Week 10 _ John Agbo_Economic Analysis_Week 13_Lanre Giwa

Problem Recognition / Identification

My colleague at work was convinced through a bank to buy a set of apartment building at a cost of NGN30, 000, 000. From his personal savings, he was able to provide a down payment of NGN5, 000,000, meaning he had to take a loan of NGN25, 000,000 from the bank. The bank has advised him that he will pay NGN400, 000 annually to service his mortgage based on the agreed interest rate. Furthermore, his consultant estate manager informed him that he may spend an average of NGN 200, 000 annually for maintenance cost such as electricity bills, painting, and plumbing works. My colleague is overwhelmed with the high cost as he did not anticipate that and he is thinking of the best approach to sort himself.

Development of Feasible Alternatives/Solutions

The following are the alternatives available to my colleague:

Alternative 1:– Since the apartment building has 4 mini flats in it, he may rent out the four apartments.

Alternative 2:– He should resell the apartment building

Alternative 3: He should rent out three apartments and live in the fourth apartment.

Alternative 4 – Do nothing

Possible Outcomes and Cash Flow of Alternatives / Solutions

Alternative 1: The four mini flats can be rented out at a rate that will cover his annual cost with a marginal profit. This will make it possible to use the money earned from the rental to service his mortgage, maintain the property and make little profit on investment.

Alternative 2: Looking at the total cost of the building, mortgage and maintenance, he is considering reselling the property at a favourable price. The only risk is that the price will depend on the market demand and he stands to sell it at a loss if the demand is low.

Alternative 3: Since my colleague currently lives in a rented apartment with his family, he is also considering moving to one of the four apartments and renting out the remaining three mini flats. This will eliminate the amount he pays on rent and he would also get paid for the 3 other flats.

Alternative 4: The last option is just to maintain status quo by declining the offer. This will mean that he does not have to spend anything regarding the building other than the fact that he will still be paying rent in his current apartment.

Selection Criteria / Attributes of best solution

• Comfort and luxury of living in one’s apartment without harassment from Landlord
• Steady source of income to cover the cost of mortgage, maintenance and a marginal profit
• Minimise expected loss of money
• Improve credit rating in the Bank
• Improved reputation of owning a property.

Analysis and comparison of the Alternatives/Solutions

Analysing all the options available to my colleague, option 4 seems to be the least preferable as that is the current position and he decided to take a facility from the bank because he is not comfortable with his present situation. Secondly, with option 4, he will still continue to pay rents that are usually reviewed annually and this will impact on his salary. Furthermore, this will impact on his credit ratings with the bank.

Option 2 seems like a good choice. Since he did not envisage that there will be so many hidden charges on the building, he may take the advantage of reselling the building apartment to cover his investment and the mortgage and he would not need to bother on the maintenance cost. The low point to this option is that he has to consider the market demand at that point in time and consider minimising his loss. With high demand, he stands to make profit or break even at least. With low demand, he may sell the property at a loss or barely break even in his investment.

Options 1 and 3 look like the preferred alternatives in his current situation. Looking at both options, option 1 will make it possible to rent out the 4 mini flats and if calculated properly will cover his cost, mortgages, maintenance and he will still make a marginal profit over the years. For option 3, if calculated properly, he will fulfil his set criteria by stop paying rents by moving into one of the apartments and he will still cover his cost by getting rents form the three other apartments.

With the performance of a quantitative analysis below, Option 3 will successfully fulfil all the set criteria he has set up for himself.

S/No	Description	Amount
Assuming he is to service his mortgage over a period of 15 years
	His personal investment	NGN 5,000,000.00
	Mortgage	NGN25, 000,000.00
	Annual payment to service loan NGN400, 000.00 * 15	NGN 6,000,000.00
	Annual Maintenance Fee is NGN200, 000.00 * 15 = (Inflation not considered)	NGN3, 000,000.00
	Total Cost	NGN 39,000,000.00
	Cost per annum = NGN39,0000 / 15	NGN2,600,000.00

Meaning to cover his cost assuming that inflation and other external factors are not considered, the rent of an apartment will be NGN2,600,000 / 4 = NGN 650,000 ( Option 1)

Since he intends to live in one of the apartments, he will need to divide the cost of the building by 3 i.e NGN2, 600,000 / 3 and that will be NGN867, 000 (Option 3). This will cover his cost and indirectly a profit for him since his own rent will be borne by the three other flats. This is the minimum amount that will be recommended to him to adopt for rent of his apartment.

Best Alternative to be Selected

Based on the analyses of the options identified, I would recommend option 3 to my colleague as I am of the view that the third option will fulfil his set criteria above and will minimise his loss of money and stress.

Performance Monitoring / Post evaluation

For performance monitoring and post evaluation, my colleague would be advised to continue to monitor and review the rent of the three other flats viz a viz the value obtainable within the area. He should also continue to do an analysis periodically to ensure that he is successfully servicing his mortgage and he is making considerable profit after all the cost deductions.

References:

1. AACE International. Skills & Knowledge of Cost Engineering, 5^th Edition Revised.Chapter-9, pp.9.1-9.9 Edited by Dr. Scott J. Amos, PE. 2010. AACE International. Morgantown, WV, USA.

2. Sulliven, W. G., Wicks, E.M., Koelling, C. P., et al. (2009). Engineering Economy (14^th ed.), Chp 14 pp551 -570. New Jersey: Pearson Education.
3. Brassard M, Ritter D. The memory Jogger 2. Tools for Continuous Improvement and Effective Planning.2010.

WK 8_Tony_Managing Unrealistic Project Task

Problem Statement

Sometimes Project owners, management & supervisors place impossible demands on us with regards to certain project deliverables or task. I once had an experience where the cost management committee of a company I worked with demanded that the tendering process that my department (Property) was handling be moved to another department (Admin) that did not have the technical knowhow. Their concern was transparency and integrity. This did not go down well with me as the new department will not know what to do and do not have the required manpower to handle tendering. It will eventually slow down or delay the award of contracts and eventually the number of projects we were able to deliver as that was a KPI for my department. I told the committee their new proposal will not work based on the aforementioned reasons. The committee reacted so badly and verbally threatened my job. How should one handle a situation like this?

Feasible Alternatives/Solutions

1. Tell the committee we will work with the Admin Department on the tendering process

2. Accept the demand with conditions, after studying the situation and its implications

3. Accept the demand as proposed

4. Tell the committee right there that their new proposal would not work

Analysis of the feasible alternatives.

Alternative 1: Property Dept to work with Admin on the tendering process

In this option the property unit will handle technical issues/clarifications while Admin handle invitation to tender, return of same and such non technical work. By so doing property unit will not be doing everything all by themselves. While this is an option it still leaves the property dept in every phase of the process which the cost mgt committee did not want. This approach will take a slightly longer tendering time than when Property dept was solely managing it.

Alternative 2: Accept Demand with conditions

This option involves studying what has been requested to establish the pros and cons and thereafter meeting with the committee with facts and figures. The obvious advantage of this process is that the committee would be able to re-evaluate their proposal based on hard facts. The final proposal will reflect the implications such as longer tendering time and higher cost of tendering. The committee will still feel they are in charge and not see it as an affront to their authority.

Alternative 3: Accept the demand of the committee as proposed

In order to avoid conflict or confrontation accept the demand of the cost management committee and wait for the proposal to fail. The proposal will fail as the Admin Unit does not have the needed technical knowhow and manpower. There was no intention to address these limitations. For Admin to handle tendering they would have to get new staff with the technical capability. That would take time and money. So rather than save cost, they will incur more cost through this process.

Alternative 4: Tell the committee their proposal will not work; maintain status quo

This is premised on the fact that as professionals, we should tell management the truth all the time. Property dept has the professionals who were employed to manage the organizations projects and will thus do a better job than a novice. The tendering process would be faster as the knowhow and adequate resources are in the team. Management would however see it as confrontational and an-willingness to try out a new proposal or embrace change. They will also feel that Property Unit has a hidden agenda and that could be the reason why we want to maintain the status quo, i.e continue to handle the process by ourselves.

Selection Criteria/KPIs

1. Integrity

2. Timely tendering process

3. Meeting Projects Delivery targets

4. Retain good relationship with cost management committee

5. Administrative cost of tendering

Analysis and Comparison of Alternatives

All of the KPIs are equally important and so the comparative analysis will be done using the compensatory model of Nondimensional scaling. This is a popular way to standardize attribute values by converting them to nondimensional form[1].

The selection criteria in relation to the attributes are summarized in table 1 below.

TABLE 1

Attribute Alternative 1 Alternative 2 Alternative 3 Alternative 4 Integrity & Transparency good good Excellent fair Timely tendering fair poor poor good Meeting projects delivery targets good fair fair good Retain good relationship with CMC good fair good poor Minimizing Administrative cost good poor poor excellent

The basic principle behind all compensatory models, which involve a single dimension, is that the values for all attributes must be converted to a common scale such as dollars or utiles from which it is possible to construct an overall dollar index or utility index for each alternative [2]. A utile is a dimensionless unit of worth [3].

For the attributes in table 1 above higher numerical values are desirable so we use the formula below to convert them to their dimensionless values.

Rating = Outcome being made dimensionless – worst outcome

Best outcome - Worst outcome

TABLE 2: Dimensionless value of attributes

Attribute	Value	Rating Procedure	Dimensionless Value	Alternative
Integrity/transparency	poor	(relative rank* -1)/3	0.00
	fair		0.33	alt 4
	good		0.67	alt 1 & 2
	excellent		1.00	alt 3
Timely tendering	poor	(relative rank* -1)/3	0.00	alt 2 & 3
	fair		0.33	alt 1
	good		0.67	alt 4
	excellent		1.00
Meeting delivery targets	poor	(relative rank* -1)/3	0.00
	fair		0.33	alt 2 & 3
	good		0.67	alt 1 & 4
	excellent		1.00
Relationship with CMC	poor	(relative rank* -1)/3	0.00	alt 4
	fair		0.33	alt 2
	good		0.67	alt 1 & 3
	excellent		1.00
Minimize Administrative cost	poor	(relative rank* -1)/3	0.00	alt 2 & 3
	fair		0.33
	good		0.67	alt 1
	excellent		1.00	alt 4

* Scale of 1 to 4 used, 4 being the best (excellent).

Table 1 expressed in dimensionless values give the results in table 3 below

TABLE 3: Nondimensional Data of Alternatives

Attribute	Alternative 1	Alternative 2	Alternative 3	Alternative 4
Integrity & Transparency	0.67	0.67	1	0.33
Timely tendering	0.33	0	0	0.67
Meeting projects delivery targets	0.67	0.33	0.33	0.67
Retain good relationship with CMC	0.67	0.33	0.67	0
Minimizing Administrative cost	0.67	0	0	1
SUM	3.01	1.33	2	2.67

Selection of Best Alternative

The best alternative is selected using the nondimensional scaling model demonstrated above. In this decision model, the alternative with the highest summed score is the best and in this case it is Alternative 1 which is “Property Unit working with Admin on the tendering process”. That was exactly how it played out in the real life scenario. Property Unit brought their expertise while Admin handle non technical issues. It was no longer one department doing everything and it brought more credibility to the process.

Performance monitoring & Post Evaluation of Results

1. Until I left the organization in question the process worked.

2. It could be improved and sustained by slightly raising the manpower of Admin to more timely respond to this new tendering assignment by direct employment or deployment of a property unit staff to Admin .

References

1. Sullivan, G., Wicks, E., Koelling, C., Engineering Economy 15^th Edition.14.7.1 –Nondimensional scaling

2. Sullivan, G., Wicks, E., Koelling, C., Engineering Economy 15^th Edition.14.7 –Compensatory models

3. Ibid