MacBruce is a family-owned building contractor  which is deciding whether to bid for a medium-size project. The total [internal] costs have been estimated at £4,500,000; and one-third of the costs are incurred as time-related charges to cover site management, plant and overheads for the duration of construction.  The contract period to practical completion is 18 months. Payment for work-in-progress will be certified by the client’s architect/QS on the basis of 10% being complete after 6 months, 70% after 12 months, and practical completion after 18 months, on time.

The contractor requires a 15% profit on his internal costs.  Interim payments at valuation dates are each made subject to a Client’s retention of 5% for ‘defects maintenance’ but half of this retainage is released at Practical Completion and the other half 12 months later. Before submitting the bid, the directors of the company want to know (and you should demonstrate):

The shape (in chart form, carefully constructed and annotated) of the predicted “S-curves” describing the forecast costs’ profile and certified measured work versus time;

The Net Present Value (NPV) of the contractor’s investment into this contract, (to the nearest £1,000), assuming a discount rate of 9%.  Present Value Tables are available for use in the Handouts on Moodle to help your calculation of the periodic discount factor needed). Demonstrate, with clear step-by-step written descriptions, how you deduce the NPV, for exhibition to the board of directors of the business, and add your own recommendation on whether or not to bid for the project.

Also provide a commentary on the discount rate used, by creating an illustration describing its component elements.
If the Central Bank’s Base Rate is 1% and commercial banks’ margins for loans to construction SMEs are typically 4%, is this company being reasonable in using 9% as the discount rate?

For this family business, assume its annual statutory Report & Accounts are published 6 months after its year-end, and that the contract described above achieved Practical Completion at the time of publication of the Annual Report. It states this contract contributed £1million to gross profit in the year.  Produce your opinion with clear reasoning on whether the amount stated here gives a true and fair view of the contractor’s profit.   

     
Now describe the alternative sources of funding which are likely to be available to a SME such as MacBruce in the Question above, and include who they could approach could be the provider(s) of such financing, and if applicable, what security those providers might require.