Engineering Economics Business Plan 2017

CHAPTER ONE
INTRODUCTION
1.1 Introduction about the construction industry
A construction is a process of constructing something by man for one purpose or another. It may
be a road, bridge, a dam, a dwelling place, an airport, a commercial building, etc. It also includes
the art of constructing residential building, institutional, commercial buildings, etc. The main parts
which involves in the construction industry are the client which is the owner of the project, the
consultant which involve in the design and supervision of the project, and the contractor which is
going to construct the project.
1.1.1 What are clients?

The client is the most important party who is active from inception to completion and event to
post-occupancy maintenance. The client is the owner of the project.
Clients may be classified as Public sector clients and private sector clients.
A. Public sector clients
 Central Government Offices (Ministries)
 Local Authorities (Regional or Town)
 Public Corporations
B. Private sector clients
 These are private individuals & private companies.

Duty of the Client

 Demand for the product.
 Availability and cost of land,
 Location & accessibility
 Price
 Required Infrastructure
 Legal constraints
 Current & future development
 Soil characteristics of land
 Site preparation (right of way)
 Permits

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1.1.2 What are consultants?

The main role of the consultant is to interpret the client’s project requirement into a specific design.
The consultants’ team shall:

Ascertain, interpret and formulate the client’s requirement into an understandable
project.
 Design the project to much requirements
 Assess client’s cost limit to decide on materials & the like.
 Prepare contract documents.
 Supervise the project and constantly inform the client on the progress
 Approve payments
 Resolve contractual disputes
 Issue provisional and final acceptance certification
1.1.3 What are contractor?

These are groups established mainly as commercial companies, that contract to construct
development projects. The contactors may be specialized in constructing road projects, real states,
apartment building, as a foundation specialist, and a lot.
Responsibility of contractors:
 Carry out a full site investigation prior to submission of tender
 Submit tender
 Plan, Program, Control the construction process.
 Notify the consultant about delays, discrepancies
 Effect all payments to his employees, suppliers, subcontractors
 Rectify all defects on completion of works, etc.
 Provide post occupancy repair & maintenance if required.

Most contractors in Ethiopia specialized in different areas of construction. But, as we try to survey
the Ethiopian construction industry there are few foundation specialists throughout the country.
To fulfill the gap in the field we are interested to be a foundation specialists. But the special reason
is we have special interest on that field of construction.

1.2 What are foundation specialists?

Foundation specialists are contractors specialized in constructing structural and nonstructural
piles, check the performance of piles, works on soil stabilization, etc. The nonstructural piles are
known as shoring piles .The shoring piles are essential to prevent the ground and nearby buildings
from collapse.

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CHAPTER TWO
COMPANY PROFILE
2.1 Background of the company
In Ethiopia there are few construction companies which are established as a foundation specialist.
The main once are ANCHOR foundation specialist and MIDROC Ethiopia Construction Plc.
ANCHOR foundation specialist is established in 2003 E.C. by BAMACON construction PLC.
MIDROC Ethiopian Construction private limited company is a grade one contractor established
in 1993, with a total investment in construction equipment plant and facilities of Birr 500 million.
MIDROC Ethiopia Investment Group is a member of the MIDROC Group Companies owned by
the prominent global businessman, Sheikh Mohammed Hussein Ali Al-Almoudi. These Group
Companies are operating in Africa, Europe, the Middle East, and the United States of America.
Each of the MIDROC Ethiopia Group Companies is legally established and autonomous.

Our team is interested in this field of construction due to the reason that the construction companies
which are established in this field are not enough to address all the activities on the required time
and professionally wise. We believe that our company will be profitable if we do our business in
this field of construction.

2.2 Overview of the company

2.2.1 Vision of the company
Our company’s vision is providing qualified, safe and economical underground construction
solutions that meets our customer’s need in mind and exceeds their expectation. Environmental
and social commitment will be the key to our success.

2.2.2 Mission Statement

HT3 specialist will strive to provide its clients quality and cost effective underground solution by
implementing up to date technologies and construction methods. HT3 will fully engage its resource
and knowledge to create a continuous learning platform from the day to day activities to develop
local solutions and local construction inputs.

2.2.3. Goals and Objectives

Our company determines to provide high quality engineering and construction services to clients
by establishing, implementing and continually maintaining and improving quality system.

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2.2.4 Keys to Success

In order to make the mission fully practical the following values would be implemented. This
includes:

 Treat every customer as if they were the most important customer the business has.
 Honestly evaluate the needed skills for a job,
 Work hard, guarantee all work and promote 100% customer satisfaction
 Satisfaction of customers’ needs
 Continues human resource development
 Integrity and loyalty to all member of the company
 Good relationship to the environment.

2.3 Overall Organization and Work Flow

General
manager

Techncal Finance and

Secretary Legal Affaires
Manager Adminstration

project Human
Office Manager Accountant Purchaser
engineer resource

Site engineer

General/Anchor General/piling
Forman Shoring Forman piling
work work

General Anchor Operator/piling

Mechanic mechanic
drilling drilling

Figure 2.1 company organization and work flow

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2.4 Company Summary

HT3 foundation specialist PLC will be established in 2011 E.C by five fresh graduate engineers as
a share company to be a specialist contractor in the following fields;

i. Excavation Shoring

ii. Pile Foundation construction and performance test

iii. Tieback/Anchor installation and test

iv. Soil Stabilization; Shot creating and pressure grouting

HT3 foundation specialist will made a huge investment to acquire pile drilling machines, anchor
machines and all the necessary equipment and tools to fully execute the above works.

2.4.1 What are the processes during the construction of the shoring piles?
In order to prevent the ground and nearby structures from collapse we have to construct a shoring
piles. The activities which are done to construct the shoring piles are:
1. Site clearance
2. Drilling of hole on which the shoring piles are required
3. Fabrication of reinforcement bar
4. Reinforcing the concrete with the reinforcement bar in the drilled hole
5. Excavation of the ground
6. Mesh work between the shoring piles to prevent the soil from collapse
7. Shot create is done for the meshed part
8. Pile anchorage is done at some depth of the pile.
9. Level the ground
10. The surveyor check the elevation of finished level the ground

The drilling of holes for the shoring is one of the most difficult process during the construction of
shoring piles, because we don’t know what will happen below the natural ground level. During
this process we may face a hard rock, ground water, or weathered rock which makes it difficult.
The drilling process is done by the machine shown in the figure below.

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Figure 2.2 Drilling machine

After the drilling process is done the concreting process comes next. During this process the
fabricated reinforcement bar is inserted in to the drilled holes and the drilled holes becomes filed
with concrete. As we have completed the concreting process the excavation of the ground is the
next activity to be executed. The excavation process is done using excavator and the excavated
soil is transported into the land fill using the Sino truck.

Figure 2.3 Excavation process Figure 2.4 Fabricated reinforcement bar

Figure 2.5 Drilled hole

After we have finished the concreting process and the excavation process the pile anchorage comes
next in order to prevent the shoring piles from falling apart. During the construction of pile
anchorage a hole is drilled and tension bars are inserted to it in order to support the pile by tension

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and grouting process should be done to make it strong. The pile anchorage is done at some height
of the pile by giving with some degree of inclination. The next task to be executed is the mesh
work in order to prevent the collapse of the soil between the piles. After doing this activity the shot
create is the next activity to be done in order to make the soil stable.

Figure 2.6 Pile anchorage Figure 2.7 shot create machine

Figure 2.8 Mesh work

Finally, leveling the ground and checking the elevation of the ground by the surveyor becomes the
last but not the least activity of the foundation specialist.

2.4.2 Start-up Summary

The company will incur start-up costs associated with the beginning of the business. The company
will be using his personal tools for jobs but will need to purchase the following additional
equipment/tools:

 Excavator
 Sino truck
 Drilling machine
 Grouting machine

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 Shoot create machine

 Anchorage machine
 Roller
 Mixer
 Tools for fabrication of reinforcement bar
 And other tools

2.5 Competitiveness of HT3 Foundation specialist

Like any other business entity that is expected to operate in a commercial way and in a competitive
environment, the HT3 needs to achieve a range of operational objectives by avoiding financial
losses on its business activities. These objectives include the need to

 Be economical in purchasing and use of inputs

 Be efficient in the production of outputs
 Sell an optimum quantity of its services to clients at the right price.

Location and Environment of the projects to be executed

The location of our project will be around Addis Ababa because most of the construction activities
are found around that area.

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CHAPTER THREE
MARKETING STRATEGY
3.1 HT3 Foundation Specialist Marketing Strategy
It is important to determine how our business is going to achieve its objectives. For example, by
improving the product, increasing promotion, implementing a new pricing strategy.

This should be clear and realistic, reflecting the practical implications behind the business'
marketing objectives.

 Marketing Budget - This should contain detail of resources that will be delegated to the
marketing activity. Areas of major cost should be detailed.

 Marketing Action Plan - An action plan should be compiled for each strategy, e.g. the
selection of media for a promotional campaign, delegation of resources for product
development and market research.

To succeed and develop our company must have a strategy that can give a perspective of where
the business will be at any given point in time. In other words our strategy is aimed at driving
the business forward. Our strategy should involve;

 The people who work in the company, because without them there is no business.

 Many managers fall down because they are not capable of understanding how best to use
the people within their company. The staff should be the first to be consulted because they
know what is going on in their section of the business and how it can be improved so that
even those at the ‘bottom of the ladder.

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3.2 Key elements of a successful Company marketing strategy.

Begin our company marketing strategy document with an honest and rigorous analysis

 Strengths
 Weaknesses
 Opportunities

First make a list of specialist skills in what we do.

 Strengths – e.g. personal and flexible customer service

 Weaknesses - e.g. inefficient accounting systems limited financial resources lack of an

established reputation.

 Opportunities - e.g. increased demand from a successful customer using the Internet to
reach new markets new technologies that allow us to improve product quality.

3.3 Price our product or service to reflect the market place.

As Foundation specialist there is quite often a tendency for some of the strengths and weaknesses
to diminish. Whatever sizes our business is we should be honest with our self and whether any of
the weaknesses still apply to our company?

We will made a list of our business' strengths and weaknesses, getting input from all staff including
management as many of our employees as possible. Compare our strengths and weaknesses with
those of our main competitors. We need to take corrective action to minimize weaknesses and
identify where we can exploit strengths that our competitors don't have.

The ability of the smaller business to be flexible and respond rapidly to market changes is a major
strength in the right direction. This is particularly the case in fast moving markets and when in
competition with larger businesses who are far less likely to be able to respond as quickly. In order
to avoid short-term knee-jerk reactions whilst maintaining flexibility, we need an overall strategy
for our activities to fit into. Our response to market situations is consistent with overall strategy
we can decide whether a particular course of action is appropriate.

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3.4 Customer profitability:

 Analyze the profitability of each of our main customers. We may be surprised to find how
unprofitable some of them are, so look at ways of increasing the profitability of these
customers.

 Focus on the more profitable ones; check their needs and identify ways to sell more to each
of them.

 We have to start the operation with adequate and sufficient customer database because we
have to give a priority to invest in them.

 Many of the strategies discussed require the ability to analyze our customer/contacts

3.5 The main customers and End users of our Services

The main customers and end users of our services will be

 Governmental institutions such as schools, Administration buildings,
Hospitals Banks, etc.
 Private institutions

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CHAPTER FOUR
FINANCIAL ANALYSIS
The amount of money required to start as a foundation specialist are shown below. These
moneys are required for buying the machines to run as a foundation specialist, to be paid for the
employers, for office rent, and for furniture expenses.
It is a 10-year business plan, so as it is convenient to sub divide it into three terms for simplicity.
The firs term comprises the first three consecutive years, the second term includes the next three
years and the third term includes the last four consecutive years.
For the first term
Machine type Cost of machine(Birr) Number of machine Total cost(million)
(Birr)
Truck mounted 20 million 1 20
Drilling machine
Track Excavator 4 million 1 4
Sino truck 1.5 million 2 3
Roller 4 million 1 4
Grouting machine 1.5 million 1 1.5
Generator 25,000 1 0.025
General tools 5,000 1 0.005
Anchor 5 million 1 5
Shoot Crete 3.5 million 1 3.5
Total money 41.030 million
Table 4.1 Amount of money required for the machines
Item type Number Cost per year(Birr) Remark
House Rent 1 120,000
Computer 3 45,000
Printer 1 20,000
Photo copy 1 10,000
machine
Furniture 50,000
Advertising 120,000
Total money 365,000
Table 4.2 Amount of money required for office work
Employment type Number Cost per month(Birr) Cost per year(Birr)
General Manager 1 20,000 240,000
Legal affairs 1 5,000 60,000
Finance and administration 1 6,000 72,000
Human resource 1 5,000 60,000
Purchaser 1 5,000 60,000

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Secretary 1 2,000 24,000

Accountant 1 5,000 60,000
Project engineer 1 8,000 96,000
Office Engineer 1 8,000 96,000
Site Engineer 1 6,000 72,000
Technical manager 1 10,000 120,000
Sino truck drivers 2 6,000 144,000
Mechanic 3 5,000 18,0000
Security man 2 1,800 43,200
Total money 1,327,200
Table 4.3 Amount of money required to be paid for the employers
Additional note
 The number of employers and machines will not be changed for the consecutive three
years.
 Total initial cost= cost of machines+ The total amount of money to be paid for the
employers+ The amount of money required for house rent+ The amount of money for
furniture expense.
Total cost=41.03 million + 0.365 million +1.327 million
Total cost=42.722 million
For the second term
Additional machines to be bought during the second term.
Machine type Cost of machine(Birr) Number of machine Total cost(million)
( Birr)
Track Excavator 4.5 million 1 4.5
Sino truck 2 million 2 4
Roller 4.5 million 1 4.5
Total money 13
Table 4.4 cost of machines to be bought in the second term.
Item type Number Cost per year(Birr) Remark
House Rent 144,000
Computer 2 30,000
Printer 1 20,000
Total money 264,000
Table 4.5Amount of money required for house rent, computer and printer during the second term
Employment type Number Cost per month(Birr) Cost per year(Birr)
Purchaser 1 5,000 120,000
Project engineer 1 8,000 96,000
Office Engineer 1 8,000 96,000
Site Engineer 2 6,000 144,000
Technical manager 1 10,000 120,000

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Sino truck drivers 2 6,000 144,000

Mechanic 1 5,000 60,000
Security man 2 1,800 43,200
Total money 823,200
Table 4.6 Amount of money required to be paid for the employers during the second term
Additional note for the table
 This cost should be added to the total cost on 2020. .
 The number of employers and machines will not be changed for the consecutive three
years.
For the third term
Additional machines to be bought on the third term
Machine type Cost of machine(Birr) Number of machine Total cost(million)
(Birr)
Track Excavator 5 million 1 5
Sino truck 2.5 million 2 5
Roller 5 million 1 5
Total money 15
Table 4.7 Cost of additional machines to be bought on the third term
Item type Number Cost per year(Birr) Remark
House Rent 180,000
Computer 2 30,000
Printer 1 15,000
Furniture 75,000
Total money 180,000
Table 4.8 Amount of money required for house rent and for furniture expenses on the third term
Employment type Number Cost per month(Birr) Cost per year(Birr)
Project engineer 1 10,000 120,000
Office Engineer 1 10,000 120,000
Site Engineer 1 8,000 96,000
Sino truck drivers 2 7,000 167,000
Security man 2 2,000 48,000
Total money 551,000
Table 4.9 Amount of money required to be paid for the employers.
Additional note for the table
 This cost should be added to the total cost on 2023.
 The number of employers and machines will not be changed for the consecutive three
years.
 The term includes four years

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SALLVAGE VALUE
To calculate the salvage value
S = C*(1-X) ^N
WHERE S= salvage value
X=depreciation
N= number of years
C = initial cost

USING X=10% for Truck mounted Drilling machine, Grouting machine, Anchor and
Shoot Crete
X= 15% for Track excavator, Sino truck and Roller
Machineries Working time (year) Number Salvage
value(Birr)
Truck mounted Drilling 10 1 6973568.8
machine
Track excavator 10 1 787497.6
Track excavator 7 1 1442597
Track excavator 4 1 2610031
Sino truck 10 2 590623.2
Sino truck 7 2 1282308.4
Sino truck 4 2 2610031.25
Roller 10 1 787497.6
Roller 7 1 1442597
Roller 4 1 2610031
Grouting machine 10 1 523017.6
Anchor 10 1 1743392.2
Shoot Crete 10 1 1222037.4
Total money 24,625,230
Table 4.10 Salvage value of machineries

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Year Total Total salary Total cost No of Cost Cost of Percentage Total
Salary for for office for projects for the profit (%) Profit
employers work(million) machineries each Projects (million)
(million) Birrr (Million) project (million) (Birr)
(Birr) (Birr) (million (Birr)
birr)
2017 1.3272 0.3650 41.030 3 4 12 25 3
2018 1.3936 0.12 0 4 4 16 25 4
2019 1.4632 0.12 0 5 6 30 25 7.5
2020 2.3594 0.384 13 5 10 50 30 15
2021 2.4774 0.144 0 5 10 50 30 15
2022 2.6012 0.144 0 6 12 72 30 21.6
2023 3.2823 0.324 15 6 12 72 30 21.6
2024 3.4464 0.180 0 6 15 75 35 26.25
2025 3.6187 0.180 0 6 15 75 35 26.25
2026 3.7997 0.180 0 6 20 120 35 42

Table 4.11 Total cost over the ten years vs Total profit over the ten years.
Additional note from the table

 The salary of the employers will be increased by 5% for every year.

 The number of employers and machineries will be increased as number of projects increased.
 Three number of projects for the first consecutive three years indicates that each project takes an
average of four months.

Sample calculation for the profit in the first year

No. of project = 3
Cost of money for each project = 4 million
Percentage profit = 25%
Total project cost = No. of project * Cost of money for each project
Total project cost = 3* 4million
Total project cost = 12 million birr
Total profit = Total project cost * Percentage profit
Total profit = 12 million * 0.25
Total profit = 3 million birr

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The MARR is decided based on rate of return, risk premium and inflation.so we use
Rate of return = 7%
Risk premium= 5%
Inflation= 0%
MARR= Rate of return + Risk premium + Inflation = 7% + 5% + 0% = 12%
N.B The percentage for inflation is zero because we have decided the money should be paid
based on its value at that time.
Cash Flow Diagram
66.62523= 42+24.62523(salvage)
26.25 26.25
21.6 21.6
15 15
3 4 7.5

1.5136 1.5832 2.6214 2.7452 3.6264 3.7987 3.9797

15.7434 18.6063

42.722

Figure 4.1 cash flow diagram (unit: million Birr)

Calculation of net present value
NPV=-42.722+3(p/F,12%,3,1)-1.5136(P/F,12%,1)+4(P/F,12%,2)-1.5832(P/F,
12%,,2)+……..+66.625(P/F, 12%,,10)
The values are calculated in the table shown below
Cash
End of year flow(Birr) p/F,i%,N NPV(Birr)
0 -42.722 -42.722 -42.722
1 1.4864 1.3271429 -41.3949
2 2.418 1.9276148 -39.4672
3 -8.2434 -5.8674893 -45.3347
4 12.3786 7.8668241 -37.4679
5 12.255 6.9538161 -30.5141
6 2.99 1.5148271 -28.9993
7 17.9794 8.1329675 -20.8663
8 22.4513 9.0677035 -11.7986
9 22.27 8.0307853 -3.76781
10 66.625 21.451467 17.68366 NPV=17.68366 million Birr
Table 4.12 Net present value calculation

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𝑖(𝑖+1)𝑛
A = 𝑃 ∗ (((𝑖+1)𝑛−1))

𝑖(𝑖+1)𝑛
The capital recovery factor = (((𝑖+1)𝑛−1))

(1+0.12)10
= 0.12 ∗ (1+0.12)10 −1

= 0.1757
A = 17.68366* 0.1757
A = 3.1 million birr > 0
The positive value indicates that the project is expected to bring a net annual benefit of 3.1
million birr over 10 years.
Therefore, the project is worth to under taken

Calculation of internal rate of return

A B C D E
0 -42.722 0 0 -42.722 A =End of year t
1 1.4864 -42.722 -7.29213 -48.5277 B= Cash flow at t(million)
2 2.418 -48.5277 -8.2831 -54.3928 C= unrecovered balance at the beginning f the year t
3 -8.2434 -54.3928 -9.2842 -71.9204 D= Interest earned on the unrecovered balance during the year
4 12.3786 -71.9204 -12.276 -71.8178 E= unrecovered balance at the beginning of the year (t+1)
5 12.255 -71.8178 -12.2584 -71.8212
6 2.99 -71.8212 -12.259 -81.0903
7 17.9794 -81.0903 -13.8411 -76.952
8 22.4513 -76.952 -13.1348 -67.6355
9 22.27 -67.6355 -11.5446 -56.91
Through trial and error
10 66.625 -56.91 -9.71386 0.001113 IRR=17.0688%
Table 4.13 IRR calculation
Internal rate of return is the interest rate which makes the difference between present benefit and
present cost zero.
IRR=17.0688%>cost of capital=15%.........................ok! Accept the project.
IRR=17.0688%> MARR=12%...................................ok! Accept the project.

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Calculate the payback period

We have assumed that the bank will give us the initial investment cost with 15 % cost of capital.

The payback is required to recover the initial investment in a project

And also it is the period in which the project benefit equals with project cost.
For i=15%
cumulative amount of
Time cash flow(Birr) P/F,I%,N money( Birr)
0 -42.722 -42.722 -42.722
1 1.4864 1.292522 -41.4295
2 2.418 1.828355 -39.6011
3 -8.2434 -5.42017 -45.0213
4 12.3786 7.077505 -37.9438
5 12.255 6.092901 -31.8509
6 2.99 1.29266 -30.5582
7 17.9794 6.759122 -23.7991
8 22.4513 7.33937 -16.4597
9 22.27 6.330524 -10.1292
10 66.625 16.46868 6.33947

Table 4.14 Determination of Payback period

BY interpolation we can find the payback period at the break point

(9,-10.1292)
(t,0)
(10,6.33947)
Therefore by interpolation t=9.6 years
This means at a payback period of 9.6 years our initial investment will be recovered.

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CONCLUSION
From this we can conclude that it is the best idea to establish a construction company which is
foundation specialist. Most of the time there is a delay in construction due to a lot of reasons, from
these reasons one is due to the less number of construction companies established as foundation
specialist. Therefore in order to overcome these problems it is better to be foundation specialist.
In addition to that economically wise it is profitable and professionally wise it is interesting
because we are going to use all the knowledge that we have gathered during our stay at the campus.

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REFERENCE
CHAN S. PARK, 2004, fundamentals of engineering economics, upper saddle river new jersey
LELAND BLANK & ANTHONY TARQUIN, 2012, Engineering Economy, seventh edition, New
York
Ted G. Eschenbach, 2003, Engineering Economy applying theory of practice, second edition,
University of Alaska Anchorage

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