will be used to show this information and describe the College’s financial position at key milestones indicating positive or negative cash flows in the different periods. The cornerstone of effective project planning, reporting, controlling and execution is the development of a good work breakdown structure (WBS) Rev (2003). A clear WBS will be created and will clearly show how the project is being organized and conducted. The WBS for the college project will ensure that work is estimated, budgeted, scheduled and identified. The WBS elements of the project will be shown graphically to clearly demonstrate how the total works in the project is subdivided.

A design responsibility matrix will be produced from the list of professional that will be working on the project; this will set out the various responsibilities for each design element at each stage of the design development process. As the project progresses the design responsibility matrix becomes more detailed to accommodate the changes that occur in the process Baldwin et al (2014).  As a conclusion a strategy for future proofing the development will be considered, with the aim of producing design suggestions that will ensure the future viability of the buildings. The changes that will occur in the life of the building will influence the type of strategy to implement, the impact of this change and the likelihood of it occurring are key. Financially the cost of future proofing the building against such change has to be considered Smith (2009).

2.0 Work Packages & Work Breakdown Structures

For the college construction project work packages are developed to describe the entire scope of the construction process and in facilitating the integration of cross-functional disciplines Gardner (2006). The work packages will provide detailed interpretation between construction and estimating, safety, project controls, field engineering and material management. The various subcontractors that have been shortlisted to work on this project will give the client and indication of costs, budgets, ability to forecast and the potential length of the entire project. Based on different work packages that are presented to the client, a number are selected to carry out various parts of the project.

“The objectives of work packaging are to reconcile the differences of planning, scheduling, budgeting, status and control implied by the system orientation of design, procurement, start up and operation and the area orientation of construction. By effective work packaging, these differences can be addressed in a uniform manner so that integrated project management is possible” Kim et al (1995). The development of work packages has to be done by experienced personnel with knowledge on allocation of the work into workable and manageable packages, prior to execution of the work all items required to carry out the work must be in place and ready Gardner (2006). Well-planned work packages will make it easier to track performance and progress throughout the college project.

Figure 1 below is an illustration of a work breakdown structure (WBS) the purpose of having a WBS in a project like this is to organize the work into manageable section. Figure 1 shows the work packages that the project team will need to execute for the life of the project.

Figure 1: Work breakdown structure of college building project

3.0 Project programme & Gantt Chart

To assist with the initial planning stages of the project a gantt chart has been developed to show start and finish times of different aspects of the project. The project is divided in to tasks such as demolition, landscaping and building. Each of these tasks has a time frame in which it has to be completed and then another task can be started. A good gantt chart can give the project manager information regarding how the project is moving along and when various parts of the project can be started.

The Gantt chart that has been produced for the college project runs for just over 3 years from the start of the project in January 2019 until the completion of landscaping in February 2022. The chart will categorically show each part of the project and the length of time it will take to complete each task. The aim of this project programme is for it to be able to be viewed like this, and helps individuals working on the project to get a quick overview of how key tasks within the project are progressing.

Figure 1 represents a pictorial method of project management that can be viewed by all those involved in the project. The challenge of the Gantt chart is that a number of tasks are dependent on the completion of prior task before work can be started. In this project a key milestone is the movement of students to the new accommodation once the buildings are completed with the minimum amount of disruption to their daily living conditions, and more importantly ensure that rental from the students continues to flow uninterrupted.

A conservative figure of 5 days has been set side to move the students to both  ‘A’ & ‘B’ Blocks once construction is complete. To move students into ‘A’ block appears much simpler as two tasks have to be completed first before the move. Although both blocks are completed on the same day 3 tasks have to be completed first before moving students into Block ‘B’ when compared to Block ‘A’ that has fewer preceding tasks.

Figure 2 Project programme (Gantt Chart) from January 2019 – February 2022

Some draw backs to the Gantt chart are that the size of the bar does not indicate how much work needs to be done, it gives an indication of the time it is expected to take to complete the task but what needs to be done on the task. The chart will need to be constantly updated to cater for changes in weather, machine breakdowns or shortages of labour that may cause the project to slow down and not follow set time frames for completion.

4.0  Construction costs and the budget

The college will have prepared a budget so that they can determine what is affordable usually done very early before the project begins. To establish a budget a number of factors would have been considered such as:

-          Similar projects would have been used as a comparison to what the college planning to have built

-          There would be close assessment of money available for the project

-          The Income and expenses over the project life would be assessed to see if the project is a viable proposition.

-          There would be an initial analysis of design options that are available

The client sets the budget and a number of items will be considered for inclusion in the budget. Table 2 below show itemized costs for the project and the total cost.

Table 1: Project Itemised costs breakdown

Its interesting to note that the contingency, professional fees and insurance are budgeted for as a percentage of the total cost with professional fees being highest as different professionals or services may be required if things do not go to plan and hence the higher percentage. New information might be revealed from surveys, which the client might need to hire more professionals to rectify this.

5.0 Cash flow evaluation

The college project is expensive and has an initial estimated budget of circa. £47 million pounds, a project of this size needs to be managed appropriately to ensure funds are in place to complete the project, and the college has to have additional sources of funds incase cash flow becomes negative. The cash position of the college at the end of each month has to be adequate enough to meet cash requirements for the months to follow. The college enjoys a number of financial advantages such as a good credit rating, current cash flow from current tenants (students/staff), ability to raise funds from a successful alumnae base and use of the stock market to raise additional funds. The college has already secured a £35M bond over 45 years.

To increase profits and ensure success good cost control information will be useful, the use of break-even analysis charts, cash flow and profit and loss projections are useful tools to keep the flow of money in check and making informed decisions at the right time. To develop a cash flow forecast for the college project a number of assumptions have been considered to aid in the input of figures over the life of the project. Some of the assumptions are as follows:

-          The college has been conducting a fundraising initiative for the past few years and has managed to raise £20M in the process.

-          Like many colleges there is a large endowment set up by the college and the college has been successful in being able to withdraw £12M from the endowment this will be made available from January 2021 – December 2021, with £1M released each month to cover the high construction costs in that period.

-          To cover shortfalls and negative cash flow in the year 2021 the college will be able to use £12M from the operating cash flow of the college, this will be split over the 12 months.

-          After completion of the project a sum of £100, 000 per year will be set aside for maintenance, repairs and servicing of the new buildings, and increase by 3% per year.

-          It is expected that interest rates for the bond will fluctuate, as such the project cash flow periods have been split into four 12 year periods and each period has a different interest rate for the bond as shown in table 3 below

Table 3- Bond Interest Payments over different periods

The table clearly shows for the second 12 years from 2031-2042 the payment on the bond should interest rates reach as high as 8% would more than double the cost of the previous 12 years. If money that will be collected from rentals is not sufficient enough to cover the increased cost, alternative sources of funds will have to be considered.

Other assumptions are that all costs will be applied on a monthly basis from when the work begins, with professional fees being applied from the start of the project in January 2019.

Table 4 above shows the cash flow for the first year, initially the main costs at the start are the interest from the bond, surveys and environmental study. The amount of £20M raised from fundraising is introduced at this stage. At the end of every month the net cash flow remaining is added to the opening balance of the following month. This amount includes the funds from the fundraising and rental income from students and the fellows’ houses, this process is repeated throughout the year. At the start of construction in September there is funds available to cover the increased costs that have been spread over the duration of the build process.

At the end of 2019 an amount of just over £17M is carried over into 2021 to continue funding the project. Total expenditure in 2019 is £4,512,865 and total income that includes funds from fundraising, interest paid from the bond issue and rental income amount to £22,290,404. Total expenditure in 2021 increases to over £8M as the construction of A & B Blocks is fully underway and demolition work also begins at the end of the year.

Monthly-retained cashflow is carried over to the next month and in this way it remains positive. At the end of December 2021 an amount of £1,200,749 is carried over to the start of the New Year. In February of 2022 the project ends and from there the college can depend on cashflow from the completed buildings and the reduced costs. Total net profit from the end of 2022 is put away in a reserve account this money will be used at the end of the 45 years to pay off the bond.

Table 4 Shows Income and expenditure for the first year of the project 2019

A closer look at the year 2021 when construction costs were at the highest the college experienced negative cashflow from April to November, cashflow for the entire year ended up positive but had a few months where the project made a net loss. Total Income was £27.4M and expenses were £27M. In the negative cashflow months the college was able to use money from the operating cashflow of the college.

5.1 Analysis of income and expenditure over 12-year periods

Table 5 below illustrates the flow of cash in and out of the project every 12 years. In the first 3 years the college funds are mainly spent on the high construction costs and fees. From the end of 2021 there is combined rental income coming from all the properties, this increases the cashflow of the college, as a result after 2022 a separate reserve account is set up that will be used to deposit all the net profit from the college in anticipation of paying off the £35 million bond on time.

Table 4- Total income and expenditure every 12 years

Maintenance costs have been added from the end of 2021 for maintenance of the buildings and service. As expenses taper off the income begins to increase year on year in line with yearly increases in the rental figures. In 2062 the college has enough cash in reserve to pay off the bond and continue to profit from the project and that period has the lowest net profit of the other three. Going forward the college will be able to make healthy profits in the following years.

5.2 Return on Investment

The return of investment (ROI) on this project over 45 years is very impressive, with total expenditure just above £144M and the net profit a healthy £67.9M the return on investment is just above 46%. ROI is a crucial analytical tool that the college can use to attract more investors if they need to work on new projects for the college.

6.0 Future proofing Strategies that could be implemented in the build process

Future proofing or design for the future often refers to low energy buildings that are sustainable and are able to accommodate environmental, economic, social, regulatory and technological changes to maximize the lifecycle value over the long term Pitts (2008). The college has to encompass this into the early design stage to increase the likelihood of their buildings remaining useful in the long-term rather than meet short-term needs. There is a generic risk of buildings becoming obsolete if the design is such that it fails to respond to changes in the present and future Pitts (2008)

Figure 3 presents strategies that can be implemented to assist in future proofing the project and making it viable and adaptable in future years.

Figure 3: Future Proofing strategies and Design feature

7.0  Design Responsibility Matrix

For the project to be a success it is important to define who is responsible for which part of the design and what level of detail is required, this is set out in a design responsibility matrix. Design responsibility needs to be clearly defined and understood before any appointments are made or any tender documents are prepared. Table 7 below shows the design responsibility matrix, the person who has primary responsibility for a particular design has a 1 in their box and anyone with a supporting role has a 2 in their box.

Table 6 – Design Responsibility Matrix

8.0 Conclusion

The college construction project appears to have been a profitable project and was well orchestrated and managed. The key to this success was their ability to raise funds that would be used in the construction process. The project plan was well organized and was designed to cause the least amount of disruption to the students and staff at key intervals such as moving from one block to another. Such strategic thinking enables almost a zero loss of rental income to the project. Total expenditure on the project was higher than the budgeted amount, but a good source of regular income ensured that, as each year passed the college was not in a negative cashflow position. Work packages within the project plan were planned meticulously and as such there was a good flow of progress throughout the entire build process.

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Sustainable material was used in the build process and this will ensure the longevity of the buildings to last long into the future, the college ensured that the new buildings were modern, sot-effective, elegant and sustainable. The return on investment for the entire project over 45 years was an impressive 46% and therefore a success in terms of return for the college. Strong cash flows and diligent money management ensured that the £35M bond was paid off on time, and the college continued to make a profit in the years to follow.

9.0 References

• Baldwin, A. and Bordoli, D., 2014. Handbook for construction planning and scheduling. John Wiley & Sons.
• Brook, M., 2016. Estimating and tendering for construction work. Routledge.
• Gardner, G.R., 2006. Effective Construction Work Packages. AACE International Transactions, p.S131
• Kim, Jae-Jun and Ibbs, William C. Work Package Process Model for Piping Construction 
Journal of Construction Engineering and Management, Dec. 1995
• Levy, S.M., 2009. Construction process planning and management: An owner’s guide to successful projects. Butterworth-Heinemann.
• Rev E, June 2003. Work Breakdown. Structure. Office of Management, Budget and Evaluation 
• Pitts, A. Future proof construction—Future building and systems design for energy and fuel flexibility. Energy Policy 2008, 36, 4539–4543.
• Smith, P.F., 2009. Building for a changing climate: the challenge for construction, planning and energy. Routledge.
• www4.rcf.bnl.gov/~videbaks/hft/cd1/DOE_guidance_wBS.pdf