Corporate Dressing for Personality Development
Corporate dressing helps an individual to dress formally according to his/her work culture. Dressing sensibly not only helps an individual to earn respect and appreciation but also makes him/her a source of inspiration for others. An individual who is dressed correctly finds acceptance everywhere and he does not have to try too hard to impress […]
Improve Communication Skills at Workplace
Communicating effectively is an art and must be practiced effectively at workplace for better output and successful achievement of goals of the organization. It also helps in reducing the error rate, better understanding of work, better bonding among the employees as well as conflict management. Every employee must be very clear what his colleague wants […]
Organizational Diversity – Fostering an Inclusive Environment
The question that is uppermost on business leaders’ mind is how to foster an inclusive environment as the current environment in the business world is about not tolerating harassment and discrimination. For instance, in recent years, there has been some high profile cases involving senior management figures in the US and in India in matters […]
Corporate Etiquette – Dos and Donts
It is essential for every individual to behave in a socially acceptable way. Etiquette refers to good manners which help an individual leave his mark in the society. An individual must know how to behave at the workplace. There is a huge difference between college and professional life. One needs to be disciplined at the […]
What is Productivity and Why it is Important to Corporates, Nations, and Professionals?
What is Productivity and Why it is so Important? We often hear the term Productivity, bandied about in economics and management textbooks and the popular press. Indeed, not a day goes by without this term popping up in myriad contexts. Further, when experts talk about falling or rising productivity, they stress its importance to everything […]
The risk involved in an infrastructure project does not remain the same throughout the life of a project. Instead, the risk varies depending upon the stage in which the project is. The construction phase is supposed to be the riskiest phase of an infrastructure project. This is also the phase where investors demand the highest yield. This is because delays in the construction phase cause cost overruns. These cost overruns pose a significant risk to the success of the entire project.
In this article, we will have a closer look at the causes of cost overruns and how they impact the project as a whole.
A cost overrun is commonly defined as a variance of the final project cost from an estimate. The problem is that there are several estimates made within the lifespan of a project. Hence, which cost estimate needs to be considered is an important decision. In most cases, the final budget, which is prepared just before the construction phase of a project begins, is considered to be the planned scenario. The numbers mentioned in this scenario are then compared to the actuals in order to determine the variance.
Cost overruns are pretty common in the infrastructure sector. However, each cost overrun has a huge financial impact. Hence, it is important to mitigate these overruns in order to increase the overall profitability of a project.
Infrastructure projects generally run on a strict budget. In case of cost overruns, the project budget is exhausted much before the date of actual completion of the project. Hence, the project sponsors find themselves in a situation where they do not have sufficient funds to complete the project.
As a result, sponsors are exposed to several risks. They have to pool in funds urgently by liquidating their other investments. This has to be done since the sponsors have already invested a large sum of money into the project. Hence, they are forced to invest some more in order to salvage their previous investments. The bigger issue is that raising money for projects in which cost overruns have already occurred is extremely difficult. Most lenders do not want to fund the project since they believe that it is being managed poorly. Also, the few lenders who are willing actually to take the risk charge exorbitant interest rates.
From the equity shareholders’ point of view, a cost overrun can have disastrous effects. This is because a cost overrun increases the investment required. However, the return remains pretty much the same. As a result, the return on investment is reduced drastically. This reduction in return is regardless of the interest rate at which the new financing has been procured. An increase in costs without any increase in revenue severely impact the financial viability of the project. In many cases, the viability is completely destroyed, and financiers find it easier to abandon the project and move on instead of making attempts to revive the project.
Cost overruns are not good news for the lenders either! Like other stakeholders in the project, they, too, are negatively affected by these overruns. This is because lenders generally keep some margin when they give loans. This margin can be expressed in the form of a coverage ratio. For instance, if the lenders give a loan of $80 on collateral worth $100, the coverage ratio can be said to be 80%. In the case of cost overruns, the underlying collateral remains the same, however, the value of loans outstanding increases. This negatively impacts the coverage ratio. A higher coverage ratio means an increased risk for the lenders.
Your email address will not be published. Required fields are marked *
