Project Funding
Chapter 8
Project Funding
1
I
8.1 MONEY: A BASIC RESOURCE
The essential resource ingredients that must be considered in the construction of a project are usually referred to as the four Ms. These basic construction resources are (1) money, (2) machines, (3) manpower, and (4) materials. They are presented in this order since this is the sequence in which they will be examined in the next few chapters. Here, the first of these resources to be encountered in the construction process, money, is considered. Money (i.e., actual cash or its equivalent in monetary or financial transactions) is a cascading resource that is encountered at various levels within the project structure. The owner or developer must have money available to initiate construction. The contractor must have cash reserves available to maintain continuity of operations during the time he is awaiting payment from the owner. The major agents involved in the flow of cash in the construction process are shown in simple schematic format in Figure 8.1. Rising construction costs have increased the pressure on the construction industry to carefully monitor and control the flow of money at all levels. As a result, more emphasis is being placed on cash flow and cost control functions in construction management than ever before. In the planning phases, more thorough investigations and more accurate cost estimates are being required for those seeking financial backing. To remain competitive, contractors are being forced to monitor their cost accounts more closely and to know where losses are occurring. In this chapter, the methods by which the owner/entrepreneur acquires project funding will be considered. The relationship between the flow of money from owner to contractor and its impact on the contractor's project financing has been discussed in Chapter 7. 8.2 CONSTRUCTION FINANCING PROCESS The owner's financing of any significant undertaking typically requires two types of funding: short-term
Project Funding
1
I
8.1 MONEY: A BASIC RESOURCE
The essential resource ingredients that must be considered in the construction of a project are usually referred to as the four Ms. These basic construction resources are (1) money, (2) machines, (3) manpower, and (4) materials. They are presented in this order since this is the sequence in which they will be examined in the next few chapters. Here, the first of these resources to be encountered in the construction process, money, is considered. Money (i.e., actual cash or its equivalent in monetary or financial transactions) is a cascading resource that is encountered at various levels within the project structure. The owner or developer must have money available to initiate construction. The contractor must have cash reserves available to maintain continuity of operations during the time he is awaiting payment from the owner. The major agents involved in the flow of cash in the construction process are shown in simple schematic format in Figure 8.1. Rising construction costs have increased the pressure on the construction industry to carefully monitor and control the flow of money at all levels. As a result, more emphasis is being placed on cash flow and cost control functions in construction management than ever before. In the planning phases, more thorough investigations and more accurate cost estimates are being required for those seeking financial backing. To remain competitive, contractors are being forced to monitor their cost accounts more closely and to know where losses are occurring. In this chapter, the methods by which the owner/entrepreneur acquires project funding will be considered. The relationship between the flow of money from owner to contractor and its impact on the contractor's project financing has been discussed in Chapter 7. 8.2 CONSTRUCTION FINANCING PROCESS The owner's financing of any significant undertaking typically requires two types of funding: short-term