Construction activity accounts for anything between 40% to 60% of the cost of several industrial, governmental or private ventures, at least at the time of initiating the venture and bringing out the first set of outputs or products into the market for public use.
Whenever moneys have to be invested, by whomsoever it be, in construction as well as in any other activity for and by any organisation or group of individuals or an individual, several desirable goals or objectives, come into play and have to be watched for. These may relate to taxation and tax liabilities, public standing and credit worthiness, the earning power of the activity, procurement, control and efficient management of the resources, maintaining industrial and labour peace, appropriate and applicable governmental policies, contribution to public welfare, and so on. It shall be obvious that there would inhere both aspects - viz. mutual complimentarity as well as possible mutual conflict between a few of these goals, taken two or more at a time. Also, there shall have to prevail an inviolable objectivity that the business has to be taken in its totality and also as a continuing entity.
Even though much has been deliberated for long on granting industry status for construction activity, affirmative action on a legalistic basis thereon continues to be awaited.
Construction activity differs from industrial production activity in several ways. The foremost and fundamental difference lies in the following. In industrial production, the intended output passes through fixed location machinery and the workforce is mostly non-mobile; but in construction activity, the output grows in stages (or is assembled in stages) at a fixed location and the*machinery and workforce locate and/or move themselves compatibly with the stage wise growth of the output - as can be easily recognized with reference to the construction of a building. Other differences can be deferred in this study and aspects may be mentioned at appropriate places in the further sections of this unit.
Objectives
After studying this unit, you should be able to
- adapt management accounting to construction industry,
- employ concepts of time value of money for construction related applications,
- understand concepts regarding NPV and IRR for the project evaluation,
- appreciate the cash flow at the contractor's end in a construction project taken on the basis of tendering including IDC, earned profit, role of scheduling and captim,
- examine critically the effect of contract clauses on cash flow as well as of advances and real market mechanism, and
- quantify the funds requirements for turnkey projects.
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