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…
As highlighted in the illustration, in this step we will analyze the financial costs of our 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.
We emphasize that incomes or resources come from the payment for progress of the work.
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.
Additionally, in some contracts, advance payments or payments for stockpiling are also agreed upon.
The difference between expenses and income determines the monetary needs of the project.
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.
To determine 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.
We discuss the steps involved in developing the work plan and the corresponding investment plan below.
Finance Cost – Work Plan
We obtain the work plan from the planning of the project; 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 calculate the execution times of each activity, it is necessary:
First, have the record of productivity of workers.
Second, knows the performance of equipment to be used.
Third, define the times of provision of the supplies, etc.
-Definition of the sequence or logical chain in which the activities are developed.
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 periodically during construction.
Once the investment plan has been drawn up, it is necessary to define the dates and amounts of the revenues from work advances.
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 fundamentally linked to:
-The client’s method of payment.
-The payment conditions that the contractor gets from its suppliers and subcontractors.
-The amount of the project, etc.
It is usual for the contractor to propose to its suppliers and subcontractors the same payment period as that agreed with the client.
We carry all this analysis out with the company’s financial department and determine what we charge to the estimate.
In the next post we will analyze how to Calculate the Cost of Contingency Reserve for industrial construction and assembly works.