Introduction:
To build a building or infrastructure, the chief process is construction. To construct a building, road, bridge or any other things, a proper planning is required. Moreover, proper design and investment are also required to start any construction project. In developed and developing countries, large-scale construction needs efficient and skilled employees to construct. Hence, under a large construction industry, works from different disciplines can be seen (Finkel 2015). They are architects, design engineer, construction manager and construction engineer. Moreover, a project manager supervises an entire project. This sector contributes some percentage of a country’s gross national income. In this report, a construction company of United Kingdom will be discussed. This chosen construction company is the Pacy and Wheatley Construction This Company has completed various projects and some new projects are going on (Pacy-wheatley.co.uk, 2018). After analysing a construction project of this company, a relevant economic theory will be given to understand a specific concept of economy. This concept is that how a business organisation or an investor can maximise return by investing in a construction project. After that some economic limitations will be analysed.
Case Study on Construction
In U.K, the total number of construction firm was 296093 in the year 2015. Moreover, at the same year, above 2.6 million people are employed in this sector. However, the number of new firms and employment are increasing gradually. Pacy and Wheatley Construction is one of those construction firms in U.K. This firm has constructed healthcare centres and retail shops. Moreover, this construction firm has built various educational, commercial and industrial sectors. Among all its constructed projects, a commercial construction of Bedale, North Yorkshire is taken to analyse. The client of this project was North Yorkshire Fire and Police. To construct a temporary fire station in Bedale, total project value was £ 465000 (Hameed and Abbott 2017). This project was to construct a fire station in Bedale. However, to construct this project, this construction firm has faced some difficulties. This project was constructed within a limited and bounded site. However, this construction firm has achieved some important achievements related to this project. This project was completed within 34 weeks. Moreover, this project was completed within the client’s budget. In this context, a chief concept should be considered. Each construction firm follows a proper business strategy (Finkel 2015). They construct project to earn higher profits. On the other hand, investors invest money to earn higher level of return. Hence, in this context, a proper business strategy should be analysed.
Return on Investment
In a construction process, the project manager basically supervises a project and does not take any business decision. However, investors and decision-makers of a contraction firm take several important business decisions to maximise their profit. They do not only consider the total cost level and time related to their business. They also give importance on the return on investment and payback periods of a project (Crespin-Mazet, Havenvid and Linné 2015). Return on investment (ROI) is a process of calculation of the rate of return. This rate of return will be achieved from given investment for a particular time. Investors apply different types of calculation method to calculate ROI.
Economic Concept
Each business plan should have proper business strategy to justify economic concept. Return on investment can be economically measured with the help of cost-benefit analysis under a construction process. Benefits imply the most real financial earnings that a construction firm can expect to earn from a project (Nas 2016). On the other hand, cost indicates the amount which will be spent for constructing a suggested program. To start a project, the construction firm needs some money to invest (Muehlemann and Wolter 2014). For completing an entire project, a construction firm needs huge amount of money. Moreover, there will be some risk factors, which are unpredictable during a construction process. Hence, the estimated costs will be varied. However, after completing the project, the firm will earn some amount of revenue. By applying this cost-benefit approach, a firm can maximise its return on investment. This cost-benefit analysis for any construction projects is divided into seven steps. These are proper definition of objectives, project identification, options and feasibility analysis, financial and economical analysis, analysis regarding multi-criteria and sensitivity and risk analysis.
ROI can be explained as a ratio (de Vries and Veurink 2017). This ratio is constructed by the expected financial benefits and total cost related to a project. It can be explained with a formula:
Return on investment= (net benefits/total cost).
Moreover, a discount factor will be used to see the Net Present Value (NPV) related to future costs and benefits (Creemers 2017). This is important to compare best alternatives in future.
Hence, to maximise ROI, it is important for each constructor and investor to estimate benefits and costs related to a particular project. Under cost structure, some particular cost related to construction should be taken under consideration. These are labour cost, extra equipment cost, extra software cost, physical facilities and costs related to contracts (Crespin-Mazet, Havenvid and Linné 2015). Moreover, there are some other costs, which will appear at the different phases of a project. These are built-in costs. Under built-in costs, management related to project and contract, quality control and assurance, project maintenance will be included. However, to calculate benefits, there is very small information regarding average benefit factors.
Limitations
Hence, from the above discussion it can be said that the appropriate measure to calculate return on investment is the cost-benefit analysis. This process will help a firm to understand that whether a proposed project will be profitable for them or not. However, this analysis has some limitations. Firstly, under cost-benefit analysis, all costs and benefits should be identified properly (Mishan 2015). However, due to weak forecast, all costs and benefits cannot be identified. Secondly, some amount of subjectivity may be included under within this analysis. Those costs and benefits cannot be quantified. Thirdly, to estimate all costs and benefits of a project, it is important to calculate the present value of this project. One can perfectly calculate the present value, but the discount rate may be unrealistic. Lastly, sometimes it can be seen that this cost-benefit analysis sometimes turns into a proposed budget of the project.
Conclusion
In conclusion, it can be said that the construction sector plays an important part, in a country’s economic condition. There are various numbers of construction firm, who construct building. However, before any proposed construction, the cost-benefit analysis related to a proposed project is essential. It will help this firm to estimate the return on investment from a proposed project.
Reference:
Creemers, S., 2017. Maximizing the expected net present value of a project with phase-type distributed activity durations: an efficient globally optimal solution procedure. European Journal of Operational Research.
Crespin-Mazet, F., Havenvid, M.I. and Linné, Å., 2015. Antecedents of project partnering in the construction industry—The impact of relationship history. Industrial Marketing Management, 50, pp.4-15.
de Vries, H.J. and Veurink, J.L., 2017. Cost-Benefit Analysis of Participation in Standardization: Developing a Calculation Tool. International Journal of Standardization Research (IJSR), 15(1), pp.1-15.
Finkel, G., 2015. The economics of the construction industry. Routledge.
Hameed, W. and Abbott, C., 2017, September. Critical review of the success factors of strategic alliances in the UK construction industry. In 13th International Postgraduate Research Conference 2017: conference proceedings (pp. 15-26). Salford University.
Mishan, E.J., 2015. Elements of Cost-Benefit Analysis (Routledge Revivals). Routledge.
Muehlemann, S. and Wolter, S.C., 2014. Return on investment of apprenticeship systems for enterprises: Evidence from cost-benefit analyses. IZA Journal of Labor Policy, 3(1), p.25.
Nas, T.F., 2016. Cost-benefit analysis: Theory and application. Lexington Books.
Pacy-wheatley.co.uk.2018. Commercial Construction in Bedale, North Yorkshire. [online] Available at: https://pacy-wheatley.co.uk/commercial-industrial-construction-contractors/commercial-construction-bedale-north-yorkshire
