Project Funding

Topics: Interest, Loan, Debt Pages: 19 (5699 words) Published: March 14, 2013
Chapter 8

Project Funding

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 (construction) funding and long-term (mortgage) funding. The short-term funding is usually in the form of a construction loan, whereas the long-term financing involves a mortgage loan over from 10 to 30 years. The short-term loans may provide funds for items such as facility construction, land purchases, or land development. Typically these short-term loans extend over the construction period of the project. For large and complex projects, this can extend up to 6 to 8 years as in the case of utility power plants. A short-term loan is provided by a lending institution, based on the assurance that it will be repaid 132 s r c

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8.2 Construction Financing Process
Construction Owner/ Prime




Figure 81 Project money flow. with interest, by some other loan. This following mortgage loan constitutes the long-term financing. Therefore, the first objective of any entrepreneur is to seek a commitment for long-term, or permanent, financing from a mortgage lender. Regardless of the type of project, this commitment will permit the construction loan, and any other funding required, to be obtained with relative ease or, at least, more easily. Unless he is in a position to raise the funds required directly by the issue of his own securities, the entrepreneur will seek to obtain a commitment from one of several alternate sources, including real estate investment trusts (REITs), investment or merchant banks, commercial banks, savings and loan associations, insurance companies, governmental agencies (VA, FHA) or, in special cases, from one of the international development banks. Public institutions often raise project construction funds by the sale of bonds. The choice of lender often depends on the type and size of project. The choice of the form of security employed depends on a number of factors such as relative cost, the time period for which the funds will be available, the degree of...
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