How to Calculate the Financial Cost of the Offer

Finance Cost - Calculate Man Hours How to Calculate the Financial Cost of the Offer.
It comprises all disbursements in terms of monetary units for interest, commissions, and other expenses arising from taking loans from financial institutions…

Image with the Steps to Follow to Estimate a Bid

As highlighted in the illustration, in this step we will analyze the financial costs of our offer.

The image shows the step-by-step guide for a successful bidding process. The image highlights the stage that is developed in this post "Consider the financial cost".
How to Calculate the Financial Cost of the Offer

When the contractor performs works that exceed its economic possibilities, it must appeal to private capital or credit institutions.

Private capital or credit institutions will provide the economic resources to carry out the work.

Therefore, the above implies the payment of interest or the participation of a third party in the benefits of the work.

Consequently, it is essential to carry out an economic-financial study together with the estimate of the work budget.

The mentioned economic-financial study is composed of a budget of expenses or investment plan and a budget of income or resources.

Of course, the income or resources come from the payment for work in progress.

Additionally, in some contracts, advance payments or payments for stockpiling are also agreed upon.

The resultant between the two sets of values, investments, or expenses on the one hand, and income on the other determines the monetary needs of the work.

Finally, the financial cost arises from multiplying the capital financed by the financing time at the corresponding interest rate.

Besides, we must be added to the costs of the loan.

In conclusion, to know the financial cost of a project, it is necessary to prepare an investment plan.

How to Calculate the Financial Cost of the Offer – Investment Plan

The investment plan, or spending budget, is drawn up from the work plan.

For this purpose, we discuss the steps involved in developing the work plan and the corresponding investment plan below.

Finance Cost – Work Plan

Firstly, we get the work plan from the planning of the project.
Basically, this implies quantifying the time and resources that the project will demand.

The planning is fundamental to trace the action plan to follow and to define the logical sequence of the activities or tasks to develop.

We materialize the work planning in a diagram, e.g., a Gantt chart, and thus we review:

  • The totality of the tasks and supplies to be executed.
  • The choice of technologies to be used to develop the project.
  • The execution times of each activity.

Finance Cost – Calculating the Execution Times

To sum up, for calculating the execution times of each activity is necessary:

Firstly, have the record of productivity of workers.

Secondly, knows the performance of equipment to be used.

Thirdly, define the times of provision of the supplies, etc.

Definition of the Sequence or Logical Chain of Activities

Once the previous steps have been completed, it is possible to create a preliminary work plan following the milestones established by the customer or by the bidding document.

Then, the resource consumption of each activity is quantified, and the cost of those resources is added.

Once this is done, we can distribute the money requirements over time, i.e., we can formulate the investment plan.

This allows us to know the amount of initial capital needed and the funds to be invested during construction.

When we have drawn the investment plan, it is necessary to define the dates and amounts of the revenues from work advances.

Finally, the result between expenses and payments or income (payback) determines what the cash flow is, and in which periods the capital needs occur.

As we have seen, the financial cost of a project is basically associated with:

  • Customer’s form of payment.
  • The payment conditions that the contractor gets from its suppliers and subcontractors.
  • Project amount, etc.

Undoubtedly is convenient for the contractor to propose to his suppliers and subcontractors the same payment term he agreed with the client.

Finally, we present all this analysis with the company’s financial department to determine the financial cost of the estimate.

In the following post we will analyze how to Calculate the Cost of Contingency Reserve for industrial construction and assembly works.

How to Calculate the Financial Cost of the Offer – Calculate Man Hours

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