A very important element in the world of construction must be taken into account in order to successfully complete the task of analysing the economic side of an existing project: this element is economic figures, specifically budgets and financing.
On most occasions, these two items are decisive when it comes to decision-making, and it is one of the most complex phases of a project; for this reason, Financial Monitoring of construction projects has become so relevant and important in recent years.
Financial Monitoring is a fiscal audit, usually intended for and commissioned by financial companies that provide all or part of the capital to undertake a construction project.
It is an investigative project that helps stakeholders in the project to make decisions. The purpose of this document is to provide an overview of the status and feasibility of the project. As the project progresses, it also provides the investor with details of the investment made at any given time, and forecasts the funds required to successfully complete the work. For this reason, it must be carried out realistically and objectively, and specialised companies unrelated to the parties (developer, construction company and financial entity) are normally contracted for this purpose.
The structure and style of Financial Monitoring can vary, but the essential elements of the document that are included in the analysis tend to be:
– Preliminary data collection phase
– Introduction setting out the project’s background.
– Project planning and development.
– Cost of development and economic viability.
The preliminary data collection phase is just the beginning. To conduct this phase, it is necessary to have knowledge about the location of the project, the executive design, the parties that are going to implement it, project planning and whether there are any special circumstances that affect the plot of land (easements, geology of the area, archaeology, etc.). In general, it can be said that the more sources of information we have, the greater the chance of performing complete Financial Monitoring to provide the investor with clear knowledge.
In addition to the preliminary data collection side of things, both the owner and the construction company must provide full access to the economic management of the project throughout the execution process, by providing budgets, contracts, certificates, change orders and other documentation that give a clear insight into the project’s economic health and viability. Access to this information will provide knowledge about cash flow records and where money is being spent at any given time.
Once drafting of the Financial Monitoring report starts, the first sections tend to contain a generic summary of the construction project without too many technicalities. It should be kept in mind that the financial entity or investor for whom the report is intended is often more focused on financing than construction. This section also includes the details of the developer, the main construction company and subcontractors, official organisations such as local governments and their building permit regulations, and insurance policies involved during the execution of the project and afterwards, among other details.
Moving on to the main body of the report, the next important section to include is project planning and development. At all times you must be aware of the project planning agreed by both parties and set out in the contract. It is important to know about and clarify the main design and project milestones, without forgetting any additional procedures that tend to be required for the correct delivery of the building, such as end-of-project certificates, inspections by local government technicians, requests for essential service connections (electricity, gas, water, sewerage, etc.), application for the first occupancy licence, etc. All of the above must be studied to perfection and included in the planning. This will avoid unexpected delays that immediately result in additional costs for the developer, and consequently for the investor.
For the costs and economic viability section, it is crucial that all of the costs associated with the project are set out in the corresponding contract between the developer and construction company, and the type of contract on which the performance of the work is to be based must be known. It is not the purpose of this article to describe each of these formulae, but we can mention the different types of contract in order of lowest to highest risk for the developer: turnkey contracts, lump sum contracts, measurement contracts, open book or management contracts and, finally, batch contracts.
The Financial Monitoring report is usually split up into short monthly reports that describe the economic status of the project in the month in question. They are normally accompanied by tables and graphics showing the work certified to date and the forecast for the coming months. Mention should also be made of change orders and their cost, if any. It is in this section that investors can see the specific section of the project where the money is being invested, and can get a clear insight into the status of the financing, so that they can make their own funding provisions.
Finally, it is highly advisable to include a short conclusions section using a chart (often colour-coded) to show whether or not each of the sections included in the report meet the requirements, and whether there are sections that require immediate action by any of the stakeholders.
Of course, all of these Financial Monitoring steps and advice are theoretical. In practice, each project, each developer and each financial entity are different and may have diametrically opposed needs. But as long as you are rigorous in your work and submit a brief, comprehensive and understandable report, everything will fit together and you will have achieved your objective.