BUHAAT TEZZ HOGAY HO

CASE STUDY
BeeZed Construction Services

INTRODUCTION:
BeeZed is a construction and property management company listed on a European stock
exchange. BZCS has many construction projects around the world, ranging from road building,
construction of public sector buildings, including hospitals, schools and university buildings to
commercial contracts for office buildings. Some of the construction projects that BeeZed is
involved with are financed by PFI. However, only the revenue related to the construction
project is allocated to BZCS. BZCS has a good reputation in this industry for quality and safety as
well as its ability to deliver projects on time. These are all critical success factors for keeping its
existing customers content and for providing a basis for winning future business. BZCS has 6
divisions, which are: Office Buildings Division, Sports Facilities Division, environmental Projects
Division, Infrastructure Projects Division, Community Projects Division, Energy Projects Division.
Each of these 6 divisions is headed by a Commercial Director who is responsible for all of the
projects undertaken by that division.

PROBLEMS FACED BY BZCS:

Low Operating Margin:
The operating profit margins achieved by BZCS are low, as is the norm for this industry.

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Software Concern:
The problem with BZPM is that there seem to be concerns over changes in some data and the
integrity of the information contained in BZPM following the software upgrade 3 days ago.
Unfinished Sports Club:
Poor management of ES sports club contract.
Waste Control:
Waste materials wrongly going to landfill sites.

FACTS:
BZCS has some facts which are mentioned as follows:

 Office Building Project: BZCS has the opportunity to construct a large office building
which could generate significant revenues and profits, but at a high commercial risk.
 Project Management: BZCS uses a project management system to plan each project,
called BZPM. The contract details and agreed key stages are set up in BZPM when the
contract is signed for each new construction project.
 CSR: BZCS takes its Corporate Social Responsibility (CSR) very seriously. The BZCS Board
is committed to safety on all projects and also to the reduction of waste from sites and
the reduction of carbon emissions. It is also very aware of environmental concerns and
works closely with the communities in which it operates.
 Concerns : It also has 2 immediate concerns which are site safety, due to a delay in
safety checks, and also the urgent problem following a software upgrade resulting in
concerns over the integrity of data in BZPM.
 Healthy Business: BZCS is a profitable construction company involved with a large range
of projects. The company has recently had one of its customers go into liquidation and
all work on site has stopped.
 Contracts: BZCS is continuously working on bids for possible new contracts. It has
specialised teams headed up by Bid Managers in each of BZCS’s 6 divisions.

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ALTERNATIVES:
It appears like this scheme has been poorly handled and it could have been expected or
foreseen like ES will be liquidated on Friday 13 May 2011. BZCS is working as a matter of policy
to earn a profit and no progress on this platform or other initiative would have been completed
until the client makes the negotiated stage fees on schedule. Good coordination between the
Director of Finance and the Project Managers is obviously important.

 Sales Revenue: BZCS has already invested € 14 million, despite revenues of just € 10
million, contributing to the book loss of € 4 million to date. The expense of €14 million
so far is small and will not impact the potential decision.
 Option Available: The unfinished sports club will have to pay an extra 8 million euros to
finish it for € 3 million. If the projected revenue of 20 million euros could be reached,
that will produce a profit of nine million euros.
 Risk Attached: There is a possibility that the sports club will be demolished and no
bidder can be identified. In the completion of the sports club there is always a chance of
expense overflows. BZCS thus has the right to recognize or invest 11 million euros more
on damages now (3 million euro for development and 8 million euro to finish).

FINANCIAL IMPLEMENTATION:
Cash availibility = Non current assets = 241 = 20.4%
Trade payables 118

Net profit margin= Net Income = 21.9 = 1.72%

Revenue 1,269

Current ratio= Current assets = 193.5 =1.56%

Current liabilities 127.5

In 2009 the company was having 1.67% net profit margin .By year 2010 they showed slightly
increse in net profit.

Operating profit margin= Operating profit = 34.7 = 2.7%

Revenue 1267

Fixed assets turn over= Sales revenue = 1267 = 5.2 Times

Non current 241
Last year was 5.47 times

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Equity analysis = Operating profit = 34.7 = 18.65

Equities 186

OVERALL BUSINESS ANALYSIS:

Revenue Operating Ratio

(M) profit (M) analysis
Office building 220.0 3.5 3.8
Sports 145.2 3.4 2.3
Enviornmental projects 193.1 4.2 2.17
Infra structure projects 365.2 16.8 4.60
Community projects 213.6 1.3 0.6
Energy projects 129.9 0.5 0.38
Total 1267 34.7 13.85

Office Building Proposal: This is a big undertaking of estimated revenues of €650 m to €700 m over
four years. The estimated annual profits was about €160 million (for 4 years), reflecting about 13% of
business revenue. This is thus a very large, potentially profitable project.

 Suitability: It is important to question if the BZCS will be pursuing this growth, as the
economic climate is in danger of not selling office space. This project is suited for the
development of such an office building by BZCS since it has the abilities and expertise.
 Acceptability: The financial return for the shareholders of the company should be
assessed in order to determine whether the return on risk is justified. The investment
NPV is €117.1 m at a strong discount rate of 15 per cent including the disposal of 25
floors to DJ. Yet the meaning and pacing of potential cash flows depends a lot.
 Feasibility: BZCS’s parent company, BeeZed, has stated that it could secure sufficient
external financing for this proposed development.
 Selling 50% Space: With regard to the planned selling of 25 floors to the DJ, which is
50% of the house, it is not unfair to allow these early sales for DJ to obtain a discount of
€65 m. Whereas the overall sales value falls from 700 million euro to 650 million euro,
an NPV that, after considering taxes, time value and the risk adjusted discount rate, will
be reduced to 126,1 million euro over four years is reflected in the overal sales profile.

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PROJECTED CASH FLOW:

Office building proposal

Y0 Y1 Y2 Y3 Y4 TOTALS
Cash outflows 65m 90m 120m 10m 50m 335m
Sales forecast 0 80m 150m 160m 165m 555m
Net cash flows (65) (10m) 30m 150m 115m 220m
Discount rate 0.9 0.87 0.76 0.65 0.56
Cash flows after discounting (58.5) (8.7) 22.4 97.5 64.4
NPV 117.1

RECOMMENDATIONS:
A high-level internal investigation is recommended, and written warning should be issued to
any BZCS manager that has permitted incorrect disposal of this waste. Any disciplinary action
should be taken by the HR Director. To check its version of the events, and to confirm where
the waste has been disposed, the site waste contractor should be contacted. A whistle blowing
procedure should be established by BZCS that all employees or contractors have a safe way of
providing information on procedures or site incidents they are concerned, without having any
fear of their job effects.

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