Procurement Methods for Design and Construction

Procurement Methods for Design and Construction 1.0 Introduction A client brief has been provided for the development of a new facility in the University of Salford. In this report, a review will be carried out based on the requirements of the client in the brief and critically analyse the potential procurement methods for both the design and construction of the project. Recommendations for the appropriate procurement route and forms of contract supporting by detailed reasons will be suggested in the report. The Client, The University of Salford, is aspiring to become an outstanding University renowned for the quality of its engagement, humanity, global reach and leadership in research, innovation and education. Strategic plan has been developed to achieve the Universitys goal which is to be ranked amongst the very best of UK universities and recognized internationally by 2017. To achieve this objective, the School of the Built Environment is intended to develop a new facility within the university campus. The building is to be a prestigious and high aesthetic facility which will replace an older building in the university. The new proposed building will contain facilities listed as below: State of the art lecture theatres Meeting rooms Extensive classroom and studio facilities Office accommodation Laboratory accommodation Learning Resource Units External works In addition, the Client requires the new facility to be carbon neutral to be in accordance with the University policy. Furthermore, the Client has allocates a budget of  £ 20 million to cover the total development cost of the project. This cost will include construction works, external works, statutory and professional fees. This proposed building must be completed and handover by 1st of August 2012. The completion date is critical as the facility must be ready for the new academic year. In short, the Clients key requirements and objectives of this new build building are listed as follows: New university facility which will realise the Universitys goal to become a high reputable and internationally renowned university. The facility is to be constructed in highest aesthetic and qualitative standards. The budget of the project is  £ 20 million. The construction time is important as the building is needed by 1st of August 2012 at the very latest. To carry out the construction works of this new facility, the Client needs to understand the various procurement methods available for the project. Hence, this report will analyse the key procurement issues for the Client to consider. 2.0 Procurement Assessment Criteria (PAC) Turner (1990) says that ‘the procurement route that is appropriate to the overall balance of objectives and to client priorities for each project should arise from those objectives and priorities. There are several procurement assessment criteria being set as a guide to choose the appropriate method of procurement: Time Complexity Quality Cost Risk Flexibility In this case, three main criteria which are time, cost and quality will be focused and assessed in the following sections for this particular project to find the most suitable procurement route that balance between these three criteria. Figure 2.1: The balance of time, cost and quality 3.0 Traditional Procurement The traditional system, probably the most commonly adopted procurement strategy in UK, sometimes referred as ‘design-bid-build method. This is because the traditional route separates the responsibility for the design of the project from its construction with a ‘tendering period (Cooke Williams, 2009). Initially, the client appoints consultants for design and for cost control and contract administration of the project. After the design is completed, the tender stage starts by using two stage tendering or negotiation to appoint a contractor for the project. The appointed contractor will then enters into a direct contract with the client and responsible to build and deliver the project. The organizational structure of traditional procurement is shown in Figure 3.1. In addition, due to the design must be completed before the tender stage, the cost of construction can be determined with reasonable certainty before the construction commences on site (Morledge, Smith Kashiwagi , 2006). Client Consultant Contractor QS, structural engineer Architect Subcontractor Supplier Figure 3.1: Traditional procurement (Morledge, Smith Kashiwagi, 2006) The traditional procurement is commonly used because of its particular advantages. These advantages are listed as follows: The design is complete before tendering ensures price certainty for the client. The design does not substantially change during construction therefore contract variations can be kept to a minimum. The client able to have direct influence and retains control over the design team, thus quality in the design can be assured. Detailed information such as drawings and Bills of Quantities provide a common basis for tendering and evaluation is relatively easy. The procedures are well known and enabling confidence to be assured in parties which involved throughout the process. Variations and contract changes are relatively easy to handle. Firm contractual date for completion. While this procurement route has its advantages, there are also criticisms. The main disadvantages are: The duration of project may be longer than other procurement methods as the strategies is sequential and construction cannot be commenced before the completion of design. A longer duration of project may make the cost of project higher because of the increased period of interim financing charges and interim payment to the contractor and consultants. These may cause the cost of project exceeds the clients budget. All the design risk is carried by the client. The contractor has no input into the design and planning of the project. The sequential nature of this system can result in poor communication between the client and the project team and can be cause of expensive disputes. 3.1 Cost By adapting this method of procurement, the cost is agreed as a lump sum fixed price between the University and the contractor thus provides overall cost certainty for the University before the construction commences on site. Besides, the project cost can be estimated, monitored and controlled by the Clients cost consultant during the whole project period and therefore large cost overruns will not occur which is an important advantage to the Client. In addition, traditional method could provide the Client value of money. As explained before, since the design stage is completed before the construction, the design and cost consultant team of the Client will corporate to ensure the design is value for money. 3.2 Time With this procurement route, as the design is carried out before the tender process, the length of time spent to develop the design and prepare the tender documents by the consultant team can be very long. This process tends to prevent the construction works to be started on site. In fact, traditional procurement is identified as the slowest method of procurement compare to others. Hence, this is a disadvantage for this new university facility project as the date of completion is critical. 3.3 Quality The traditional procurement provides the high degree of certainty that the quality and aesthetic standards will be met (Masterman, 2002). This is because the University can select the most appropriate design team for this project to complete the design before the tender stage. During the design stage, the University has direct control and influence over the design therefore can ensure the high aesthetic and quality standards for the new facility are fulfilled. 4.0 Design and build Procurement Ashworth (2006) defined design and build as ‘a procurement arrangement where one single entity or consortium is contractually responsible to the client for both the design and construction of the project. In other words, under a design and build strategy, a single contractor takes the risk and responsibility for designing and building the project. The client will employ a design team to carry out some preliminary design or scheme design. The client will then appoint a contractor to assume the responsibility for the design as well as the construction process. The contractor needs to develop the scheme design to a detailed design. Figure 4.1 illustrates the relationships between the parties that involved in the project. In this method of procurement, the construction can start before the detailed design is completed, but at the contractors risk (Morledge, Smith Kashiwagi, 2006). In practice, design and build procurement consist of a range of variable. The two common variants of this type of procurement are client-led design and build and contractor-led design and build. Client Architect or QS advisers Contractor Subcontractor Suppliers Architect and other designers Figure 4.1: Design and build (Morledge, Smith Kashiwagi, 2006) In client-led design and build, also known as develop and construct, a small number of contractors will be invited to tender for the project when the design is virtually completed possibly with full bills of quantities or notional bills. In this procurement route, study of Cooke Williams (2009) indicates that the client is fully involved in the design development and therefore the design risk is taken fully by the client as the contractor has little involvement to the fundamental design. Additionally, the client will be responsible for all design fees from start to ends of the project. There is an alternative to this method which is a popular practice in the construction industry. Once the contract has been awarded, the design team including the clients architect and other members of the design team will be novated to the contractor. In other words, the contractual obligation to complete the detail aspect of design is legally passed over to the contractor. In this way, the client wi ll maintain an interest in the design but the contractor will be responsible to the continuing design fees and the entire design (Cooke Williams, 2009). On the other hand, in contractor-led design and build, the client may provide minimal information in the outline brief to the contractor. Thus, the contractor is fully responsible for the conceptual and detailed design. As a result, the contractor has to produce a building which meets the clients requirement. In this situation, the contractor takes all of the responsibilities, risks and rewards of design. The contractor may provide an in-house design facility or engage independent design teams (Cooke Williams, 2009). It is preferable to appoint a design team coordinator to ensure the flow of information between the design team and the project team. The main advantages of design and build procurement are listed as follows: The client has only to deal with one firm since the contractor provides single-point responsibility for design and construction. Price certainty is obtained before the commencement of construction works provided the clients requirements are adequately specified and changes are not introduced. The total cost of project is usually lesser than other types of procurement systems. The overall project period is reduced because of overlapping activities as construction can be started before the design is completed. Despite its advantages, design and build has many arguments among the practitioners and client of the industry. The drawbacks of this procurement method are: Tender bids are difficult to compare since each design will be different result in different project time and prices. The tender period and negotiation tends to be much longer Changes of client to project scope can be expensive. No guarantee in terms of design and quality because has less control over this aspect. The client may find difficult in preparing an adequate and sufficiently comprehensive brief. 4.1 Cost The design and build approach enables the contractor to be more positive about the final cost to the Client at an earlier stage (Masterman, 2002). The price would be agreed between the Client and the contractor before construction commences on site. Besides, the initial cost and final cost of using this procurement system are usually lower than other procurement approaches. This is mainly because of the reduction in design costs and the integration of design and construction process. However, value for money is difficult to assess in this type of procurement. This is because there is usually limited information available at the tender stage, not to mention there are different methods, designs and services can be offered by the contractor. As a result, the Client may not be able to judge the efficiency of the design. 4.2 Time The specialty of this procurement route is that the contractor is responsible for both design and construction. Therefore, it allows the overlap of design and construction phases thus reduce the overall project period. This would be an advantage for the University because it ensures the construction works of the new facility can be commenced early. According to Masterman (2002), design and build projects have a better record in terms of completion on time. Hence, the University would be able to have the new building ready for new academic year by using this method of procurement. 4.3 Quality This method of procurement would not be a suitable procurement for this high aesthetic and quality standards project. Design and build is belief that most suitable for simple uncomplicated project which the aesthetic and quality of the project is low. The reason for this is that the contractor is responsible to develop the detailed design of the project. In some circumstances, inevitably the contractor will economise the cost of design to boost the profit margins which will caused a negative effect on the project quality. Additionally, in a design and build project, if the Client unable to provide a satisfactory brief, it is possible result in the Clients functional and quality requirements being unsatisfied. 5.0 Management Procurement 5.1 Management Contracting In this procurement strategy, a management contractor is engaged by the client to manage a number of work package subcontractors in return for a fee. Morledge, Smith Kashiwagi (2006) stated that the management contractor has direct contractual links with all of the subcontractors and carries the responsibility for the construction works without actually carrying out that work. In this method of procurement, the works are let in forms of work package and subcontractors will bids competitively for each work package to obtain the work. The relationship between the parties in management contracting is shown in Figure 5.1.1. Client Consultants Contractor QS, structural engineer Architect Work contractor Figure 5.1.1: Management contracting (Morledge, Smith Kashiwagi, 2006) Management contracting is a ‘fast track strategy says Morledge, Smith Kashiwagi (2006). The work package approach allows the maximum overlap design and construction activities. In more general terms, provided that the work package is completed, the subcontractor may starts works on site before all of the design works are completed. Therefore, the overall project period can be reduced. Due to the nature of this type of procurement, cost certainty cannot be achieved until all packages of work is tendered and let. Hence, strict control of the work package budget is essential for the success of the project (Cooke Williams, 2009). In this strategy, the client reimburses the cost of the work packages to the appointed management contractor who will then pay the subcontractors. So, it is important to appoint the management contractor carefully and ensure that the management fee is appropriate. As the common characteristics of management contracting are previously described, the advantages of this procurement route can now identified: Overlapping of the design and construction processes tends to save time for the overall project thus enables earlier completion to be achieved. The nature of the procurement enables the contractor contribution to design and project planning. Changes can be accommodated provided that packages affected have not been let and there is little or no impact on those already let. Quality of the project can be assured as the design can be developed in stages and site supervisor can be appointed to ensure the quality standard is achieved. On the other hand, there are also weaknesses in this procurement method. The disadvantages are listed as follows: Poor price certainty at the early stage and the potential cost commitment depends on the design team estimates. The total cost of project is usually unknown until the project is well into the construction programme. The client must provide a good quality brief to the design team as the design will not be completed until the client has committed significant resources to the project. The client is responsible for the majority of the project risks. Damages of delay are difficult to pin on one subcontractor. 5.2 Construction Management Under a construction management strategy, Morledge, Smith Kashiwagi (2006) points out that the client does not allocate risk and responsibility to a single main contractor. The client employs the design team and appoints a construction manager based on a negotiated fee simply to manage, programme and co-ordinate the design and construction activities carried out by the work package contractors. Unlike the management contracting, the each work package contractors have direct contractual link with the client and is paid directly by the client (see Figure 5.2.1). Client QS, structural engineer Architect Construction manager Trade contractor Trade contractor Figure 5.2.1: Construction management (Morledge, Smith Kashiwagi, 2006) The construction manager will provides professional construction expertise without assuming financial risk because there is no contractual link with design team or work package contractors. Hence, by using this procurement route, Morledge, Smith Kashiwagi (2006) stated that the client has to be involved closely in the design and construction phases and take necessary actions based on the recommendations from the construction manager. Therefore, this method of procurement is not suitable for inexperienced client. It is recommended to use this procurement for large and complex project or a high degree of design innovation where the client wants deep involvement. Basically, the construction contracting has the similar advantages and disadvantages with the management contracting. Therefore, they will not discuss more in this section and please refer to the previous section if necessary. 5.3 Cost The uncertainty of price will be seen as a disadvantage for the management procurement system. However, the benefit of this ‘fast track strategy may result in cost savings and offsetting extra construction costs. Therefore, it could reduce the overall expense of the project. Besides, in this procurement, the cost of the project can be minimised by improving buildability and by work package contractors undertake the works at competitive prices. 5.4 Time For projects which need fast design and construction period, this would be the appropriate type of procurement to be used. The overlapping of design and construction phases will allows an early start of construction works on site and therefore saving in time can be achieved. Since the time of completion is an important issue in this project, the Client would be suggested to consider to adopting this procurement methods. 5.5 Quality Under this procurement route, the quality of the completed project can be achieved which fully meet the Clients needs provided that the design team is working closely with the management contractor on all aspect of the project to ensure he is fully aware of the design constraints as well as the Clients requirements. Besides, due to the management contractor is appointed at the early stage, he will be able to contribute his construction expertise to achieving an efficient quality standard for this project. 6.0 Justification of procurement strategy 6.1 Procurement Matrix After considering and evaluating the options of procurement available for the project, the most appropriate procurement system that suitable for the project can be selected. This can be achieved by assessing and setting the priorities of the project objectives in terms of time, quality and cost and the client attitude to risk. A universal procurement selection technique which is a procurement matrix is employed to help to select an appropriate procurement strategy for this particular project. The Universitys key objectives and requirements of this project are taken into account during the assessment. After completing this procurement matrix, the result shows that Management Contracting would be best suited procurement system for this new university facility project. Please see the attachment for the completed procurement matrix for this project. 6.2 Procurement strategy After a critical analysis of the procurement options as discussed above and completing the procurement matrix, the Management Contracting route is highly recommended to be adopted for this new build facility project. The reasons of this suggestion is being made are discussed as below. 6.2.1 Cost strategy In terms of cost issue, the Management Contracting probably is not the most recommended procurement systems compare to Traditional and Design and Build. This is because it is not the greatest at providing price certainty to ensure the budget of  £ 20 million can be met at the beginning of the project. However, Morledge, Smith Kashiwagi (2006) points out that this does not mean that the Client has less control over the project cost as strict supervision can be exerted over this aspect of the project. Due to that each package of work are being let by competition between contractors, the Client can monitor the cost closely and if necessary, adjust later work packages in order to cover any cost overruns in the previous work package. Furthermore, the University has to appoint the Management Contractor so that he can advise and contribute at the design process based on his professional expertise and carry out value engineering works to ensure the project is being built within the budget. 6.2.2 Time strategy The completion on time is a key requirement of this project. The Client has specifically required that the new facility must be completed on 1st August 2012. Under this circumstance, Management Contracting would be appropriate to meet the deadline. Due to the rapid progress of this procurement which provides overlapping of design and construction phases allows early commencement of works on site and therefore results in time saving. Moreover, the key strategy to ensure the project is completed on time is to make sure that all of the information from the design team is continuously issued on time to the Management Contractor and to ensure that the Management Contractor is always being updated. Hence, these could avoid any misunderstandings and delays during the construction works. Besides, the competency and experience of the Management Contractor will also ensure this ‘fast track procurement can be carried out efficiently. A high level of experience Management Contractor who familiar with this type of procurement route must be appointed so that the works on site are well manage and control throughout the whole process. 6.2.3 Quality strategy The Management Contracting would ensure the required high quality and aesthetic standards of this new build project can be successfully met. This is because this type of procurement method allows the Client to appoint and oversee the design team to develop detailed design which fulfills the specific requirements. Furthermore, to ensure the quality and aesthetic standards of this university facility are met, the Client has to make sure that the design team are aware and focus from the beginning of the project to develop the design based on these commitments. Additionally, all of the detailed drawings and specification produced by the design team must go into the contract between the Client and the Management Contractor so that the requirements of the Client are well informed thus can be managed efficiently the works on site to ensure the requirements are met. 7.0 Form of Contract A contract is defined by Cooke Williams (2009) as a means of formalising the relationship between the contracting parties in which the rights and obligations of the parties are agreed and the balance of risk between the parties established. The contracts also establish how administrative procedures and the serving of formal notices are to be conducted and mechanisms for dealing with contract payments, delays, compensation and disputes says Cooke. There are several of contracts produced by different bodies used in the construction industry but by far the JCT (Joint Contracts Tribunal) is the most popular forms of contract in use. Hence, the JCT 2005 Management Building Contract is recommended to be used in this project. The JCT 2005 Management Building Contract comprises (Hackett, Robinson Statham, 2007): Management Building Contract Management Works Contract Tender Agreement Management Works Contract Conditions Management Work Contract / Employer Agreement Under this forms of contract, the management contractor tenders on the basis of a management fee and the works contract are being let by separate packages when the design of those packages are developed (Cooke Williams, 2009). The management contractor is legally bound with these work package contractors under the Management Works Contract. In other words, the management contractor is responsible to manage the work package contractors. Moreover, during the design stages, the contract also requires the management contractor to cooperate with the consultant team such as architect, engineering and quantity surveyor. In addition, all necessary programmes for execution of the project which includes detailed construction programme are required to prepare by the management contractor (Cooke Williams, 2009). Under the contract, the management contractors duties include maintaining and regularly updating the detailed construction programme. 8.0 Conclusion In conclusion, the Management Contracting is the most suitable procurement route for this project. This procurement system allows the Client to design the new university facility according to his requirements and appoints the Management Contractor to manage the construction works on site. Using the Management Contracting, the price certainty can be achieved with close monitor of the cost of each work packages so that the building can be built within the budget of  £ 20 million. Furthermore, the advantage of this ‘fast track procurement method tends to meet the time of completion for this project. Last but not least, since this is a prestigious project, this type of procurement route ensure the high quality and aesthetic standards are met in accordance with the Clients requirements. With these, it is recommended for the University to adopt the Management Contracting as the method of procurement to maximise the success of the project. Procurement Methods for Design and Construction Procurement Methods for Design and Construction 1.0 Introduction A client brief has been provided for the development of a new facility in the University of Salford. In this report, a review will be carried out based on the requirements of the client in the brief and critically analyse the potential procurement methods for both the design and construction of the project. Recommendations for the appropriate procurement route and forms of contract supporting by detailed reasons will be suggested in the report. The Client, The University of Salford, is aspiring to become an outstanding University renowned for the quality of its engagement, humanity, global reach and leadership in research, innovation and education. Strategic plan has been developed to achieve the Universitys goal which is to be ranked amongst the very best of UK universities and recognized internationally by 2017. To achieve this objective, the School of the Built Environment is intended to develop a new facility within the university campus. The building is to be a prestigious and high aesthetic facility which will replace an older building in the university. The new proposed building will contain facilities listed as below: State of the art lecture theatres Meeting rooms Extensive classroom and studio facilities Office accommodation Laboratory accommodation Learning Resource Units External works In addition, the Client requires the new facility to be carbon neutral to be in accordance with the University policy. Furthermore, the Client has allocates a budget of  £ 20 million to cover the total development cost of the project. This cost will include construction works, external works, statutory and professional fees. This proposed building must be completed and handover by 1st of August 2012. The completion date is critical as the facility must be ready for the new academic year. In short, the Clients key requirements and objectives of this new build building are listed as follows: New university facility which will realise the Universitys goal to become a high reputable and internationally renowned university. The facility is to be constructed in highest aesthetic and qualitative standards. The budget of the project is  £ 20 million. The construction time is important as the building is needed by 1st of August 2012 at the very latest. To carry out the construction works of this new facility, the Client needs to understand the various procurement methods available for the project. Hence, this report will analyse the key procurement issues for the Client to consider. 2.0 Procurement Assessment Criteria (PAC) Turner (1990) says that ‘the procurement route that is appropriate to the overall balance of objectives and to client priorities for each project should arise from those objectives and priorities. There are several procurement assessment criteria being set as a guide to choose the appropriate method of procurement: Time Complexity Quality Cost Risk Flexibility In this case, three main criteria which are time, cost and quality will be focused and assessed in the following sections for this particular project to find the most suitable procurement route that balance between these three criteria. Figure 2.1: The balance of time, cost and quality 3.0 Traditional Procurement The traditional system, probably the most commonly adopted procurement strategy in UK, sometimes referred as ‘design-bid-build method. This is because the traditional route separates the responsibility for the design of the project from its construction with a ‘tendering period (Cooke Williams, 2009). Initially, the client appoints consultants for design and for cost control and contract administration of the project. After the design is completed, the tender stage starts by using two stage tendering or negotiation to appoint a contractor for the project. The appointed contractor will then enters into a direct contract with the client and responsible to build and deliver the project. The organizational structure of traditional procurement is shown in Figure 3.1. In addition, due to the design must be completed before the tender stage, the cost of construction can be determined with reasonable certainty before the construction commences on site (Morledge, Smith Kashiwagi , 2006). Client Consultant Contractor QS, structural engineer Architect Subcontractor Supplier Figure 3.1: Traditional procurement (Morledge, Smith Kashiwagi, 2006) The traditional procurement is commonly used because of its particular advantages. These advantages are listed as follows: The design is complete before tendering ensures price certainty for the client. The design does not substantially change during construction therefore contract variations can be kept to a minimum. The client able to have direct influence and retains control over the design team, thus quality in the design can be assured. Detailed information such as drawings and Bills of Quantities provide a common basis for tendering and evaluation is relatively easy. The procedures are well known and enabling confidence to be assured in parties which involved throughout the process. Variations and contract changes are relatively easy to handle. Firm contractual date for completion. While this procurement route has its advantages, there are also criticisms. The main disadvantages are: The duration of project may be longer than other procurement methods as the strategies is sequential and construction cannot be commenced before the completion of design. A longer duration of project may make the cost of project higher because of the increased period of interim financing charges and interim payment to the contractor and consultants. These may cause the cost of project exceeds the clients budget. All the design risk is carried by the client. The contractor has no input into the design and planning of the project. The sequential nature of this system can result in poor communication between the client and the project team and can be cause of expensive disputes. 3.1 Cost By adapting this method of procurement, the cost is agreed as a lump sum fixed price between the University and the contractor thus provides overall cost certainty for the University before the construction commences on site. Besides, the project cost can be estimated, monitored and controlled by the Clients cost consultant during the whole project period and therefore large cost overruns will not occur which is an important advantage to the Client. In addition, traditional method could provide the Client value of money. As explained before, since the design stage is completed before the construction, the design and cost consultant team of the Client will corporate to ensure the design is value for money. 3.2 Time With this procurement route, as the design is carried out before the tender process, the length of time spent to develop the design and prepare the tender documents by the consultant team can be very long. This process tends to prevent the construction works to be started on site. In fact, traditional procurement is identified as the slowest method of procurement compare to others. Hence, this is a disadvantage for this new university facility project as the date of completion is critical. 3.3 Quality The traditional procurement provides the high degree of certainty that the quality and aesthetic standards will be met (Masterman, 2002). This is because the University can select the most appropriate design team for this project to complete the design before the tender stage. During the design stage, the University has direct control and influence over the design therefore can ensure the high aesthetic and quality standards for the new facility are fulfilled. 4.0 Design and build Procurement Ashworth (2006) defined design and build as ‘a procurement arrangement where one single entity or consortium is contractually responsible to the client for both the design and construction of the project. In other words, under a design and build strategy, a single contractor takes the risk and responsibility for designing and building the project. The client will employ a design team to carry out some preliminary design or scheme design. The client will then appoint a contractor to assume the responsibility for the design as well as the construction process. The contractor needs to develop the scheme design to a detailed design. Figure 4.1 illustrates the relationships between the parties that involved in the project. In this method of procurement, the construction can start before the detailed design is completed, but at the contractors risk (Morledge, Smith Kashiwagi, 2006). In practice, design and build procurement consist of a range of variable. The two common variants of this type of procurement are client-led design and build and contractor-led design and build. Client Architect or QS advisers Contractor Subcontractor Suppliers Architect and other designers Figure 4.1: Design and build (Morledge, Smith Kashiwagi, 2006) In client-led design and build, also known as develop and construct, a small number of contractors will be invited to tender for the project when the design is virtually completed possibly with full bills of quantities or notional bills. In this procurement route, study of Cooke Williams (2009) indicates that the client is fully involved in the design development and therefore the design risk is taken fully by the client as the contractor has little involvement to the fundamental design. Additionally, the client will be responsible for all design fees from start to ends of the project. There is an alternative to this method which is a popular practice in the construction industry. Once the contract has been awarded, the design team including the clients architect and other members of the design team will be novated to the contractor. In other words, the contractual obligation to complete the detail aspect of design is legally passed over to the contractor. In this way, the client wi ll maintain an interest in the design but the contractor will be responsible to the continuing design fees and the entire design (Cooke Williams, 2009). On the other hand, in contractor-led design and build, the client may provide minimal information in the outline brief to the contractor. Thus, the contractor is fully responsible for the conceptual and detailed design. As a result, the contractor has to produce a building which meets the clients requirement. In this situation, the contractor takes all of the responsibilities, risks and rewards of design. The contractor may provide an in-house design facility or engage independent design teams (Cooke Williams, 2009). It is preferable to appoint a design team coordinator to ensure the flow of information between the design team and the project team. The main advantages of design and build procurement are listed as follows: The client has only to deal with one firm since the contractor provides single-point responsibility for design and construction. Price certainty is obtained before the commencement of construction works provided the clients requirements are adequately specified and changes are not introduced. The total cost of project is usually lesser than other types of procurement systems. The overall project period is reduced because of overlapping activities as construction can be started before the design is completed. Despite its advantages, design and build has many arguments among the practitioners and client of the industry. The drawbacks of this procurement method are: Tender bids are difficult to compare since each design will be different result in different project time and prices. The tender period and negotiation tends to be much longer Changes of client to project scope can be expensive. No guarantee in terms of design and quality because has less control over this aspect. The client may find difficult in preparing an adequate and sufficiently comprehensive brief. 4.1 Cost The design and build approach enables the contractor to be more positive about the final cost to the Client at an earlier stage (Masterman, 2002). The price would be agreed between the Client and the contractor before construction commences on site. Besides, the initial cost and final cost of using this procurement system are usually lower than other procurement approaches. This is mainly because of the reduction in design costs and the integration of design and construction process. However, value for money is difficult to assess in this type of procurement. This is because there is usually limited information available at the tender stage, not to mention there are different methods, designs and services can be offered by the contractor. As a result, the Client may not be able to judge the efficiency of the design. 4.2 Time The specialty of this procurement route is that the contractor is responsible for both design and construction. Therefore, it allows the overlap of design and construction phases thus reduce the overall project period. This would be an advantage for the University because it ensures the construction works of the new facility can be commenced early. According to Masterman (2002), design and build projects have a better record in terms of completion on time. Hence, the University would be able to have the new building ready for new academic year by using this method of procurement. 4.3 Quality This method of procurement would not be a suitable procurement for this high aesthetic and quality standards project. Design and build is belief that most suitable for simple uncomplicated project which the aesthetic and quality of the project is low. The reason for this is that the contractor is responsible to develop the detailed design of the project. In some circumstances, inevitably the contractor will economise the cost of design to boost the profit margins which will caused a negative effect on the project quality. Additionally, in a design and build project, if the Client unable to provide a satisfactory brief, it is possible result in the Clients functional and quality requirements being unsatisfied. 5.0 Management Procurement 5.1 Management Contracting In this procurement strategy, a management contractor is engaged by the client to manage a number of work package subcontractors in return for a fee. Morledge, Smith Kashiwagi (2006) stated that the management contractor has direct contractual links with all of the subcontractors and carries the responsibility for the construction works without actually carrying out that work. In this method of procurement, the works are let in forms of work package and subcontractors will bids competitively for each work package to obtain the work. The relationship between the parties in management contracting is shown in Figure 5.1.1. Client Consultants Contractor QS, structural engineer Architect Work contractor Figure 5.1.1: Management contracting (Morledge, Smith Kashiwagi, 2006) Management contracting is a ‘fast track strategy says Morledge, Smith Kashiwagi (2006). The work package approach allows the maximum overlap design and construction activities. In more general terms, provided that the work package is completed, the subcontractor may starts works on site before all of the design works are completed. Therefore, the overall project period can be reduced. Due to the nature of this type of procurement, cost certainty cannot be achieved until all packages of work is tendered and let. Hence, strict control of the work package budget is essential for the success of the project (Cooke Williams, 2009). In this strategy, the client reimburses the cost of the work packages to the appointed management contractor who will then pay the subcontractors. So, it is important to appoint the management contractor carefully and ensure that the management fee is appropriate. As the common characteristics of management contracting are previously described, the advantages of this procurement route can now identified: Overlapping of the design and construction processes tends to save time for the overall project thus enables earlier completion to be achieved. The nature of the procurement enables the contractor contribution to design and project planning. Changes can be accommodated provided that packages affected have not been let and there is little or no impact on those already let. Quality of the project can be assured as the design can be developed in stages and site supervisor can be appointed to ensure the quality standard is achieved. On the other hand, there are also weaknesses in this procurement method. The disadvantages are listed as follows: Poor price certainty at the early stage and the potential cost commitment depends on the design team estimates. The total cost of project is usually unknown until the project is well into the construction programme. The client must provide a good quality brief to the design team as the design will not be completed until the client has committed significant resources to the project. The client is responsible for the majority of the project risks. Damages of delay are difficult to pin on one subcontractor. 5.2 Construction Management Under a construction management strategy, Morledge, Smith Kashiwagi (2006) points out that the client does not allocate risk and responsibility to a single main contractor. The client employs the design team and appoints a construction manager based on a negotiated fee simply to manage, programme and co-ordinate the design and construction activities carried out by the work package contractors. Unlike the management contracting, the each work package contractors have direct contractual link with the client and is paid directly by the client (see Figure 5.2.1). Client QS, structural engineer Architect Construction manager Trade contractor Trade contractor Figure 5.2.1: Construction management (Morledge, Smith Kashiwagi, 2006) The construction manager will provides professional construction expertise without assuming financial risk because there is no contractual link with design team or work package contractors. Hence, by using this procurement route, Morledge, Smith Kashiwagi (2006) stated that the client has to be involved closely in the design and construction phases and take necessary actions based on the recommendations from the construction manager. Therefore, this method of procurement is not suitable for inexperienced client. It is recommended to use this procurement for large and complex project or a high degree of design innovation where the client wants deep involvement. Basically, the construction contracting has the similar advantages and disadvantages with the management contracting. Therefore, they will not discuss more in this section and please refer to the previous section if necessary. 5.3 Cost The uncertainty of price will be seen as a disadvantage for the management procurement system. However, the benefit of this ‘fast track strategy may result in cost savings and offsetting extra construction costs. Therefore, it could reduce the overall expense of the project. Besides, in this procurement, the cost of the project can be minimised by improving buildability and by work package contractors undertake the works at competitive prices. 5.4 Time For projects which need fast design and construction period, this would be the appropriate type of procurement to be used. The overlapping of design and construction phases will allows an early start of construction works on site and therefore saving in time can be achieved. Since the time of completion is an important issue in this project, the Client would be suggested to consider to adopting this procurement methods. 5.5 Quality Under this procurement route, the quality of the completed project can be achieved which fully meet the Clients needs provided that the design team is working closely with the management contractor on all aspect of the project to ensure he is fully aware of the design constraints as well as the Clients requirements. Besides, due to the management contractor is appointed at the early stage, he will be able to contribute his construction expertise to achieving an efficient quality standard for this project. 6.0 Justification of procurement strategy 6.1 Procurement Matrix After considering and evaluating the options of procurement available for the project, the most appropriate procurement system that suitable for the project can be selected. This can be achieved by assessing and setting the priorities of the project objectives in terms of time, quality and cost and the client attitude to risk. A universal procurement selection technique which is a procurement matrix is employed to help to select an appropriate procurement strategy for this particular project. The Universitys key objectives and requirements of this project are taken into account during the assessment. After completing this procurement matrix, the result shows that Management Contracting would be best suited procurement system for this new university facility project. Please see the attachment for the completed procurement matrix for this project. 6.2 Procurement strategy After a critical analysis of the procurement options as discussed above and completing the procurement matrix, the Management Contracting route is highly recommended to be adopted for this new build facility project. The reasons of this suggestion is being made are discussed as below. 6.2.1 Cost strategy In terms of cost issue, the Management Contracting probably is not the most recommended procurement systems compare to Traditional and Design and Build. This is because it is not the greatest at providing price certainty to ensure the budget of  £ 20 million can be met at the beginning of the project. However, Morledge, Smith Kashiwagi (2006) points out that this does not mean that the Client has less control over the project cost as strict supervision can be exerted over this aspect of the project. Due to that each package of work are being let by competition between contractors, the Client can monitor the cost closely and if necessary, adjust later work packages in order to cover any cost overruns in the previous work package. Furthermore, the University has to appoint the Management Contractor so that he can advise and contribute at the design process based on his professional expertise and carry out value engineering works to ensure the project is being built within the budget. 6.2.2 Time strategy The completion on time is a key requirement of this project. The Client has specifically required that the new facility must be completed on 1st August 2012. Under this circumstance, Management Contracting would be appropriate to meet the deadline. Due to the rapid progress of this procurement which provides overlapping of design and construction phases allows early commencement of works on site and therefore results in time saving. Moreover, the key strategy to ensure the project is completed on time is to make sure that all of the information from the design team is continuously issued on time to the Management Contractor and to ensure that the Management Contractor is always being updated. Hence, these could avoid any misunderstandings and delays during the construction works. Besides, the competency and experience of the Management Contractor will also ensure this ‘fast track procurement can be carried out efficiently. A high level of experience Management Contractor who familiar with this type of procurement route must be appointed so that the works on site are well manage and control throughout the whole process. 6.2.3 Quality strategy The Management Contracting would ensure the required high quality and aesthetic standards of this new build project can be successfully met. This is because this type of procurement method allows the Client to appoint and oversee the design team to develop detailed design which fulfills the specific requirements. Furthermore, to ensure the quality and aesthetic standards of this university facility are met, the Client has to make sure that the design team are aware and focus from the beginning of the project to develop the design based on these commitments. Additionally, all of the detailed drawings and specification produced by the design team must go into the contract between the Client and the Management Contractor so that the requirements of the Client are well informed thus can be managed efficiently the works on site to ensure the requirements are met. 7.0 Form of Contract A contract is defined by Cooke Williams (2009) as a means of formalising the relationship between the contracting parties in which the rights and obligations of the parties are agreed and the balance of risk between the parties established. The contracts also establish how administrative procedures and the serving of formal notices are to be conducted and mechanisms for dealing with contract payments, delays, compensation and disputes says Cooke. There are several of contracts produced by different bodies used in the construction industry but by far the JCT (Joint Contracts Tribunal) is the most popular forms of contract in use. Hence, the JCT 2005 Management Building Contract is recommended to be used in this project. The JCT 2005 Management Building Contract comprises (Hackett, Robinson Statham, 2007): Management Building Contract Management Works Contract Tender Agreement Management Works Contract Conditions Management Work Contract / Employer Agreement Under this forms of contract, the management contractor tenders on the basis of a management fee and the works contract are being let by separate packages when the design of those packages are developed (Cooke Williams, 2009). The management contractor is legally bound with these work package contractors under the Management Works Contract. In other words, the management contractor is responsible to manage the work package contractors. Moreover, during the design stages, the contract also requires the management contractor to cooperate with the consultant team such as architect, engineering and quantity surveyor. In addition, all necessary programmes for execution of the project which includes detailed construction programme are required to prepare by the management contractor (Cooke Williams, 2009). Under the contract, the management contractors duties include maintaining and regularly updating the detailed construction programme. 8.0 Conclusion In conclusion, the Management Contracting is the most suitable procurement route for this project. This procurement system allows the Client to design the new university facility according to his requirements and appoints the Management Contractor to manage the construction works on site. Using the Management Contracting, the price certainty can be achieved with close monitor of the cost of each work packages so that the building can be built within the budget of  £ 20 million. Furthermore, the advantage of this ‘fast track procurement method tends to meet the time of completion for this project. Last but not least, since this is a prestigious project, this type of procurement route ensure the high quality and aesthetic standards are met in accordance with the Clients requirements. With these, it is recommended for the University to adopt the Management Contracting as the method of procurement to maximise the success of the project.

Living in a dysfunctional family Essay

â€Å"I have learned that if one advances confidently in the direction of his dreams, and endeavors to live the life he has imagined, he will meet with a success unexpected in common hours†. These were the inspiring words of a famous writer and philosopher, Henry David Thoreau that has been etched in my heart as I have envisioned and prepared myself to follow the path that would lead me towards the achievement of my dreams. Living in a dysfunctional family and belonging to the minority are challenges that may either strengthen a person’s character or break a person’s life. Growing up without the full support and presence of my parents was not easy but these circumstances did not dampen my spirit. Instead, being in this situation has awakened my consciousness and I learned to be independent and responsible at an early age. Being the eldest among my siblings, I also became protective and nurturing and I managed to provide a balance between my studies and my responsibilities. At school, I developed a strong interest in subjects like Mathematics, English and History and I have engaged in various sports activities, e. g. soccer, basketball and hockey. Academics and sports have strengthened my mind, body and spirit and have taught me the importance of discipline, team work and camaraderie. In addition, my grandmother, whom I have lived with in the last few years, has instilled the value of obedience, hard work and integrity in my heart. These teachings and qualities will serve as my guiding principle in preparation for a career in law enforcement. Protecting lives and properties and preserving peace are part of my goals in life. I also want to make a difference in the lives of the youth who are lost and who find security in the company of those who violate the law. When I become a law enforcer, I would bridge the gap between my colleagues and the Hispanics and other immigrants so a relationship of trust will be built and strengthened. My entry in the university will not only allow me to interact with people with diverse cultural background. Most importantly, earning a degree in law enforcement will provide me with the skills and knowledge in reaching my dreams and in making a difference in the lives of the youth offenders.

Fracking A Necessary Part Of The Future Of Natural Gas

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Sources Of Finance To A New Business Finance Essay - Free Essay Example

Sample details Pages: 13 Words: 3951 Downloads: 7 Date added: 2017/06/26 Category Finance Essay Type Narrative essay Did you like this example? Whether you are thinking of starting up your own business or if an existing business is thinking of expanding, it is likely that money will be needed. The money needed to start a business is called business finance. Where do businesses get the finance to start a business or to finance expansion? This resource will look at some of the possibilities. When you are working through the resource, remember that some sources of finance will be appropriate for some businesses but not for others. Don’t waste time! Our writers will create an original "Sources Of Finance To A New Business Finance Essay" essay for you Create order When looking at this area, there are a number of things you need to think about. First of all, you need to consider why the business needs to raise finance. Finance can be needed for a variety of different reasons, which will have an effect on what the most appropriate sources of finance will be. The type of finance needed to deal with these problems is going to be different it is unlikely, for example, that Liverpool FC would use a bank overdraft or a credit card as a source of finance to pay for their new stadium! We tend to break up the sources of finance into two parts short term finance and long term finance. You might also see reference to medium term finance. There might be some types of finance that do not sit neatly into either short term or long term so medium term might apply! Short term finance Hopefully you managed to get the right sources of short term finance in the drag and drop activity. Let us have a look in a bit more detail at each of the main types of short term finance. Bank Overdraft Most businesses have an account with a bank. The bank deals with all the deposits (money put into the account) and withdrawals (money taken out). Most banks know that businesses do not always receive money from sales straight away. If you run a sandwich bar in a local trading estate then you might get money straight away when you sell your sandwiches. If you are a business selling electrical equipment to an electrical retailer then you may not get paid straight away when you deliver your goods. When differences occur in the money a business receives from sales (its revenue or turnover) and the money it has to pay out on labour, machinery, equipment, distribution and so on (its costs) the firm can face difficulties. The money flowing into a business from sales and the amount it spends on costs that go out of the business is called its cash flow. Cash inflows to a business Cash outflows from a business (Revenue from sales, loans, interest, sales of assets etc (Payment for raw materials, stock, labour, insurance, rent, rates etc.) A business might need to pay a bill on the 28th November for pound;1,500 but not have enough money in its account to pay the bill. It might know that it is due to receive pound;3,500 from a customer on the 10th December but in the meantime it has a cash flow problem. This is when it is appropriate to arrange an overdraft with a bank. An overdraft is an agreement with a bank to allow the business to spend money it does not have it is a form of a loan therefore. In our example, the business might arrange for an overdraft facility of pound;5,000 with its bank. It can now pay the bill for pound;1,500 and not worry about the cheque bouncing. A cheque is said to bounce when the bank refuses to honour the payment. It might be returned to the business and if this happens a charge is made to the business. Not only do bounced cheques cost the business money in bank charges but the relationships with its suppliers can be damaged. Some suppliers might think twice before supplying the business with any more stock in such circumstances! Arranging an overdraft avoids this problem. The business will get charged interest on the amount they have loaned. In our example, the overdraft facility is pound;5,000. If the business only uses pound;1,500 of that limit, they only pay interest on the pound;1,500, not the whole pound;5,000. This is a key difference between an overdraft and a loan. Overdraft facilities do have their disadvantages. The interest rate on an overdraft can be quite high, especially for small firms where the risk to the bank that they might not get their money back is greater. In addition, the business is not allowed to exceed their overdraft limit. If they do the bank might refuse to pay cheques to creditors (people who are owed money) and may hit the business with a hefty charge for exceeding the limit. Overdraft facilities can be re-negotiated but if this is tried too many times, it may be a signal to the bank that a business has not got control over its finances. Trade Credit This is a period of time given to a business to pay for goods that they have received. It is often 28 days but some businesses might not pay for 6 months and on some occasions even a year after they have received goods. Hill Farm Furniture is a small business based between Nottingham and Lincoln. The business makes high quality kitchen furniture. The vast majority of the work done by the business is strictly to order and made to suit the specific requirements of the customer. Hill Farm use wood lots of it! When they receive a delivery from their supplier they do not pay straight away. They will receive a 28 day period before having to settle the bill. For a small business like Hill Farm Furniture, trade credit might be a useful source of short term finance to help them manage their cash flow more effectively. Source: Hill Farm Furniture. For many small firms, this effectively means they are getting some funds for free. Assume that the bill for a delivery of wood comes to pound;8,000 for Hill Farm. If they have 28 days before they have to pay they have effectively received a loan of pound;8,000 from their supplier for 28 days interest free. This gives the business the time to be able to manage their finances and balance their cash flows more effectively. If a business did not pay the debt after the 28 days has past then there might be a penalty to pay. The supplier might charge a fee or start charging interest or even take the business to court to get its money back. Non payment of debts like this can cause businesses especially small businesses real problems. If they are not receiving money for the goods they have supplied they cannot pay their own debts! Task Businesses supplying the motor parts retailer Halfords were very angry at a decision made by the company in December 2005. Halfords announced that they were going to change the trade credit terms with their suppliers from 90 days to 120 days. Consider the advantages and disadvantages to a small firm supplying Halfords of this decision. Credit Card A credit card works very much like trade credit. If you buy something using a credit card, you will receive a statement once a month with the details of the amount spent during the last month. You then have a certain period of time to either pay the full amount or a minimum amount. Example: James runs a sandwich bar. He gets a lot of his supplies from a cash and carry bread, cheese, margarine, ham, tuna and so on. He pays for his weekly supplies by credit card. On the 16th of each month he receives his statement. This month it is for pound;645. He is told that he must pay a minimum sum of pound;50 or the full amount by the 5th of next month. If he pays the full amount he effectively gets over a months interest free loan. If he chooses to pay off only part of the full amount he will have to pay interest on the amount still owed. That can be expensive! Many businesses have a company credit card. It can be a useful way of managing expenses and if paid off in full can be a useful and cheap source of short term finance. Lease Most businesses have to buy equipment and machinery of some sort. Many firms have a fleet of company cars which certain staff use or vehicles that they use for distribution. There are a number of ways of buying these things. The business might go to the bank for a loan, arrange some sort of finance deal with the supplier, use cash they have in the business or arrange a lease option. Some machinery or equipment might not be a cost effective proposition to be bought outright. In these cases, leasing may be a more sensible option. Copyright: Adrian Adrian, from stock.xchng. A lease effectively means that the business is paying for the use of a product but do not own it. It is also called hiring. A lease agreement on a van, for example, might mean that the firm pays out pound;350 per month for a three year lease. At the end of the three years the vehicle returns to the owner. Lease agreements can be of benefit to the firm for the following reasons: It can be cheaper to arrange a lease rather than having to buy equipment outright Leases can be very flexible equipment might only be needed for a short time or for a particular project and so does not warrant being bought outright. The company that owns the equipment, machinery or vehicles is responsible for the maintenance and this can help reduce costs for the business. The payments made are generally fixed and will not therefore change as interest rates change. This helps business plan more effectively. Bank Loans Bank loans are very flexible. They can vary in the length of time that the loan has to be repaid. Loans arranged with a bank that are less than one year are regarded as short term finance. As with any other form of loan there are interest payments to be made and this can be expensive and also can vary. Task Tyrell worked in a Pizza Hut store for five years before deciding to set up his own pizza delivery store. The business has been going for two years and has been quite successful. The quality of the service and the pizzas themselves has led to an increased demand for his products. The pizza business is booming but how should Tyrell finance his plans for expanding his distribution network? Copyright: Jacque Stengel, from stock.xchng. Tyrell now feels he needs to increase the number of vehicles he has that deliver the pizzas. He did buy two Smart cars initially to make deliveries from a local dealer. He is now contemplating buying two more. He is thinking about the most appropriate way of financing the acquisition of the two cars. Prepare a 200 word report advising Tyrell of his options and what source of finance you would recommend and why. Long Term Sources of Finance Long term sources of finance are those that are needed over a longer period of time generally over a year. The reasons for needing long term finance are generally different to those relating to short term finance. Long term finance may be needed to fund expansion projects maybe a firm is considering setting up new offices in a European capital, maybe they want to buy new premises in another part of the UK, maybe they have a new product that they want to develop and maybe they want to buy another company. The methods of financing these types of projects will generally be quite complex and can involve billions of pounds. Large-scale development of plant and equipment may cost millions of pounds. Long term finance is needed for this type of development. Copyright: Alfonso Lima, from stock.xchng. It is important to remember that in most cases, a firm will not use just one source of finance but a number of sources. There might be a dominant source of funds but when you are raising hundreds of millions of pounds it is unlikely to come from just one source. Shares A share is a part ownership of a company. Shares relate to companies set up as private limited companies or public limited companies (plcs). There are many small firms who decide to set themselves up as private limited companies; there are advantages and disadvantages of doing so. It is possible, therefore, that a small business might start up and have just two shareholders in the business. If the business wants to expand, they can issue more shares but there are limitations on who they can sell shares to any share issue has to have the full backing of the existing shareholders. PLCs are different. They sell shares to the general public. This means that anyone could buy the shares in the business. Merrill Lynch: a merchant bank that engages in large-scale deals to acquire sources of finance. Some firms might have started out as a private limited company and have expanded over time. There might come a time when they cannot issue any more shares to friends or family and need more funds to continue expanding. They might then decide to become a public limited company. This is called floating the business. It means that the business will have to go through a number of administrative and legal procedures to allow it to be able to offer shares to the general public. It might be that a business wants to raise pound;300 million to finance its expansion plans. It might issue 300 million pound;1 shares in the company. The offering of these shares has to be accompanied by a prospectus which lays out details of the business what it is involved in, how it is structured, how it will be managed and so on. This is so that prospective investors, people or institutions who might want to buy the shares, can get information about the company before committing to buying shares. Often a business will employ the services of a merchant bank to help with a share issue. These institutions specialise in arranging large financial deals of this sort. Examples of such institutions are Morgan Stanley, Merrill Lynch, Rothschilds and Goldman Sachs. These institutions may agree to underwrite the share issue. What this means is that if all the shares are not sold, the institution will still provide all the money to the firm issuing the shares. Once the shares are sold, share owners can buy and sell their shares through the stock exchange. Such buying and selling does not affect the business concerned directly and is one of the main advantages of the stock exchange. You can get more details of how the stock exchange works through our resource on the London Stock Exchange. There may be times in the development of a plc when it needs to raise more funds. In this case it can issue more shares. Many firms will do this through what is called a rights issue. This occurs where new shares are issued but existing shareholders get the right to purchase new additional shares at a reduced price. If the business is doing well and the new finance is needed for expansion, this can be an attractive proposition for existing shareholders. For the business it is a relatively quick and cheap way of raising new funds. Task Follow this link to Morgan Stanleys United Kingdom Transactions. (https://www.morganstanley.com/about/offices/uk-transactions.html) Select three of the transactions from the list. Try and work out who was trying to raise finance, how much they wanted to raise and then think about what they might have wanted to raise this money for. For example, one of the entries for March read: March Transport for London pound;200 million Euro market public issue, 25-year fixed-rate note. In this case, the business trying to raise money was Transport for London. They wanted to raise pound;200 million and did so through borrowing money over a 25 year period. The people lending the money would have received a fixed rate of interest for the period that they choose to hold the loan. (These notes can be bought and sold as well!). Why did Transport for London want to raise the money? Well, that is for you to think about. Venture Capital Venture capital is becoming an increasingly important source of finance for growing companies. Venture capitalists are groups of (generally very wealthy) individuals or companies specifically set up to invest in developing companies. Venture capitalists are on the look out for companies with potential. They are prepared to offer capital (money) to help the business grow. In return the venture capitalist gets some say in the running of the company as well as a share in the profits made. Venture capitalists are often prepared to take on projects that might be seen as high risk which some banks might not want to get involved in. The advantages of this might be outweighed by the possibility of the business losing some of its independence in decision making. Examples of venture capitalists (who are also called private equity firms) are Advantage Capital Limited, Braveheart Ventures, Permira and Hermes Private Equity. Task Go to the BVCA Web site. (https://www.bvca.co.uk/index.html) The site contains a list of members all firms providing capital for businesses! It also contains some case studies of how private equity firms have helped entrepreneurs. To find this, go to Entrepreneurs, Entrepreneurs case studies and open the pdf file. You can get some interesting information on the work of venture capitalists here. Now go to Permiras page on the Gala Coral Group (https://www.permira.com/permira/en/dealdetail.jsp?id=50530) and read the information. How much money did Permira invest in Coral? In October 2005, Gala bought Coral Eurobet. How much did they pay to buy this company? What do Permira plan to do to help the business grow in the future? Why do you think that Permira believes the investment in the Gala group is a good one? Government Grant The Eden Project near St Austell in Cornwall. The cost of the project was pound;133.6 million. Some of the funding came from the National Lottery and some came from the EU. Copyright: Simon Nicholson, from stock.xchng. Some firms might be eligible to get funds from the government. This could be the local authority, the national government or the European Union. These grants are often linked to incentives to firms to set up in areas that are in need of economic development. In Cornwall, for example, there have been a number of initiatives to encourage new businesses to locate there. Cornwall has the lowest gross domestic product (GDP) per head of the population in the UK. The average wage in Cornwall is 28% below the UK average. As a result, the area attracts funding from the EU and the government. Firms looking to set up in Cornwall might be able to apply for some help in starting or moving a business to the area. One of the disadvantages of this type of funding is that it involves large amounts of paperwork and administration. This can add to costs and in some cases might not make the project worthwhile. One famous example of how a business project can be developed using European Union funding was the Eden Project. The EU was not the only source of finance to help set up the project but was an important partner in helping to realise this important tourist destination for a deprived part of Cornwall. Bank Loans As with short term finance, banks are an important source of longer term finance. Banks may lend sums over long periods of time possibly up to 25 years or even more in some cases. The loans have a rate of interest attached to them. This can vary according to the way in which the Bank of England sets interest rates. For businesses, using bank loans might be relatively easy but the cost of servicing the loan (paying the money and interest back) can be high. If interest rates rise then it can add to a businesses costs and this has to be taken into account in the planning stage before the loan is taken out. Mortgage A mortgage is a loan specifically for the purchase of property. Some businesses might buy property through a mortgage. In many cases, mortgages are used as a security for a loan. This tends to occur with smaller businesses. A sole trader, for example, running a florists shop might want to move to larger premises. They find a new shop with a price of pound;200,000. To raise this sort of money, the bank will want some sort of security a guarantee that if the borrower cannot pay the money back the bank will be able to get their money back somehow. The borrower can use their own property as security for the loan it is often called taking out a second mortgage. If the business does not work out and the borrower could not pay the bank the loan then the bank has the right to take the home of the borrower and sell it to recover their money. Using a mortgage in this way is a very popular way of raising finance for small businesses but as you can see carries with it a big risk. There may be a need to move to larger premises but the risks could be great if using your home as security for a loan. Copyright: Sue Anne Joe, from stock.xchng. Owners Capital Some people are in a fortunate position of having some money which they can use to help set up their business. The money may be the result of savings, money left to them by a relative in a will or money received as the result of a redundancy payment. This has the advantage that it does not carry with it any interest. It might not, however, be a large enough sum to finance the business fully but will be one of the contributions to the overall finance of the business. Retained Profit This is a source of finance that would only be available to a business that was already in existence. Profits from a business can be used by the owners for their own personal use (shareholders in plcs receive a share of the company profits in the form of a dividend usually expressed as Xp per share) or can be used to put back into the business. This is often called ploughing back the profits. The owners of a business will have to decide what the best option for their particular business is. In the early stages of business growth, it may be necessary to put back a lot of the profits into the business. This finance can be used to buy new equipment and machinery as well as more stock or raw materials and hopefully make the business more efficient and profitable in the future. Selling Assets As firms grow they build up assets. These assets could be in the form of property, machinery, equipment, other companies or even logos. In some cases it may be appropriate for a business to sell off some of these assets to finance other projects.