Financial Management of the Construction of a River Port Located in Western Africa - Case Study Example

FINANCIAL MANGEMENT CASE STUDENT’S NAME PROFESOR INSTITUTION 2ND MARCH 2012 Introduction This thesis focuses on the financial management of the construction of a river port located in Western Africa. The river port will be used to handle bauxite (an aluminum ore) brought in from mines located nearby. The contractor has given a time limit of two years to complete the construction of the bauxite terminal failure to which liquidated damages of a certain amount will be subtracted from his final remuneration. The guaranteed maximum price for the whole construction has been estimated to be 450 million pounds and therefore the government (which is the client) will not cater for any other expenses incurred above that amount (including cost resulting from inflation and cost escalation) as dictated by the conditions of FIDIC contracts. The contract has considered costs brought about by currency fluctuations and provided that the contractor can look for ways of getting back the lost revenues due to the weak nature of the local currency as discussed later in this assay. Although the client will not cater for additional costs over and above the agreed amount of 450 million pounds, the savings on the total cost of construction will be divided on a 50/50 basis between the contractor and the client according to terms and conditions of the contract. Part 1: Tender Sum the Contractor should submit The project has been allowed a guaranteed maximum price of 450 million pounds above which the client will not pay for extra costs, but on savings of the costs the contractor and the client are to share by half the total savings. Some costs have been included in the tender cost schedule although the contractor will be repaid back. The reason why they were included is because they ultimately affect the cash flow of the contractor. The costs include labour cost; material procured locally and imported, and plant construction costs which are repayable within the guaranteed maximum price. Labour was categorized into three; supervisory and managerial staff that are mainly expatriates and paid in Sterling pounds, skilled labour and unskilled labour that are paid in local Freedonian Dalasi (DJF). The amount expected to be paid to the supervisory and managerial staff is 30, 600,000 pounds, which when converted to the weak local Freedonian Dalasi at the rate of 150 is equal to 4,590,000,000 DJF. The amount payable to the skilled labourous can be established by adding all the components that are consumed by them. The same can be done on unskilled labour to get a total of 2,420,850,000 DJF and 16,246,500,000 DJF for skilled labour and unskilled labour respectively. The total cost of labour is established by adding the cost of the three categories of labour which amounts to 7,027,096,500 DJF. There are other costs which were incurred but also are covered by the skilled and unskilled labour divisions. These costs include; costs of temporary works and site overheads, construction of quay costs, cost of construction of rail links, cost of constructing roads, warehousing costs, and landscaping costs. The total costs incurred by each of the above activities and cost drivers can be shown by the information below. Temporary works and site overheads- Skilled labour is expected to consume 306,000,000 DJF -Unskilled labour is expected to consume 1,989,000,000 DJF -Local materials are expected to consume 306,000,000 DJF -Plant from USA are expected to consume 1,815,600 Dollars whish can be converted to the starling pound at the rate of 1.78 to give 1,020,000 pounds which are then converted to Freedonian Dalasi at the rate of 150 to give 153,000,000 DJF -components from France are anticipated to use 2,958,000 Euros whish can be converted to the starling pound at the rate of 1.45 to give 2,040,000 pounds which are then converted to Freedonian Dalasi at the rate of 150 to give 306,000,000 DJF. The total amount of temporary works and site overheads are expected to be 3,060,000,000. The cost of construction plant includes construction of quay and jetties, construction of rail links, construction of roads, warehouses, cost of storm culverts and river diversions, and landscaping costs. Cost of construction plant can be illustrated as below:- Construction of quay and jetties is expected to use 982,500,000 DJF of skilled labour, 7,860,000,000 DJF of unskilled labour, and 6,877,500,000 DJF of local materials. The total amount payable in to Freedonian Dalasi is expected to be 15,720,000,000. Other costs associated with construction of quay and jetties are; - Plant from United States of America is expected to cost 34,977,000 dollars which can be converted to starling pounds at the rate of 1.78 to give 19,650,000 pounds. This amount is equal to 2,947,500,000 DJF converted at the rate of 150. -Equipment from South Africa is expected to cost 70,740,000 R which can be converted to starling pounds at the rate of 10.8 to give 6,550,000 pounds which is equal to 982, 500,000 DJF converted at the rate of 150. The total cost of construction of quay and jetties is expected to be 19,650,000,000 DJF. Construction of rail links includes: - Skilled labour which will cost 642,600,000 DJF. - Unskilled labour which will cost 2,754,000,000 DJF. - Local materials which will cost 3,488,400,000 DJF. - Plant from USA which will cost 1,377,000,000 DJF. - Components from France which will cost 367,200,000 DJF. - Equipment from South Africa will cost 550,800,000 DJF. The total cost of construction of construction of rail links is expected to be 9,180,000,000 DJF. Construction of roads includes: - Skilled labour which will cost 150,000,000 DJF. Unskilled labour which will cost 1,425,000,000 DJF. Local materials costing 1,312,500,000 DJF. Plant from USA costing 375,000,000 DJF. Components from France will cost 225,000,000 DJF. Equipment from South Africa will cost 262,500,000 DJF. The total cost of construction of roads is expected to be 3,750,000,000 DJF. The other costs associate with construction of plant which include warehouses, cost of storm culverts and river diversions, and landscaping costs are estimated to be as explained in details below. Cost of warehouses which estimated to be 1,125,000,000 DJF. Cost of storm culverts and river diversions costing 2,250,000,000 DJF Landscaping costs which will be 2,295,000,000 DJF. The total cost of construction plant can be found by adding all of the costs that are associated with it; therefore the cost is 38,250,000,000 DJF. All other costs are summarized by the table below. Temporary works and site overheads were not included in the total because they had been already included in other costs. Cost driver Cost incurred in DJF Temporary works and site overheads 3,060,000,000 Costs of supervisory and managerial staff 4,590,000,000 Costs of skilled labour 2,420,850,000 Costs of unskilled labour 16,246,500,000 Costs of construction plant 38,250,000,000 Costs of materials procured locally 11,872,150,000 Costs of imported materials and components 6,828,450,000 Costs of imported equipment 1,852,050,000 Contingencies 5,257,200,000 Head office overhead costs 2,190,500,000 Profit margin 1,077,500,000 TOTAL COST OF THE PROJECT 52,335,200,000 Part 2: Cash Flow Schedule The two cash flows below will be used to show the revenues and costs the contractor is expected to gain and incur in the period specified by the guaranteed maximum price contract. Projected cash flow for the first year of the contract (in millions of DJF) The contractor was paid in stages. He received 13,500 million DJF when starting on the site, which is 20% of the total sum of the contract. The money was intended for recruitment of workforce, setting up site, and other costs of start up. The contractor was also paid 60% the value of work completed each month and there fore did not receive such payment the first month of the first year. There is an expected cash outflow for the recruitment of supervisory staff and skilled labourous. The cost that the contractor will incur for recruiting supervisors is 918,000,000 DJF, which is 20% of the total cost for supervisory staff. The amount to be payable for recruiting skilled labour is 242,085,000 DJF which is 10% of the total cost for skilled labour. Fifty percent of the Temporary works costs will be paid upfront (which equal to 1,530,000,000 DJF) and the rest spread over the contract. Jan Feb March April May June July Aug Sept Oct Nov Dec Balance B/F 10,294.665 6,583.96 2876.225 19.055 -2832.115 -5619.885 -5619.885 -3619.88 -20105 -16505.225 -1880 CASH INFLOWS Mobilization Paid Start up payment Monthly payment Remaining payments 13,500 - - - 12 - - 15 - - 19.025 - - 25.055 - - 83.455 - - 2876.225 - 4876.225 - 6476 - - 6476 - - 17501.45 - - 17501.45 - TOTAL INFLOWS 13,500 10,306.665 6598.96 2895.28 44.11 -2743.66 -2743.66 -743.66 2856.12 -13629 996.225 CASH OUTFLOWS Staff recruitment Supervisory Skilled workers 918 242.085 - - - - - - - - - - - - - - - - - - - - - - Temporary works 1,530 83.455 83.455 83.455 83.455 83.455 83.455 83.455 83.455 83.455 83.455 83.455 Labour Supervision costs Skilled labour Unskilled labour 191.25 101 677 191.25 101 677 191.25 101 677 191.25 101 677 191.25 101 677 191.25 101 677 191.25 101 677 191.25 101 677 191.25 101 677 191.25 101 677 191.25 101 677 191.25 101 677 Construction plant 1594 1594 1594 1594 1594 1594 1594 1594 1594 1594 1594 1594 Materials procured locally 495 495 495 495 495 495 495 495 495 495 495 495 Imported materials and components 285 285 285 285 285 285 285 285 285 285 285 285 Imported equipment 77 77 77 77 77 77 77 77 77 77 77 77 Contingencies 219 219 219 219 219 219 219 219 219 219 219 219 TOTAL COSTS 3205.335 3722.705 3722.705 2876.225 2876.225 2876.225 2876.225 2876.225 2876.225 2876.225 2876.225 2876.225 Balance B/D 10,294.665 6,583.96 2876.225 19.055 -2832.115 -5619.885 -5619.885 -3619.88 -20105 -16505.225 -1880 12745.225 Projected cash flow for the second year of the contract (in millions of DJF) Jan Feb March April May June July Aug Sept Oct Nov Dec Balance B/F 12745.225 9241.515 5737.81 2234.095 -1269.61 -21602 -105079 2058.62 5168.03 7277.44 9386.85 11496.26 CASH INFLOWS Mobilization Paid Start up payment Monthly payment Remaining payments 219 - 219 - 219 - 219 - 2832.115 - 4832.115 - 6832.115 - 6832.115 5832.115 5832.115 5832.115 2832.115 TOTAL INFLOWS 12964.22 94606.515 5956.81 2453.095 1562.505 2671.915 5781.325 8890.735 11000.145 13109.555 15218.965 14328.375 CASH OUTFLOWS Staff recruitment Supervisory Skilled workers - - - - - - - - - - - - - - - - - - - - - - - - Temporary works 83.455 83.455 83.455 83.455 83.455 83.455 83.455 83.455 83.455 83.455 83.455 306 Labour Supervision Skilled labour Unskilled labour 191.25 101 677 191.25 101 677 191.25 101 677 191.25 101 677 191.25 101 677 191.25 101 677 191.25 101 677 191.25 101 677 191.25 101 677 191.25 101 677 191.25 101 677 191.25 101 677 Construction plant 1594 1594 1594 1594 1594 1594 1594 1594 1594 1594 1594 1594 Materials procured locally 495 495 495 495 495 495 495 495 495 495 495 495 Imported materials and components 285 285 285 285 285 285 285 285 285 285 285 285 Imported equipment 77 77 77 77 77 77 77 77 77 77 77 77 Contingencies 219 219 219 219 219 219 219 219 219 219 219 219 TOTAL COSTS 3722.705 3722.705 3722.705 3722.705 3722.705 3722.705 3722.705 3722.705 3722.705 3722.705 3722.705 3722.705 Balance B/D 9241.515 5737.81 2234.095 -1269.61 -21602 -105079 2058.62 5168.03 7277.44 9386.85 11496.26 10605.57 Read More