The Project Finance tools offer great financing for large-scale projects, unlike corporate finance. It is getting popular to fund construction projects; however, stakeholders utilize finance models to assess outcomes, funding security, and risks. If you are a construction professional, you can understand the model to estimate the financial performance.
Construction Project Finance Models
Large-scale construction projects need a proper financing model to mitigate the risks, understand the financial return, and ensure the long-term viability of the construction project. Construction business uses many financing methods, such as project finance, PPPs, corporate finance, and others.
The project finance depends on the project’s cash flow after it is constructed. Hence, before investment, it’s important to assess all aspects from outcome to risks; the project finance models are used to analyse the financial performance and viability of the projects.
If you wish to understand the construction project finance model, you should be aware of the components of the model, such as:
- Cost Prediction: The construction project expenses and total cost, including the material, labour, equipment, and other costs, should be assessed. A detailed analysis is needed to predict the overall construction costs in the model.
- Revenue Prediction: Construction project, where the revenue is based on financing, it’s important to analyze the revenue from the project to attract better investors.
- Debt Structuring: The model would analyze the different financing situations, as the construction projects may often get substantial financing, hence it’s important to estimate the debt. The debt structuring in the model ensures you manage the debt well and do not fall into a debt trap.
- Investment Analysis: The large-scale construction involves a heavy investment, so a full analysis would be done via a financial model.
- Capital Expenditures: You would need initial and full capital expenditures for proper financing.
- Working Capital: The working capital would be calculated from staff management, rules, and regulations.
- Financial statement: The proper financial statement carrying the profit, loss, equity, debt, and other insights would be created.
How is the Construction project finance model implemented?
To build the best construction project finance models and implement them, you would need to follow the process below:
- Data collection: You should first collect the data related to construction projects, do market research on the place, pricing, and other aspects based on the current and historical trends.
- Point out your objective: The objective of creating the project finance models can change the structure; hence, you should be clear about the objective, such as financial monitoring, feasibility analysis, etc.
- Work on assumptions: Now, based on the data collected and market research, you should make assumptions that will shape your prediction for the project’s finances.
- Construct model: Once you are clear about the prediction and what you have to find, you can create the model in MS Excel, structure it based on your motive, financial elements, assumptions, and other information.
- Validate and test: Once you create a model, it’s important to test it and run some tests to validate it’s working as per your project needs.
What are the benefits of financial modeling in the construction business?
The construction project finance model is not a one-sided approach that will fit all purposes; it depends on project goals and requirements. Here, you can find the common benefits involved in the financial model:
- Strategic planning: The financial modeling of the construction projects helps the project owners to plan strategically and stay ahead of their competition in the market. With the data-driven analysis, the project owners can improve in many aspects and manage financial efficiency.
- Better Decision-making: With proper analysis of data and a well-structured model, the project owner can take informed decisions that reduce the risks and funding gaps.
- Enhanced negotiations and reporting: The financial modeling allows the project owners to have the full report and potential challenges associated with the project that can help them in reporting the project, and if they need more funds, it can help in negotiations, too.
- Sustainability: With the proper planning beforehand, you can manage the finances well to invest in sustainable construction and create a great example.
- Focused on goal: The financing modeling allows you to focus on the project goal and helps you understand what you need to do for the long-term success of the project.
What are the best practices for financial modeling?
If you are thinking of creating a financial model for your construction project, you should keep the following things in mind:
- You should engage with industry experts and analysts to work properly on assumptions and make an informed decision through the finance modeling.
- You should never miss the worst-case scenarios in your financial modeling to be prepared for them.
- You should keep the project finance model user-friendly so that all stakeholders can understand it, and allow proper documentation.
- You can get help through various financing software available in the market, which have various tools to provide the best insights; however, you should check what suits your project the best.
Financial modeling is an important step for construction projects to estimate the cost, reduce the risk, manage the project, and score the investment, so create your model in Excel based on your needs.
