by Jeffrey C Kadlowec, Registered Architect

Time, cost and quality (TCQ) are key performance indicators of any construction project. Trade-offs occur between minimizing duration and value while maximizing performance. Improvements towards one objective lead to deterioration of the others variables. Net present value (NPV) is greater when calculated periodically as real costs and overruns are realized at finish times (Kebriyaii 2021). Profitability can be optimized through financial analysis and effective decision making throughout the building lifecycle. Proposed financial models should be implemented for large scale-projects, along with environmental impact studies and consideration of social aspects, to ensure the success of sustainable these developments.

Corporate real estate (CRE) teams utilize quantitative analysis in site selection for business expansion and relocation. Real property impacts the balance sheet, income statement, return on assets and discounted cash flow. Purchases have advantages including control of property including alteration, long-term savings and appreciation, and various tax benefits. Leases offer more choices, limited commitment and capital preservation (Zhao 2019). Value engineering (VE) seeks the lowest lifecycle cost while still achieving the required functionality. Applying VE principles to the comparison of NPV from owning or leasing will determine costs and benefits, aiding in those decisions.

Accurate forecasting of duration and cost is essential to the financial success of a construction project. Earned Value Management (EVM) has become the widely accepted technique for cost and schedule control in project forecasting (Batselier 2015). Various figures and calculations are used to measure cumulative value, variance and performance (see Fig 2). This method can also be utilized to predict the future and final budget and duration. Simulated forecasting is performed using the Monte Carlo method for risk distribution, while real forecasting is obtained from actual project tracking information. The accuracy of either prediction is based on the mean absolute percentage error (MAPE) of the results.

Figure 1. Definitions of the EVM key metrics (Batselier 2015)

Change orders often cause construction delays and budget overruns, resulting in stagnation and recession for local economies. Contractors frequently offer low bids to secure projects or by underestimating the work. Profits must then be generated through future change orders [3]. This common practice increases financial risk for all stakeholders and creates market volatility as the cost of changes increase during the project lifecycle with lessening impact on final outcome. The decision to accept or refuse these variations becomes a fundamental problem for project managers. Estimating the final project cost and complete date using EVM is critical when considering these changes.

Risk is defined by the probability and consequence of failing to meet objectives. Value-based risk management is an essential part of construction project management (CPM). The plethora of risks involved in design and construction must be monitored and mitigated through a holistic approach (Toth 2015). Understanding the impact of risk is crucial to project success and profitable business practices. Mathematical models should be utilized to quantify and evaluate their adverse effects, in order to focus adequate attention, aid in decision making, allocate resources, and implement control plans.

The financial aspects of construction are integral to successful completion of projects and the reliable operations of companies involved. Cash flow remains difficult to model in the dynamic of real estate development due to changing conditions and target projections. Though total profit is the commonly used metric and an easily understood concept, it does not account for the significant and variable impact of the time value of money (TVM) (Lucko 2012). By analyzing total project expenses and future revenues expected, the internal rate of return (IRR) can be calculated. Adjustments should be made to these speculative figure to account for market fluctuations and economic projections.

References
Batselier, Jordy & Vanhoucke, Mario. (2015). Empirical Evaluation of Earned Value Management Forecasting Accuracy for Time and Cost. American Society of Civil Engineers. DOI: 10.1061/(ASCE)CO.1943-7862.0001008.
Czemplik, Andrzej. (2017). Application of Earned Value Method for Evaluation the Time/Cost Consequences of Variation Orders in a Construction Project. IOP Conference Series: Materials Science and Engineering. 245. doi: 10.1088/1757-899X/245/7/072028.
Kebriyaii, Omid; Heidari, Ali; Khalilzadeh, Mohammad; Antucheviciene, Jurgita & Pavlovskis, Miroslav. (2021). Application of Three Metaheuristic Algorithms to Time-Cost-Quality Trade-Off Project Scheduling Problem for Construction Projects Considering Time Value of Money. Symmetry. doi.org/10.3390/sym13122402.
Lucko, Gunnar. (2012). Supporting Financial Decision-Making Based on Time Value of Money with Singularity Functions in Cash Flow Models. Construction Management and Economics. 31(3): 238-253. dx.doi.org/10.1080/01446193.2012.750728.
Toth, Tamas & Sebestyen, Zoltan. (2015). Time-Varying Risks of Construction Projects. Procedia Engineering. 123: 565-573. doi: 10.1016/j.proeng.2015.10.109.
Zhao, Chencheng; Yang, Eunhwa; Nie, Yiqian & Russo, Justin. (2019). Facility Decision Making Process with Modified Value Engineering Approach. Journal of Corporate Real Estate. 21(2): 95-112. DOR: 10.1108/JCRE-01-2018-0002.