Cost Management and Financial Feasibility - Case Study Example

SSЕSSМЕNТ 1 FЕАSIBILITY RЕРОRT Submitted By: NAME: INSTITUTION: COURSE: INSTRUCTOR: DATE: © 2014 INTRODUCTION Feasibility reports have gained a lot of popularity in recent times for their influence in the business sense. Coupled with financial feasibility analysis, managers and project managers are increasingly becoming indebted to them because of their influence in making informed decisions. For starters, feasibility reports have been used to make choices between options and hence determine the viability of the chosen projects (Ernst and Young 2011, 07). The feasibility report is also capable of analysing the effectiveness of the chosen project based on some common factors such as technology, economics; legalities; operations and schedule as noted by Bourke et al. (2005). The current report seeks to produce a financial feasibility report for the Company I work for. The said Company has a plot of 1043 m2 (Potts 2008) located in East Perth, WA. In the said piece of land, the Company is grappling with the idea of either constructing an apartment or a commercial office. It is therefore my responsibility to conduct a financial feasibility analysis for the two potential investment ventures and advice the Company accordingly. Secondly, the report has to make recommendations about the most profitable venture among the two options. The report finally concludes by presenting a brief wrap-up of the pertinent issues raised throughout the discourse. A) FINANCIAL FEASIBILITY ANALYSIS There are two potential investment ventures for the company; either to construct an apartment or a commercial office. Financial feasibility analyses for these two options must be conducted to determine the most viable project for the Company, considering the whole life cycle of the buildings. i. Financial Feasibility Analysis for Constructing an Apartment Construction of an apartment falls under the category of “Residential Housing Construction” as identified by Whitten and Bentley (2007). This category construction contains the ‘high-rise apartments’ which are professionally constructed in busy suburban neighborhoods as indicated by Potts (2008). Considering the location of the piece of land owned by the Company in question, it is evident that the option of building an apartment fits very well in this category. In the views of Ernst and Young (2011), construction of projects in this category is known to be very involving and draining especially on the part of the owners and financiers. This is particularly so because all those involved in the process must take responsibility and act as co-owners of the project by ensuring that all necessary arrangements are put in place to ensure successful completion of the facility. This implies that the project managers and other stakeholders must make arrangements from the inception of the project to its logical completion (Potts 2008). All the construction works starting with designs, masonry, fittings and marketing of the completed facility must be undertaken by qualified professionals. To ensure quality, Bourke et al. (2005) further argue that all construction work must be subcontracted to specialists in certain works such as ‘structural, mechanical, electrical and fitting’. This in my view is really very involving and as such may cause project costs to sky-rocket and make them unattainable to the Company. But the application of new technological innovations in the construction industry has helped to mitigate these shortcomings amicably. Extant literature has further demonstrated that the market segment for projects in the high-rise apartments’ category is somewhat challenging to penetrate due to the perceived competition. Moreover, Ernst and Young (2011) holds that the situation is further complicated by the harsh environment created by the stringent regulations put in place by the government in addition to the prevailing economic hardships. Despite all these setbacks, there is an observed influx into the sector. Bourke et al. (2005) attribute this to the relative ease with which investors enter into the sector especially when there is a slight increase in the demand for residential housing. In view of this, it has emerged that the market for high-rise apartments is highly competitive with potentially high risks as well as high rewards. ii. Financial Feasibility Analysis for Constructing a Commercial Office Similarly, Bourke et al. (2005) identifies the construction of a commercial office as belonging to the category of “Institutional and Commercial Building Construction”. Constructions in this category profess of ‘skyscrapers for offices and hotels’ which are very relevant to the indentions of this report. As opposed to the construction of projects in the “Residential Housing” category described in the foregoing paragraphs, the owners of buildings in this latter category are not mandated to be familiar with the construction industry practices (Ernst and Young 2011). On their part, they are usually permitted to select competent professional consultants but only facilitate the financing of the constructed facilities. On the contrary, the projects in this category require the services of ‘specialized architects and engineers’ to help in the designing of specific types of buildings (Ernst and Young 2011). Similarly, the general construction works may also be sub-contracted to individuals or Companies who are specialized in only that type of building as noted by Potts (2008). Since this category of construction is characterized by higher costs and greater sophistication as opposed to the residential housing category, there is less competition for the market share segment. This is because fewer competitors can afford to enter the market segment, thus giving the category an edge over the rest. Since the construction of buildings in this category is a long-term process which once started will take some time before completion, the demand is not seriously affected by the general economic conditions as compared to the speculative housing sector (Whitten and Bentley 2007). In this instance therefore, the owners of such projects are bound to face a skewed competition from general contractors who operate in the same market segment. For this reason, the concerned firm must develop competitive strategies that will keep it business. Otherwise such a firm may never be capable of marketing any of her completed facilities (Bourke et al. 2005). Based on this scenario therefore, it is my strongest opinion that construction of an apartment is more profitable to my Company than erecting a fleet of commercial offices. Justifications It is assumed that the financial feasibility analyses conducted here have gone through certain constants. Firstly, it is assumed that the technology applied in completing both potential ventures has been critically assessed to determine the most viable project. In this aspect, constructing an apartment will be cheaper and will take a shorter period than when constructing a commercial office. Similarly, completion of a commercial office based on accessed information will run into excess costs and also take a long time to start realizing returns on value as compared to the construction of an apartment, which on the contrary has a shorter period of starting to reap benefits (Ernst and Young 2011). Additionally, government regulations are found to constrict commercial constructions more than residential housing constructions. This further affects total costs and completion time of these facilities especially if compliance for certain provisions is a mandatory requirement. This can reside in the fact that the government may mandate compliance with the use of modern technology in the construction industry. While looking at the existing business environment and objectives with regard to the two potential ventures, construction of an apartment is more viable since the Company intends to only have a building of three floors as opposed to commercial offices that may require putting up a skyscraper (Ernst and Young 2011). This kind of a project may require the phasing out of the construction works and hence delay its completion. Considering the ‘development schedule, delivery date and corporate culture’ all set out at the inception phase of the project fits so well with the construction of an apartment rather than a commercial office. Considering the scheduling of the two potential ventures, constructing an apartment has a more reasonable timetable given that the project’s life cycle is 25 years. Construction of a commercial office may take longer and therefore leave a very short time for reaping benefits after completion works. This will be tantamount to project failure in line with arguments proffered by Whitten and Bentley (2007). This is also outside the scope of the Company’s objectives in the project development. It is also clear that entry into the market share segment for residential housing constructions is very easy in comparison to that for institutional and commercial building construction. This will enable my Company to market her project very easily if it is an apartment as opposed to when marketing a commercial office. B) MOST PROFITABLE VENTURE A project is considered to be profitable if it satisfies the market demands in the timeliest fashion possible according to observations by Potts (2008). In this regard, a project must therefore not take too long and eat into its life cycle thus leaving too short a period to benefit. In fact, Bourke et al. (2005) maintain that a project that is completed in time gives the owner amble time to get maximum benefits on returns. The timeframe for which the project should take is firstly conceived at the conceptual planning stage. It is at this stage that both the technological and economic feasibilities of all the alternatives will be assessed so as to identify the most beneficial project. This is in fact what actually happened for the two alternatives considered by my Company. The foregoing sections have comprehensively undertaken feasibility analyses for both options, taking into consideration the aspects of “technology, economics, legality, operations and scheduling” (Ernst and Young 2011). On careful analysis of each of the two potential ventures of the Company, it emerged that constructing an apartment was the most profitable option. Against all odds, construction of an apartment is far much cheaper than constructing a commercial office as it can be attested in the foregoing discourse. Firstly, a profitable project must fall within its life cycle as illustrated in Appendix 1 of this report. The delays experienced in constructing commercial buildings may be attributed to a number of factors. Firstly, the selection of professional services necessary in the construction of commercial buildings contribute significantly to the delays witnessed here as well as increasing the general costs (Potts 2008). Secondly, commercial constructions may also demand to be completed in phases which in the whole may take longer than anticipated. In addition to these factors, the difficulty with which marketing of commercial buildings presents makes it even more challenging for the project owners to penetrate the elusive market segment as opposed to the marketing of an apartment. This single factor discourages majority of investors from operating in this category of constructions. The same is further aggravated by the highly punitive government regulations put in place in this sector. New technologies however have come in handy to mitigate these negativities as demonstrated by Bourke et al. (2005). Accordingly, Whitten and Bentley (2007) laud the entry of ‘technological innovation in design, materials and construction methods’ in recent times which has significantly resulted in reduced construction costs. This is particularly observed in the fact that computer programmes have been developed to assist in generating quality designs within the shortest time possible as well as applying robots in construction works (Ernst and Young 2011). This discovery has significantly shortened the entire construction process as well reducing the general construction costs. Considering the foregoing explanation, it is clear that construction of an apartment remains the only most profitable venture for my Company owing to the fact that there is an easy market for the facility. This, in addition to other factors discussed in earlier paragraphs gives me more convictions to recommend the construction of an apartment by the Company as opposed to choosing the commercial office. CONCLUSION Throughout this report, it has been established that a feasibility report is very critical in helping entrepreneurs and managers alike in making informed business decisions based on an idea. Potts (2008) explains that these decisions are on the basis careful examination of a specific plan to determine its effectiveness before making conclusions. Production of a feasibility report is founded on certain aspects namely: Technology, Economics, Legality, Operations and Schedule (TELOS) as coined by Whitten and Bentley (2007). Based on this module, a feasibility analysis has been performed on the two alternatives available for my Company and been able to come up with the most profitable venture to be initiated. It has also been possible to make informed recommendations for my Company to decide which project to complete for better benefits. REFERENCES Bourke K., Singh V. R., Green A., Crudgington A., and Mootanah D, 2005. Achieving Whole Life Value in Infrastructure and Buildings, BRE Bookshop Ernst & Young LLP, 2011. Financial reporting developments: A comprehensive guide. Real estate project costs. P. 3-35. Potts Keith, 2008. Construction Cost Management: Learning from Case Studies, Oxon: Taylor & Francis. Whitten J. and Bentley L, 2007 System Analysis & Design for the Global Enterprise (7th ed.) p. 417. APPENDIX 1: The Project Life Cycle of a Constructed Facility  Source: Adopted from Bourke, et al. (2005) Read More