Financial models & going & seeing in construction

Jaskaran singh sainiKartikeya Pandey

Manisha minu

MBA Infrastructure

The Model Break down of the cost of production in the

project producing company. the bottom line impact of a certain change of

each of the three parameters: Value Process Operations

the model takes an overall view most of the benefit from improved velocity

may not show up in project accounting, but in the company’s total account only

general financial model is introduced. It is a model that one should expect to find

and see used throughout the project production industry

The Example

Study Four main segments each with its own objective The upper segment establishes the basis while the

next three analyses the effect of improving either the Value generated The Process (flow) efficiency, reducing the cost of operations,

The three parameters usually available for management actions in order to improve the business.

The upper segment Produces 10 units with a sales price of 100 each

making the total turnover 1.000 with a profit of 5%. 5% profit on the turnover gives a production cost of

95 per unit or 950 in total ( middle box). Production costs are divided between 40% fixed

(Permanent facilities and equipment, management, staff etc), 20% cost and wages varying to a certain degree with the production throughput, and 40% directly variable (Materials etc).

Value segment a 10% value increase is investigated.

increased value is yielding a 10% higher sales price or 110 per unit or 1.100 in total.

the value is not obtained for free. It is in this case assumed that it will demand an

increase of all three cost elements of 50% of the value increase or 5% of the total say by more staff, better sales service and higher material quality as shown in the middle box

The effect of this value improvement is shown in the right hand box and it is a profit of 9% instead of the 5% in base case or a profit improvement by a factor 2.1 because of the increased volume

THUS

this is possible within construction in general, where procurement as a rule is based upon lowest price, but when possible is an interesting albeit difficult route to pursue.

Third segment investigates the effect of improving the Process

(keeping lean process in mind). 10% improvement is looked at, but here the fixed

costs stay more or less at the same level the wages increase with 50% of the process improvement.

the cost of materials obviously grows with 100% of the throughput increase.

In the right hand box – is a remarkable growth in profit here the same as in the value case.

While the ten percent value improvement may be hard to obtain,

Probably often impossible Thus aim for 20 % which is advised by the

journal

Operations The usual approach: Cutting costs. Again 10% is used as

the outset, but as most managers may know, it is never possible to cut all costs.

It is assumed that the fixed cost may be reduced by 80% of the 10% at the outset or 8%,wages by 10% or only 1% and materials not reduced at all.

A profit improvement by a factor 1.6 – this may come in a very expensive way

Focuses on reduction of middle management which should not be done as they are the key to efficiency according to last planner process

How to use the Model Establish model

figures for the model should be easily available from the accounting.

If not then analyze projects Or use sample figures

Working with the model Develop strategies Ask questions

Value The starting point should be Value it will motivate the investor to come back, saving

marketing costs in the long run Usually not feasible with traditional projects.

Process The Process should come next. Identify and ease

the bottleneck is highly important generates an enormous effect on productivity earnings for all parties involved.

Operations Last the organisation and its costs of

operations should be considered. tendering and contracting system makes it

difficult cut the costs of middle management saving middle management increases failures

Conclusion The paper presents a simple theory based approach

to establishing a strategy management of project producing companies such as

found in construction, shipbuilding,IT, entertainment and probably in many more places.

Project production is becoming increasingly more important, as mass production more and more becomes robotised.

A deeper understanding of the nature of the project production and its management is therefore needed