You are the loan officer for a specialised division of a major bank. The Monash Bank Construction division specialises in lending to medium and larger-sized construction companies. One of your clients has been banking with Monash Bank for over fifteen years. It has been recently been awarded a contract to build an extension to the halls of residence at Monash University. Construction of higher density residential property has been this companys main business since it was founded over twenty-five years ago. In order to meet the deadline for accommodation for newly arriving students next year, the company has eleven (11) months to build the new apartment wing. The total contract price is $120,312,500. It is expected that labour costs will be sixty five (65) percent of costs. It is estimated that the company will make a profit of twenty (20) percent of the contract value. As this is a relatively straightforward project for this company, it is safe to assume that construction progress will be spread evenly over the life of the project. Assume that monthly certificates will be issued and payments will occur one month after the issue of each certificate.

The contract is structured to require monthly interim certificates with payments expected one month after the date of issue of the interim certificate. A retention fund has been set up which will require retentions at the rate of ten (10) percent of the monthly payments until the retention fund has a value equivalent to five (5) percent of the total contract value. As a well-established construction company, your client expects no difficulties in obtaining one-month credit terms from the suppliers of the necessary construction materials.

You will need to work out the minimum level of overdraft that will be needed to fund this project.

As a further safety factor, add an additional fifteen percent to this minimum level, as some long range weather forecasters are expecting increased rain (which will delay construction and thus payments) over the upcoming year. What is the total overdraft needed for this project after allowing for the safety factor? (use a conservative approach to calculate the safety factor)