AbstractThis paper deals with the construction of a river port facility in a West African country. It will focus on the financial management of theproject from the contractors perspective.KeywordsFinancial management, financial risk, guaranteed maximum price contract, cash flow, mobilization payments, retention bonds, time and costescalation, currency fluctuations, economic development.Figure 1.3.1: Location Map.Bauxite terminalThe Bauxite terminal is expected to cost in the region of 450m and to take two years to complete. It is located in the West African Republic ofFreedonia and forms a significant element of the countrys capital works programme. The Government who are the joint sponsor initiated theproject. They demand strict financial accountability for political and economic reasons.The project is the design and construction of a river port to handle bauxite as well as general trade. The ore will be brought to the terminalfrom the mines initially via a one-metre gauge railway. Subsequently it is hoped to develop further mines with the ore being transported byroad. This is intended to facilitate the growth of a local haulage sector.The ore will be loaded into hoppers on the quay and transported via barges to the smelting plant. The smelting plant is situated 50 kilometresdownstream where a large hydroelectric scheme will ensure adequate supplies of cheap energy. The aluminium produced will then be exported via anearby deep water port.The Government and an international development corporation finance the project on a 50:50 basis with guarantees being provided by the WorldBank.International Project Management Consultants have been engaged to produce outline design proposals. The project has been established as feasibleby the consultants.The project will be let on a design and build basis following a performance specification drawn up by the consultants. Detailed drawings andspecifications are to be produced by the contractors along with schedules of work and details of construction methods.The successful company or consortium will have to recruit all technical, managerial, and administrative personnel along with key skilledworkers. These will largely consist of expatriates. The Government has insisted that local unskilled labour should be used plus also, whereappropriate, local materials and resources.The local area is wooded with strands of mixed hardwood but with few truck roads at this stage. The river has always been the most convenientform of transport and hence few roads have been built apart for local needs. The railway follows the flood plain and the river valley for fivekilometres prior to moving inland.Unskilled labour is expected to be recruited from the more densely populated coastal regions of Freedonia. The government is offering land forsettlement as an inducement to those willing to work on the project. This forms part of the governments development strategy for the region.This envisages the creation of a self-sufficient industrial-agricultural community where many of the settlers will work on the docks and in thesupporting industries such as transportation and local quarrying activities.Part of the project involves providing training for the local settlers to carry out routine maintenance of plant and equipment used in thedock-side activities and transportation links. Thus the expatriate workforce brought in to operate and maintain the construction plant wouldtrain unskilled locals to undertake basic plant maintenance.Contract usedThe contract used will be based on FIDIC using a guaranteed maximum price. The contractor will be reimbursed costs for labour, material andplant up to the guaranteed maximum price. Any saving in costs from that included in the maximum price will be split 50/50 between the client andthe contractor.The contract will be on a fixed price basis with the contractor being liable to cover the cost of inflation and cost escalation.Clawback due to currency fluctuationsHowever, given that the local currency is rather soft, there is provision for the contractor to claw back part of any increased costs ofimported materials and components and wages paid to supervisory staff (in hard currency) following fluctuations in the exchange rate between thelocal currency and the Euro, the Pound sterling, the US Dollar, and the South African Rand. If the local currency falls in value by more than 5%against one or more of the above currencies, the contractor will be entitled to add 60% of the increased costs (over and above the 5%) incurreddue to local devaluation.Stage paymentsThe contractor will receive a mobilization payment of 20% of the contract sum when starting on site, Thereafter, the contractor will receive 60%of the value of work completed each month (up to half the contract sum) and thereafter 100% of value.The mobilization payment is intended to cover the contractor for he heavy costs entailed in setting up the site and recruiting the workforceincluding airfares and accommodation,Retention bondsThe client will keep no retention back but the contractor will be responsible for taking out insurance bonds from an approved bank to cover theclient in the case of default by the contractor. These should cover 10% of the certified value of the work completed subject to a maximum of 5%of the contract sum. This will reduce to 2% of the contract sum after practical completion and will be eliminated entirely at the end of thedefects liability period (six months after practical completion.Time overrunsIn the event of the contract overrunning, liquidated damages on a given scale will be deducted from the final payment. These will compensate theclient for loss of earning capacity on the facility.Cost EstimatesCost estimates for the various elements of the works are tabulated in this document. The costs are given in Sterling for supervisory staff, in$ US for Plant sourced from the US, in Euros for components sourced from France, and in R Rand for equipment sourced from South Africa.Skilled and unskilled labour plus locally sourced materials are given in the local Freedonian Dalasi (DJF). No specific recruitment costs applyto unskilled labour.You may allow 12% of costs for contingency, 5% for head office overheads and 25% for profit margin.Cash FlowYou should make assumptions regarding the cash flow. Income should come in at a steady rate throughout the progress of the works subject to thechanges brought about by the mobilization payments. Expenditure should also follow a steady pattern with the following exceptions:The cost of recruiting supervisory staff and skilled workers includes payments to agencies and air fares. Most of this will be paid up frontbefore the project starts on site. This will amount to 20% of the total cost for supervisory staff and 10% of the cost for skilled labour.Around 50% of the costs of Temporary works will be incurred up front and 10% on completion with the remainder spread over the contract.TasksPart IIdentify the tender sum that the contractor should submit for the project. This should be broken down into the following:1. Temporary works and site overheads.2. Costs of supervisory and managerial staff3. Costs of skilled labour4. Costs of unskilled labour5. Costs of construction plant6. Costs of materials procured locally7. Costs of imported materials and components8. Costs of imported equipment9. Contingencies10. Head office overhead costs11. Profit marginThe above costs should be broken down into a cash flow schedule for each month of the project commencing from the time when the contract wassigned through to the date for commencement on site to the completion date and the date for final settlement.The above should be compared with the expected cash inflow from the mobilization payment, interim certificates and final payment to form acumulative cash flow schedule.All the above should be presented in local currency. Current exchange rates can be computed as for Part II below.Part IITake account of the following economic changes and revised the expected profit margin and the cash flow schedule:1. Local inflation2. Devaluation of the local currency against other currenciesa. Pound Sterlingb. Euroc. US Dollard. South African Rand3. World interest rates4. Time and cost escalationThe incidence of inflation, currency fluctuations, interest rates and time and cost escalation will be determined by random numbers. These willbe provided in a table within the project brief and can be read off the row corresponding to the last two digits on the students matriculationnumber.Table of Estimated Costs for the ProjectSupervisoryStaff SkilledLabour UnskilledLabour LocalMaterials Plant fromUSA Components from France Equipment fromSouth Africa Sterling D Dalasi D Dalasi D Dalasi $ Dollars Euros R South Africa1 Temporary works and site overheads. DJF 306,000,000 DJF 1,989,000,000 DJF 306,000,000 $1,815,600 2,958,0002 Costs of supervisory and managerial staff 30,600,0003 Construction of Quay and Jetties DJF 982,500,000 DJF 7,860,000,000 DJF 6,877,500,000 $34,977,000R 70,740,0004 Construction of Rail Links DJF 642,600,000 DJF 2,754,000,000 DJF 3,488,400,000 $16,340,400.00 3,549,600R 39,657,6005 Construction of Roads DJF 150,000,000 DJF 1,425,000,000 DJF 1,312,500,000 $4,450,000.00 2,175,000 R18,900,0006 Warehouses DJF 112,500,000 DJF 281,250,000 DJF 506,250,000 $667,500.00 1,087,500 R 4,050,0007 Storm Culverts and River Diversions DJF 112,500,000 DJF 675,000,000 DJF 1,012,500,000 $3,204,000.00 1,740,0008 Landscaping DJF 114,750,000 DJF 1,262,250,000 DJF 459,000,000 $4,085,100.00 1,109,250Note: Approximate exchange rates are:1 = 150 DJF1 = $1.781 = 1.451 = 10.8 RReg No. Assumed Exchange rates for DJF(Part I of assignment) Revised Exchange rates for DJF(Part 2 of assignment) Inflation per annum Interest Rates Cost escalation (contract sum) Time overrunSterling $US Euro Rand Sterling $US Euro ZARand % % % weeks072 151 108 142 10.7 164 117 155 11.6 11.3 7.0 2.0 -3