Construction Management Project: Interim Report

Introduction

One of the crucial factors determining business investment decisions is the feasibility and potential returns from a proposed project. Feasibility of a proposed project indicates the possibility of achieving the proposed development and the applicability of development strategies. On the other hand, potential returns are the possible profits or increased stakeholders value that the investor is likely to gain from the project. These two factors often sway the managerial decisions concerning proposed projects. However, developing an extensive interim report on project proposals’ feasibility and potential return requires rigorous research on various market attributes. Some of the essential attributes that project proposals must consider are the cost of investment, the market size, projected financial returns on investment, the complexity of the project, and the financial capabilities of the investor. Therefore, this report gives an extensive analysis of two proposed schemes on a potential site in Birmingham city and recommends the most appropriate investment for a UK-based construction company.

This report proposes two projects to the management of Balfour Beatty Investment Company. The report hereby refers to the company as the client. The client is a construction company operating in both the United Kingdom and the USA. The client is constantly looking to invest in business projects that will increase its efficiency and revenue streams. The client intends to acquire a site in Birmingham city, the United Kingdom that has an old business structure. The client is planning to use this site to develop a new project, which will be profitable and beneficial to the community. In this report, I will evaluate two possible schemes for development at the Birmingham city site. The first of the two schemes is an apartment block with ten luxury apartments. The second scheme is a student accommodation facility that will target local education institutions at the project’s location. The report will evaluate the feasibility and potential returns to the client for undertaking these two investment schemes.

A feasibility and profitability analysis is important to inform the decision-making process of the company. The following will be the structure of the report’s analysis. First, the report will appraise the client’s financial potential in investing. The appraisal of the client will inform the nature of investment selected as a proposal. It will also inform the size and complexity decisions for the possible investment projects. The next section will provide details about the two proposals, including photographs and drawings where applicable. Then, the report will include the financial analysis of both projects to evaluate the better option. Finally, the report will present charts and other graphical representations of proposed work plans following the RIBA plan of work.

The Client

Balfour Beatty Construction Company is a multinational public limited company, which operates in the UK, USA, Hong Kong, and Canada. The company has successfully grown its revenue reserves since its internalisation. According to a mini-report on 2019’s financial statements, Balfour Beatty’s profits from operations in the year had increased by eight per cent to two hundred and twenty-one million euros (Balfour Beatty, 2020). The company had also increased its PFO for 2018 by 5.4 per cent of the previous years (Balfour Beatty, 2019). The company has shown fast accelerations in its revenue generation over the last few years. This growth is also evident in the company’s increasing order bookings. The 2020 mini-report indicates that order books amounted to 14.3 billion euros in 2019, which was a 13 per cent increased from 2018’s statistics.

Balfour Beatty mainly specialises in the construction of infrastructure and buildings. In the UK, the company’s revenue generation has continued to increase mainly because of the government’s expenditure on infrastructure. According to Balfour Beatty (2019: 8), the UK government has promised to spend more than six hundred billion euros in the next decade. The government intentions to develop the country’s infrastructure, promises more revenue for Balfour Beatty, which often employs a PPP business model. The PPP model means that Balfour Beatty’s main target market are government bodies that aim to develop regional infrastructure. The company offers its construction services in various infrastructural fields, such as power, gas, rail, highways, and water. However, the company also carries out building projects for both itself and contracting agencies across the globe. The company is always keen to build more structures for its commercial advancements, which has increased its financial strength constantly over the years. Therefore, the following is an analysis of the company’s financial strength using the data from the 2018 annual financial report (Balfour Beatty, 2019).

Company’s Nature of Services

Balfour Beatty Company generates revenue from its activities in four different sectors. These include construction services, support services, infrastructure services, and corporate activities (Balfour Beatty, 2019). The construction services are those activities involving acquisition and building of physical assets, such as resorts, business structures, etc. The Support services are those activities involving the maintenance and refurbishment of existing assets. Infrastructure services are the services involving building or disposal of infrastructure assets, such as hospitals, roads, student accommodation, etc. Balfour Beatty mainly offers these infrastructure services to government bodies and private organisations. Finally, corporate activities are revenue streams that do not involve construction activities, such as administration fees from company assets.

Current Ratio

The current ratio represents the ability of a company to avail cash for financial commitments in the near future. The ratio represents the company’s revenue that can be available for investments in future projects. The equation below represents the current ratio of Balfour Beatty in 2019. According to the company’s report, the total current assets in 2018 were worth 4,567 million euros. However, the current liabilities or commitments by the company in the year were 2,124 million euros. Therefore, using the current ration formula, the company has a current ratio of 2.15:1. The ratio indicates that the company’s assets and revenue were more than twice the commitments. Therefore, the company has about fifty per cent of its assets that can be utilised in investment proposals.

The company, however, has the following current ratio that is specific to its activities in construction services.

The company’s current ratio specific to construction services is 1.1:1. This ratio suggests that the company does not have a lot to invest in construction services due to its high level of commitments. However, it shows that the company does have enough in its reserves to pay its liabilities and commit some to proposal investments.

Investment Potential

The company invests a lot in joint ventures and associates. According to the 2018 annual report, the company invested five hundred and twenty-four million euros in joint ventures during the 2018 financial year. This investment represented a decrease in 1.3 per cent of the previous year’s investment. The small variation in investment commitments during the two recent financial years suggest that the company is willing to spend up to half a billion on business proposals.

Cash Ratio

The cash ratio represents the ability of the company to pay its debts or commitments using cash at hand. This ratio indicates the ability of the company to undertake investment projects without experiencing delays due to unreliable account turnovers. The company’s cash ratio is 1.56:1. This ratio indicates that the company has enough cash to continue with operations, even when noncurrent turnovers fail.

The proposed schemes for this report are both asset constructions. The company has an adept portfolio in constructing complex physical assets. The history of the company includes the construction of hospitals, highways, rails, and student accommodation housings. Therefore, the company is capable of undertaking the proposed projects because they fall within the same construction sector. Also, the company investment potential is half a billion euros, according to the recent financial reports. Additionally, the company’s cash ratio of 1.56:1 indicates that the company is capable of carrying out continuous construction of the proposed projects.

The Site

The proposed site for development is a 6727 square feet land at St Nicolas Place in Birmingham, West Midlands. Currently, the property contains a fifteenth-century commercial property. This property sits at a junction between The Green Wharf Road, The Rednal Road, and Westhill Road. The property is within the Kings Norton community. According to Qpzm (2020), the Kings Norton community has an estimate of twenty-five thousand residents. The property is 0.4 miles away from the Kings Norton railway station. Also, there two other railway stations at Bournville and Northfield, which are both 1.4 miles away from the property. The owner of the property has listed it for one million euros. The main higher education institution in the community is the Cadbury College that is about 0.2 miles away from the property. There are also several junior and primary schools in the community, including Fairway Primary School, Kings Norton Primary School, and Broadmeadow Junior School. The following photographs and map extracts represent the property for the proposed site and the King’s Norton community in Birmingham.

The proposed site for project development and its geographic location (Rightmove, 2020a)

The Client’s Brief

The report proposes to use the site for construction of either one of two development schemes. The first scheme is an apartment block with ten luxury apartments to offer vacation rentals in the Kings Norton community. The Kings Norton Community offers an affordable option for housing solutions in Birmingham city. The community location is a fourteen-minute trip by train to the Birmingham City centre. However, the community offers a serene environment for families who would wish to live away from the busy city centre. The proposed apartment would target business people that attend to business activities in the Birmingham city centre.

The second proposed scheme is a student accommodation facility. The Kings Norton community has many educational institutes. These institutions include high schools and colleges, which may need to increase student accommodation capacities. Notably, the site is about 0.2 miles away from the Cadbury College institute. The proposal is to develop a student accommodation apartment to target the Cadbury College institution. The report proposes to develop a five-storey apartment with eighty single housing units at the site. This apartment will provide more accommodation to Cadbury College students.

The Schemes

The St Nicolas site in Kings Norton Community offers two lucrative opportunities for Balfour Beatty Construction Company, which have the potential of increasing its corporate activities profits. The main project report will provide further details regarding the two opportunities that this report proposes. However, this report will give an overview of the feasibility and estimated financial gain from both schemes. The following are the financial analyses and feasibility reviews of the proposed projects.

Scheme 1

The first proposal is an apartment block with ten luxury apartments. The client will acquire the auctioned property at one million euros. The client will then demolish the old commercial building to create room for construction of the apartment block. The apartment will be constructed using on-site produced bricks and mortar. The roof will consist of clay tiles, which are cheaper and more durable than other roofing materials. The interior materials will consist of wood, glass, and acoustic tiles.

The apartment block will have ten spacious apartments, which will all have a living space, two bedrooms, a kitchen, and the lavatories. The apartment block will be a four-storey building. Each storey will have two apartment units on either longitudinal side of the building. The buildings will have large glass panels at the living spaces to allow intense natural light to enlighten the apartment. This natural light will reduce the dependency on the building of electric lighting. The following is an outline drawing of the apartment block.

Outline Drawing for Scheme One (CadBull, 2019a; CadBull, 2019b)

Financial Analysis

The cost of acquiring the site is one million euros. The cost of demolishing the current structure is estimated to be 12,000 euros, which is the average cost of building demolition in the UK (Homebuilding & Renovating, 2018). This report uses the average building statistics from the UK. After demolishing the company will allocate resources to construct the proposed apartment. According to the Office of National Statistics (2017) in the UK, the estimated cost of building a single-storey building in Birmingham is 1837 euros per square meter. However, a recent analysis by a UK researcher found out that the cost of building a single-storey building amounted to between sixty and eighty per cent the price of multi-storey buildings (Halusan, 2017: 19). Halusan suggests that the percentage of the cost reduces as the number of storeys increase. Therefore, for a four-storey building, the cost of building the single-storey would likely represent between sixty and seventy per cent of the total.

One of the popular methods of analysis the feasibility of a project is determining the payback period (Business Filings, 2020). Another method of determining project feasibility is using the one per cent rule of commercial property. The one per cent rule argues that a project is feasible only if the monthly earning of a project are equal or more than one per cent of the total cost of construction of the project. The financial analysis of the proposed project must consider all these factors. Therefore, the following are the estimated cost of building the apartment.

The apartment will be constructed on the property that is 625 square meters.

The single-storey construction cost represents

Therefore,

Also, additional construction fees will affect the cost of building the apartment. These fees include contractor fees and professional fees. According to RSMeanData (2020), the average contractor and professional fees in the UK are 25 and 7 per cent of the estimated building cost, respectively. Therefore,

Therefore, the total cost of constructing the four-storey apartment will be the following.

However, according to Rightmove (2020b), the cost of renting two-bedroom flats in Birmingham ranges from 650 euros PCM to 1350 euros PCM. Therefore, this report will evaluate the payback period for the scheme. The payback period represents the duration of time that the apartments will take to generate income that will cover the total cost of construction. The report assumes that all the units in the apartment will have occupants throughout the period of the evaluation. Therefore, the following equation represents the period that the proposed project will recover the amount used in the acquisition, demolition, and construction of the apartment.

Additionally, using the one per cent monthly income rule of real estate evaluation, the property will generate 0.3 per cent. Therefore, the proposed project is not profitable enough to be feasible.

Scheme 2

The second proposal is a five-storey student accommodation facility, with eighty single rooms to accommodate students in the nearby Cadbury College. The building will be constructed using concrete and metal reinforcements. The roofing will also consist of clay tiles. The interior will utilise acoustic tiles and wooden accessories. Therefore, the materials used will be similar to the first proposed scheme. The following are the drawings of the second proposed scheme.

Outline Drawing of a five-storey eighty apartment project (Weese, 2016)

Financial Analysis

Similar to the first scheme, the costs of acquisition and demolition of the current building at the site will be one million and twelve thousand euros, respectively. However, other costs of construction will differ as follows.

This cost will likely represent less percentage of the five-storey building. Therefore, the least percentage evaluated by Halusan (2017) was sixty per cent.

Therefore,

Estimated contractor and professional fees for the project will be,

The total cost of constructing the second scheme will be,

According to CRM students (2020), the cost of student accommodation in Birmingham city is about 150 euros per week. Therefore, the estimated revenue to be collected in scheme two will be,

Therefore,

Additionally, according to the equation below, the monthly income of scheme two will represent 1.36 per cent of the total construction cost. Therefore, this proposed project is feasible according to the one per cent rule.

Assumptions and Possible Problems

The financial analysis of both schemes has assumed two conditions. First, it assumes that the cost of running the two projects is equal and insignificant compared to the costs of construction. The possible problem resulting from this assumption is the likelihood that high costs of operations may result in reduced income generations. The second assumption is that both schemes will be occupied fully throughout the payback period. However, the possible problem resulting from this assumption is that differing occupation rates of the two schemes may result in unpredictable payback periods.

Conclusion

This report evaluates two development projects proposed to Balfour Beatty Company, which specialises in construction works in the UK. The client’s financial analysis revealed that Balfour Beatty Company has a huge investment potential of half a billion euros per year. The company has continued to invest in profitable housing and infrastructure projects in the UK and across the globe. This report proposes two construction projects to be undertaken by the client in Birmingham, UK. The financial analysis of both project proposals revealed that scheme two is more profitable and feasible compared to scheme one. However, a couple of assumptions made during this analysis may pose problems in the revenue cash flows recorded by the construction. Therefore, this interim report is an overview of the final report, which will give more details about the two schemes. The final report will be a good informer for decision-making personnel at Balfour Beatty Company.

References

Balfour Beatty PLC, 2015. Balfour Beatty Investments – About. [Online] Balfourbeattyinvestments.com. Available at: <http://www.balfourbeattyinvestments.com/company/about.aspx> [Accessed 20 March 2020].

Balfour Beatty, 2018. Annual Report and Accounts 2017. Balfour Beatty, [Online] Available at: <http://www.annualreports.com/HostedData/AnnualReportArchive/b/LSE_BBY_2017.pdf> [Accessed 21 March 2020].

Balfour Beatty, 2019. Annual Report and Accounts 2018. Balfour Beatty, [Online] Available at: <https://www.balfourbeatty.com/media/318113/balfour_beatty_annual_report_2018.pdf> [Accessed 21 March 2020].

Balfour Beatty, 2020. 2019 Full Year Results. [Online] Balfourbeatty.com. Available at: https://www.balfourbeatty.com/news/balfour-beatty-announces-2019-full-year-results/ [Accessed 20 March 2020].

Business Filings, 2020. Financial Analysis of Major Projects. Bizfilings.com. Available at: https://www.bizfilings.com/toolkit/research-topics/finance/managing-cash-flow/financial-analysis-of-major-projects [Accessed 22 March 2020].

CadBull, 2019a. Four-Storey Apartment Design. Cadbull.com. Available at: https://medium.com/@autocadfile2017/4-storey-apartment-building-elevation-design-dwg-file-bc09f592c7b0 [Accessed 23 March 2020].

CadBull, 2019b. Four-Storey Apartment Building Design. Cadbull.com. Available at: https://cadbull.com/detail/69104/4-storey-Apartment-building-design-in-autocad [Accessed 23 March 2020].

CRM students, 2020. Student Accommodation across the UK. Crm-students.com. Available at: https://www.crm-students.com/student-accommodation/birmingham/selly-oak-court-birmingham/?gclid=EAIaIQobChMI97jblcSw6AIVBbDtCh2k5gocEAAYAiAAEgLwtvD_BwE [Accessed 23 March 2020].

Friedlob, G. and Schleifer, L., 2003. Essentials Of Financial Analysis. 1st ed. New York: J. Wiley.

Halusan, B., 2017. Multi-storey versus Single-storey Construction Cost Analysis. International Growth Centre, [online] Available at: <https://www.theigc.org/wp-content/uploads/2017/05/Halusan-2017-Final-report.pdf> [Accessed 23 March 2020].

Homebuilding & Renovating, 2018. Should you demolish and Replace?. [Online] homebuilding.co.uk. Available at: https://www.homebuilding.co.uk/demolish-and-replace/ [Accessed 20 March 2020].

Office of National Statistics, 2017. House Prices: How Much One Square Meter Costs In Your Area. Ons.gov.uk. Available at: https://www.ons.gov.uk/peoplepopulationandcommunity/housing/articles/housepriceshowmuchdoesonesquaremetrecostinyourarea/2017-10-11 [Accessed 21 March 2020].

QPZM, 2020. Kings Norton Demographics. kings-norton.localstats.co.uk. Available at: http://kings-norton.localstats.co.uk/census-demographics/england/west-midlands/birmingham/kings-norton [Accessed 20 March 2020].

Rightmove, 2020a. Commercial Property for Sale. [Online] rightmove.co.uk. Available at: https://www.rightmove.co.uk/commercial-property-for-sale/property-88636352.html [Accessed 20 March 2020].

Rightmove, 2020b. Two Bedroom Rental Flats in Birmingham. [Online] rightmove.co.uk. Available at: https://www.rightmove.co.uk/property-to-rent/Birmingham/2-bed-flats.html [Accessed 20 March 2020].

RSMeanData, 2020. Construction Cost Estimates. [Online] rsmeans.com. Available at: https://www.rsmeans.com/model-pages/apartment-4-7-story.aspx [Accessed 20 March 2020].

Weese, E., 2016. Design for Eighty Apartment Building. Bizjournals.com. Available at: https://www.bizjournals.com/columbus/news/2016/03/21/first-look-developers-buy-balletmet-warehouse-with.html [Accessed 23 March 2020].

WSJ, 2020. Balfour Beatty PLC Pfd 2019 Financial Statements. [Online] Wsj.com. Available at: <https://www.wsj.com/market-data/quotes/UK/BBYB/financials> [Accessed 21 March 2020].