Construction Projects Funding Sources - Essay Example

Construction Projects Funding Sources A construction contract is an arrangement between two or more organizations, where one organization constructs for another organization (the client) in exchange for payment. Construction Contracts are usually in written form, whereby, if one party fails to reach its end of the agreement, then the contract is broken. The construction contract is usually very expensive and ranges from simple projects to complex ones. There are different clients in these types of contracts, and they can either be commercial or residential. Different clients have different requirements that determine what is always included in the construction contracts (Cleland, 2006). Funding of construction projects may be approached in several ways by the client. The American Recovery and Reinvestment Act (ARRA) has outlined special requirements which are to be adhered to in construction projects. All public construction contracts must contain these requirements so as to enable the funding of these construction projects. The applicable state construction contract rules should be adhered to in acquiring contracts for the projects funded under the ARRA. The following are some of the ARRA requirements; all the workers employed by contractors should be paid at rates that are not less than those that other workers doing similar projects in the same locality. The buy American Act; all the construction materials being used in the construction projects of public property should be manufactured in the country. The construction contract will be terminated if these rules will not be adhered to. ARRA is always strict that these funds should be committed into the projects fully (Cleland, 2006). In contract funding, there is a wide variety of funding methods. One of the funding sources is through the use of Cash reserves. This is money that is deposited in the bank accounts of clients. A client can fund a construction project through the use of short term bank deposits in form of savings or fixed deposits, cash deposited in bank accounts in the form of savings, or money that was invested in the money markets and treasury bills. Money market instruments are financial instruments that are given by banks and other financial institutions or from the government. These instruments can vary from treasury bills and certificates of deposit that are thought to be of very low risk. Most of these instruments have low returns, but, at the same time they are very safe since they are supported by the state and reputable institutions. A client might have invested in the money markets, hence, if the client wants to fund a construction project, then the client will have to sell the treasury bills or certificate of deposits and use the cash acquired to develop his/her construction projects (Lester, 2006). Sale of Assets is another method of funding construction projects. The sale of assets is whereby a client has a value on his/her property. The client should also have his/her records on its depreciation/appreciating trends. The client will in turn enter the sale in the accounting records and enter the money from the sale in the cash account. He/she will then balance the entry with a credit for the asset, a debit to the depreciated account. The difference from that is the clients’ gain, or loss. An example is whereby a client owns a building worth $450,000 which is depreciating and yet the client wants to develop another project that is worth $500,000, the client will put the asset on sale to get the money that will be used in the development of the new project. Clients who are willing to develop a new project can also acquire funding through borrowing from banks and other financial institutions. A lot of banks hold lots of billions of dollars in assets, hence, this makes it easier for banks to offer loans and grants to clients with security to develop more assets. In loaning money, a client who applies for a loan will require security and they should have a clean credit background. For residential developers banks have put up mortgages. This is whereby a person requests a bank or any financial institution to finance the construction of his/her property. The individual will in turn pay the cash in regular amounts for a specified time period. The banks also charge an additional fee on top of the money borrowed, this fee is calculated using certain percentages hence it is known as interest rates (Lester, 2006). Any client who wishes to own property may lease as a form of owning purchase. Normally, this is done at an agreed price, and the client can pay for the property by paying the money in instalments just like renting a place. This works for home buyers who do not meet the requirements of getting loans. These plans are designed such that both the parties will benefit. The benefit of this option is that it is the most cost effective method for acquiring an asset and the owner/client will have no maintenance costs. At the same time there are dangers and negative impacts to buyers. These dangers are; the contractual provisions may cancel the contract in case the client fails to pay the rent in the agreed period. Some home owners want a cash sale, hence, when they take a lease to sell house they sell the house and use the money to construct other projects. Sometimes the deal of selling a lease to buy house may go through and it will be a good thing however the buyers of these houses may face danger if the first owners default the payments of this lease. A client can also raise funds through, share capital of a company or asset or even the project that is being constructed. This is done by bringing in more interested people to fund the construction of the project, and in turn they will profit from the returns that will be returned after the project will have been completed and started generating profits. The people who added the funding will be paid back their money in form of dividends from the project. Raising the share capital is a good way to raise funds for a profitable project hence the client will not strain in funding the project. This is even better in growing companies that are looking to expand their infrastructure (Turner, 2006). A client can also issue debentures. This is a document that creates a debt or acknowledges the debt, which is a midterm means used by companies to borrow cash. A debenture is referred to as a loan stock or a bond in some countries. A debenture can be freely transferred by the borrower of the cash. However, people who hold debentures have no voting rights to the decision making of a company. In America a debenture means an unsecured corporate bond and has no fixed income rates. It is a good way of raising project funding for construction of company property. When companies want to start projects and they run short of funding they can as well collaborate with other companies that will chip in the construction expenses, thus minimizing the constructing costs. Government projects can be constructed through government revenue. This revenue is acquired from taxations, government investments, and government bonds, donor funding, fundraising and other means that the government will approve to use in revenue collection. The government will then use this money to complete its projects effectively and in a cheap way. The American government funds a big percentage of construction projects in the country. As a result contractors tend to misuse the resource utilization (Turner, 2006). References Read More