Valuation - April 22nd, 2021

BITS Pilani
Pilani Campus
CE F242 CONSTRUCTION MANAGEMENT

Topic: Contract Management
05/12/21 1
Cash inflow and Cash outflow – From contractor’s view point
For the following data of a project

a)Prepare the month-wise running account bill
b)Prepare the cash inflow diagram for the contractor
c)Prepare the cash outflow diagram for the contractor
The value of the contract: Rs. 76,25,000
Duration: Four months
The owner makes an advance payment of Rs. 5 Lakhs, which is to be recovered in
four equal instalments.
The owner also supplies materials worth Rs. 3.2 Lakhs, which is to be recovered
equally from each running account (RA) bill.
The owner will recover from the payments made to the contractor, 2% of the value of
the work done as income tax deducted at source, and deposit this amount with RBI.
05/12/21 2
BITSPilani, Pilani Campus
Cash inflow and Cash outflow – From contractor’s view point
Item description Unit Total quantity Rate (Rs.) Amount Month 1 Month 2 Month 3 Month 4
Earthwork m3 500 50 25,000 500

Excavation
R.C.C. m3 1000 4,000 4,000,000 250 500 250
Brick Work m3 2000 1,000 2,000,000 500 600 900
Sanitary Works L.S ----- ----- 2,00,000 50% 50%
Electrical Works L.S ------ ----- 2,00,000 50% 50%
Wood Work L.S ------ ----- 2,50,000 50% 50%
Finishing Work m2 4,750 200 9,50,000 4750
 Contractor has prepared the construction schedule, which has been approved by
the owner.
05/12/21 3
Additional Conditions & assumptions
 The cost of a particular item is 90% of the quoted rates.

 The total cost for particular item consists of labour (20%), material (60%), plant and
machinery (10%), and sub-contractor cost (10%).
 Assume that there is no delay in payment to labour, but a delay of one month
occurs in paying to the sub-contractors, material suppliers.
 Retention is 10% of the billed amount in every bill. Fifty per cent retention amount
is payable after one month of practical completion while the remaining 50% is
payable six months later.
05/12/21 4
Computation of RA bill (Value in Rs.)
Item description Unit Total quantity Rate (Rs.) Amount Month 1 Month 2 Month 3 Month 4
Earthwork m3 500 50 25,000 25,000

Excavation
R.C.C. m3 1000 4,000 4,000,000 1,000,000 2,000,000 1,000,000
Brick Work m3 2000 1,000 2,000,000 500,000 600,000 900,000
Sanitary Works L.S ----- ----- 2,00,000 100,000 100,000
Electrical Works L.S ------ ----- 2,00,000 100,000 100,000
Wood Work L.S ------ ----- 2,50,000 125,000 125,000
Finishing Work m2 4,750 200 9,50,000 950,000
1,525,000 2,600,000 2,225,000 1,275,000
05/12/21 5
Computation of cash inflow
Item 0 1 2 3 4 5 10
Total work 1,525,000 2,600,000 2,225,000 1,275,000

Progress
Recoveries
Towards advance 500,000 125,000 125,000 125,000 125,000

payment
Towards material 320,000 80,000 80,000 80,000 80,000
advance
TDS 30,500 52,000 44,500 25,500
Retention @10% 152,500 260,000 222,500 127,500

of gross invoice
Total deduction 388,000 517,000 472,000 358,000
Payment due 1137,000 2083,000 1753,000 917,000
Release of 381,250 381,250

retention
Cash received 8,20,000 1137,000 2083,000 1753,000 1298,250 381,250
05/12/21 6
Running Account Bill:
Item 1st RA Bill 2nd RA Bill 3rd RA Bill 4th RA Bill
Work done by measurement 1,525,000 2,600,000+ 2,225,000+ 1,275,000 +

1525,000 = 4,125,000 = 6325,000 =
4125,000 (Cum) 6350,000 (cum) 76,25,000
Recoveries as per statement 3,88,000 905,000 1377,000 1735,000
(TDA, MA, Material advance, (Cumulative) (Cumulative) (Cumulative)
Retention)
Payment Due 1137,000 3220,000 4973,000 5890,000
Payment already made Nil 1137,000 3220,000 4973,000
Payment due to be made now 1137,000 2083,000 1753,000 917,000
Check:
Total contract value: Rs. 76,25,000
Less TDS 2% = 152,500
Less advance payment = 500,000
Less mobilization advance for materials = Rs. 320,000
Actual payment to be received = Rs. 6652,500
Actual payments made: 1137,000 + 2083,000 + 1753,000 + 917,000 + 762,500 = 6652,500 (Hence reconciled)
05/12/21 7
Cash inflow diagram:
Cash Inflow diagram for the contractor
05/12/21 8
Computation of cash
OUTflow
Item 1 2 3 4 5 10
Total work Progress 1,525,000 2,600,000 2,225,000 1,275,000

Total cost (0.9 x Total 1372,500 2340,000 2002,500 1147,500
work)
Cost towards labour (20%) 274,500 468,000 400,500 229,500
Cost towards material 823,500 1404,000 1201,500 688,500
(60%)
Cost towards sub- 137,250 234,000 200,250 114,750
contractors (10%)
Cost towards plant & 137,250 234,000 200,250 114,750
machinery (10%)
Labour payment (No delay) 274,500 468,000 400,500 229,500
Materials (one-month 823,500 1404,000 1201,500 688,500
delay)
Sub-contractors’ payment 137,250 234,000 200,250 114,750
(one-month delay)
Plant & Machineries (one- 137,250 234,000 200,250 114,750
month delay)
Outgoings (Total) 274,500 1566,000 2272,500 1831,500 918,000
05/12/21 9
Computation of Building Cost Indices
 The Cost Index (CI) may be defined as a number that gives an indication of relative
increase or decrease in cost of a certain item or commodity with respect to its cost at
certain base year.
 There are various categories of cost indices being prepared for different purposes
such as wholesale price index to know the trend in movement of prices of various
commodities, consumer's price index which normally forms the basis for
adjustment of claims for relief in wages, indices for industrial production which
indicate the relative productive activity.
05/12/21 10
Building Cost Index (BCI)
 Building Cost Index (BCI) is an important tool used by engineers and planners to
carry out economic evaluation studies of construction activities.
 The cost index numbers for building materials and labour are also important and
any escalation in them may upset the physical targets fixed in the plan
expenditure.
 These are useful for economic analysis at different stages of construction and to
know the trend in movement of building costs over a number of years, which may
be required for the long term planning.
 These are also useful for updating the construction estimates.
05/12/21 11
Approximate material cost for the new
project
For estimating the expected cost of materials for a new construction project, the
following information is available; The material cost of a similar construction project
that was completed four years ago was Rs.1,12,64,000 and the material cost index
was 512. Calculate the approximate material cost for the new project, if material cost
index now is 625.
The approximate material cost for the new project ‘Cn’ is calculated using the
relationship and is presented below.
Approximate Material Cost (Present cost estimate) Cn = (Cr x In)/Ir
Cn = approximate material cost (present cost estimate)
Cr = material cost of similar project four years ago = Rs.1,12,64,000
In = material cost index now = 625

Ir = material cost index four years ago = 512
Cn =05/12/21
(Cr x In)/Ir = 1,12,64,000 x 625/512 = Rs.1,37,50,000. 12
Escalation clause
An escalation clause is a provision in a contract that calls for adjustments in fees,

wages, or other payments to account for fluctuations in the costs of raw materials or
labor. This clause shifts the burdens for increasing materials and labor costs from
the contractor to the client.
The prices of buildings are primarily driven by the cost of construction. Construction costs
form nearly 50% to 60% of the total selling price in low- income projects while for luxury
projects this figure is 18% to 20%.
05/12/21 13
Quantity take-off - Cost estimation – Pricing
For cost estimating, work breakdown structure (WBS) serves as an important

framework for organized collection project cost data and preparing the cost estimates
at different levels.
It is a technique that involves the hierarchical breakdown of the project into different
work elements at successive levels and defines the interrelationships between them.
For preparation of cost estimates, the estimator performs quantity take-off to quantify
each item of work by reviewing the contract drawings and specifications.
In cost estimation, quantity take-off is an important task that is carried out before
pricing each item of work and quantities should be represented in standard units of
measure.
05/12/21 14
Parametric estimate:
Before bidding for a project, the estimator (along with his or her group) of a
construction firm needs to determine the total cost of the project in accordance with
contract documents consisting of drawings, specifications and all other technical
documents and requirements.
 Parametric cost estimate is prepared during early stages of project development.
 The cost estimate is based on various parameters which define characteristics of

the project and includes physical attributes such as size, capacity, weight etc.
 The parametric cost estimate is based on cost-estimating relationships those use

past cost data to obtain the current cost estimate.
05/12/21 15
Post-tender negotiations
Post-tender negotiations are strictly discouraged. This is specifically stated in government

guidelines (Central Vigilance Commission Guideline dated 3 March 2007). Even post-tender
negotiations with the lowest bidder (L1) are not permitted except for reasons to be recorded in
writing.
05/12/21 16
Ground Retendering – Abnormally low Tenders
 Abnormally low tenders may lead to a conclusion of anticompetitive behaviour and this is
a ground to order retendering.
 Factors have been prescribed to judge the reasonableness of price such as current market
price, price of raw materials, period of delivery and quantity involved (though these are
usually resorted to if the price is found to be too high and not abnormally low).
05/12/21 17
VALUATION
05/12/21 18
Valuation
 Valuation is the process of determining the current worth of an asset or a company;

there are many techniques used to determine value.
 Valuation is also an opinion by expert to estimate the value of property such as
building, a factory, other engineering structures of various types, land etc.,
 Valuation is simple and we make it complex
 Valuation is not accounting
 Accounting Balance sheet:
Assets Liabilities
Fixed Assets Current Liabilities
Current Assets Debt
Financial Investments Other Liabilities (other long term)
Intangible Assets (Patents, Equity (Original capital investment)
Trademarks, Goodwill)
05/12/21 19
Issue in Valuation (only Numbers or Number + Story):
 Valuation is different from pricing.
 More you know about the company (Bias and preconceptions), more complex
will be the valuation.
 Value comes first, valuation to follow – Most of the times, unfortunately.
 Once you know the outcome, all is lost
 Financial balance sheet is different from accounting balance sheet
 Corporate life cycle (Start up, Young growth, Mature growth, Stable, Decline)
05/12/21 20
Purpose of Valuation
Tax purposes:
 Income tax
 Capital gain tax
 Wealth and Gift tax
 Land and building tax
The valuers are generally appointed
 Municipal taxes
to evaluate any property for one of
Loan purposes: the following reasons:
 For sale and purchase
 For rent fixation
 For insurance
 For partition
 For dissolution of firms
 For court fee and stamp duty
 For acquisition
 For mortgage
 For registration
05/12/21 21
Methods of valuation:
Six Methods of Valuation

Rental Method of Valuation
Direct Comparisons of the capital value
Valuation based on the profit
Valuation based on the cost
Development method of Valuation
Depreciation method of Valuation
05/12/21 22
Types of valuers:
 Self-Styled valuers
 Valuers approved by Certain Banks – They are called panel valuers or panel engineers
 Valuers approved by institution of valuers: Approved valuers (Fellow valuers or
Associate valuers)
 Valuers registered with Income Tax Department (Central Board of Direct Taxes) -
Registered valuers or Government approved valuers
05/12/21 23
Govt. Notified Rules for Registered Valuers:
Individuals, partnership entities as well as companies can act as valuers under the
Companies Act after getting registered with an authority specified by the government.
The Corporate Affairs Ministry has proposed to specify the Insolvency and
Bankruptcy Board of India (IBBI) as the authority with respect to registration,
recognition and ancillary matters related to valuers.
The Companies (Registered Valuers and Valuation) Rules, 2017 have been notified
by the ministry. The rules provide for registration of valuers under the Companies
Act, 2013.
05/12/21 24
Real estate:
The Real Estate (Regulation and Development) Act, 2016, mandatorily requires
promoters to register all real estate projects with the Real Estate Regulatory Authority
(RERA) in their respective States. This registration is vital for any real estate project,
because even the marketing of a project without this registration is illegal.
The Real Estate (Regulation and Development) Act or RERA is a law that seeks to
regulate and standardize the real estate sector, where the need for uniform guidelines
and transparency has been felt for long.
No buildings or townships meant for sale, in the near future, can be undertaken
without registering them with the Real Estate Regulatory Authority to be set up in each
State.
05/12/21 25
Property – Immovable Property
 Immovable Property (Land)
 Agricultural Lands/farm Lands
 Non-agricultural Lands/Urban Lands
 Urban Lands: The Urban open lands may be residential/industrial, and the
value of such lands primarily depends on the potentiality of their development by
constructing appropriate structures over them.
Property and Property Rights:

 Ownership associates the property.
 May refer to the real property or personal property
Property Rights: Sell, lease, occupy or use.
Land + air above it and below the ground (12th five year plan)
05/12/21 26
Freehold/Leasehold/Raw land/Reversionary Value
Raw land: Land with no improvement
Reversionary Value:
Worth of a lessor’s right to possess leased property at the termination of lease.
Value of a property at the end of a holding period

Real land/ Real estate /Realty:
Estate – Status
Tangible asset: Land, building, Machines
Intangible asset: Goodwill
Freehold/Leasehold property:
Lessor: One who holds property title and rents the property to another under a lease
agreement – Landlord
Lessee – One who uses and occupies a property under a lease agreement – a tenant
05/12/21 27
Transfer of property Act:
Land ratio – Ratio of Land value to the total property value.
Building ratio – Ratio of building value to the total property value
Immovable property: The most important act which deals with immovable property
is the Transfer of Property Act (T.P. Act).
Immovable property does not include standing timber, growing crops.
Transfer of Property Act (1982): The Transfer of property act is a central act and
provides general principles of real estate such as sale, mortgage, lease and gift of
property.
Rights to property was a fundamental right before 1978. Right now, it is a legal
right.
05/12/21 28
Few Terminologies -
Abnormal sale: A sale that is not typical of what is happening in the market place.
Dwelling units: A structure designed for occupancy as living quarters.
Landlocked: A parcel of land that belongs to one person and is completely
surrounded by land belonging to another.
Legally non-confirming use: A use that was once legal but no longer conforms to
the zoning in which it is located; this usually occurs due to zoning changes.
Listing price: The asking price at which the property is listed for sale, it does not
necessarily equal the market value.
Mortgage: A legal document in which real estate is named as the security or

collateral for the repayment of the loan.
05/12/21 29
Factors affecting
valuation
Valuation of a building depends on the

sort of building Economic Life:
Economic life of building means its life
its structure expectancy with normal repairs and
durability maintenance.
location Economic life of structure depends on the
size type of construction, the quality of
construction materials, climatic conditions,
shape use of structure and the level of
the width of roads maintenance and upkeep.
frontage
types and quality of building materials used and the cost of these materials.
05/12/21 30
Market Value and Fair
Market Value
 "Market value" is the price that a willing purchaser would pay to a willing seller
for a property, having due regard to its existing conditions, with all its existing
advantages and its potential possibilities when laid out in its most advantageous
manner.
 "Fair Market Value" is the estimated price which any asset in the opinion of
valuer would fetch, if sold in the open market on the valuation date.
 The terms "Market Value" and "Fair Market Value" are synonym except the word
"Fair" introduces an element of a hypothetical market.
 The expression "if sold" does not contemplate actual sales or actual state of
market. The expression "Open Market" does not contemplate a purely
hypothetical market exempt from restriction imposed by law.
 The fair market value excludes sentimental value advertisement, brokerage,

stamp-duty, commission etc. for affecting the sale transaction.
05/12/21 31
Guideline Value:
The value adopted for stamp duty is based on the land / building rates fixed by the
local authorities for the purpose of stamp duty charges.
Salvage Value:
This term is mainly in case plant & machinery. It is the value of an asset realized on
sale after it has outlived its useful span of life but has not yet become useless.
In other words, it is the amount realized over and above the cost of its removal.
Scrap Value/Residual Value:

It is the value which is realized when the property become absolutely useless except
for sale as junk. In other words, this is the value of old materials less cost of
demolition and disposal. It is also known as residual value. This value depends upon
type of structure and quantities of useful materials which can be obtained on its
demolition.
05/12/21 32
Guidelines for the valuation of immovable properties - 2009
Valuation should be realistic depending on the nature of property, its use, potential
and all other characteristics.
A valuer of land and buildings needs the knowledge of.
(i)Purpose, time and place of valuation.
(ii)Laws relating to valuation.
(iii)Building industry including method of construction, structural arrangements,

specifications, type of foundations finishing and services provided etc.
(iv)Plant and machineries installed.
05/12/21 33
Numerical Problem – Belting Method of valuation
A plot of land having an area of 12000 sq.m is situated on a National Highway. It has
only one Frontage of 30 m width and it is surrounded by the adjoining properties on
the remaining three sides. As per prevailing bye-law, no construction is allowed by
the authorities concerned in the front 20 m width except gardening, greenery and
agriculture. The study of sale instances of nearby properties in the form of land
indicates that the rate of land varies as per the following.
Rate of land for the First Belt: 18 per sq.m

Rate of land for the Second Belt (Middle belt): 12 per sq.m
Rate of land for the Third Belt ((Rear belt): 9 per sq.m
Rate of marginal front space: 5 per sq.m
Depth of front belt: 80 m
05/12/21 34
Numerical Problem – Belting Method of valuation
05/12/21 35
Numerical Problem - Solution
Depth of plot = (12,000/30) = 400 m

As the depth of the plot is more than as compared to the frontage, the belting method
will be adopted in this case.
Rate of land for the First Belt: 18 per sq.m

Rate of land for the Second Belt: 12 per sq.m
Rate of land for the Third Belt: 9 per sq.m
Rate of marginal front space: 5 per sq.m
Area of land in marginal space where no construction is allowed = (30 x 20) = 600
sq.m
Remaining depth = (400 – 20) = 380 m
Depth of front belt: 80 m (given in the question)

Depth of second belt: 1.5 times depth of front belt = 1.5 x 80 = 120 m
Depth of third belt: 1.5 times depth of second belt = 1.5 x 120 = 180 m
05/12/21 36
Area of first belt: (80 x 30) = 2400 sq.m

Area of second belt: (120 x 30) = 3600 sq.m
Area of third belt: (180 x 30) = 5400 sq.m
Area of marginal space: (20 x 30) = 600 sq.m.
Value of first belt: (2400 x 18) = 4,32,00/-

Value of second belt: (3600 x 12) = 4,32,00/-
Value of third belt: (5400 x 9) = 4,86,00/-
Front Marginal Space: (600 x 5) = 3,000/-
Total value of the property: 138,000/-
05/12/21 37
Numerical Problem -
A construction company has purchased a land of area Rs. 1,00,000 sq.m. for
Rs. 25 per sq.m.
After allotting 25% of the space for roads, parks etc., the rest of the land was
segregated into plots of 1500 sq.m. each. 5% of the money was spent on
developments. The company expects 50% profit margin.
Determine the price of each plot.
Assume that the land is free of encumbrances.
05/12/21 38
Total area of land = 1,00,000 sq.m

Area allotted for roads, parks etc., = 25,000 sq.m
Available area of construction of facility = (1,00,000 – 25,000) = 75,000 sq.m
Each plot size = 1,500 sq.m; Number of plots = (75,000/1500) = 50
Purchased rate = Rs. 25/sq.m
Cost spent in purchasing the land = (1,00,000 x 25) = Rs. 25,00,000
Cost spent towards the development = 5% of the total cost = 1,25,000

Total cost spent (land purchase & development) = 25,00,000 + 1,25,000 = Rs.26,25,000
Cost/plot = (Rs. 26,25,000)/50 = Rs. 52,500/-

Expected profit at 50% = Rs. 26,250/-
Price/plot = (Rs. 52,500/- + Rs. 26,250/-) = Rs. 78,750/-
Price/sq.m = (78,750/1500) = Rs. 52.50/sq.m.
05/12/21 39
THANK YOU VERY MUCH FOR THE KIND
ATTENTION
05/12/21 40
Types of Lease – Building or Land Lease:
Building or Land Lease:

oMany times, an owner of any land, if not in a position to construct a building on his
own plot, gives his open land to another person on lease on payment, which is called
as ground rent;
oLessee can erect building and develop the property.
oBuilding leases are generally granted for a period of 99 years or may be for
different periods.
oHowever, a long period is generally considered feasible to enable the lessee to

recover his capital invested in improvement of the land.
05/12/21 41
Types of Lease – Occupational Lease
 Both land and building are given on lease.
 Either for short duration (3 to 5 years) or for long duration (20 to 30 years)
 If the lease rent is equal to full rent of the land and building together, then the rent
is called “ Rack Rent” and if it is less than full rental value, it is called “Head Rent”.
 Head Rent: Many a times the main Lessee called Head Lessee sub-leases the
property to another person called sub-lessee.
 To distinguish between lease rent paid by sub-lessee to head lessee and rent
paid by head Lessee to freeholder lessor, the term Head Rent is used for lease
rent paid by the Head Lessee to Head Lessor, the freeholder.
05/12/21 42
Types of Lease – Perpetual Lease
o This is a continuous and permanent transaction of property for perpetuity.
o Initially, the agreement is made for a short duration and later on with good
experiences and relations, the same lease is renovated for perpetuity.
05/12/21 43
Years’ Purchase: - Perpetual Vs. Limited Period
o It is a very important term used in valuation of properties.
o Without knowing the YP, it is difficult to assess the value of any asset in general,
and rental method in particular.
o It is basically a multiplying factor when multiplied to net annual income from a

property to get capitalized value of the income.
o For a certain freehold property, if the net rent is Rs. 1800/- per year and if 5% is
regarded a reasonable return on capital invested in it, then the estimated value
of the perpetual property will be (1800) x (100/i)
o (100/i) is called the perpetual property
o This multiplier is known as the present value of Rs. 1.00 per annum invested
with specified rate of interest for specified period.
05/12/21 44
Years’ Purchase:
Years purchase for flats is less –
Flats have a higher rate of interest, moreover, the land is not owned by a single
person. It is a property of all apartment owners.
As such, it is less secured as compared to individual house.
As Y.P. is inversely proportion to that of return expected, it is less.
o Free hold property – More secured

o Lease hold property – Less secured (Higher Rate of Interest)
05/12/21 45
Numerical Problem – Value of the Residential Property
Assess the present value of the residential property situated in the suburb
of a city.
Details:
Free-hold property two-storeyed, newly constructed building plinth area of 200
sq.m. on a plot of having 700 sq.m. of area.
Two plots of vacant land situated nearby have been sold recently for the following
prices.
Plot 1 – 144 sq.m for Rs. 25,000 /-

Plot 2 - 360 sq.m for Rs. 55,000/-
The ground floor of the building is let to a tenant for residential purpose at the
rent of Rs. 750 per month (inclusive of municipal taxes). The accommodation in
the first floor is similar to the ground floor and occupied by the owner for residence.
Municipal Taxes – Rs. 350 /- for three months.
Outgoings – 17%; Rate of Interest= 6%
05/12/21 46
Solution– Value of the Residential Property
Ground Rent = Rs. 750 per month per floor
Ground Rent = Rs. 750 x 12 months x 1 floor = Rs. 9000 per annum
Outgoings = 17% of gross rent = 17% of 9000 = Rs. 1530/-
Municipal Taxes (Annual) = Rs. 350 x 4 = Rs. 1400/-
Total outgoing = (Rs. 1530 + Rs. 1400) = Rs. 2930/-
Net Rent = 9000 – 2930 = Rs. 6070 per annum
Years Purchase = (100/i) = (100/6) = 16.67
Value of building = (Net rent x Y.P.) = Rs. 6070 x 16.67 = Rs. 1,01,186.9 /-
05/12/21 47
Solution– Value of the Residential Property
Rate of first plot = (Rs. 25,000)/144 = Rs. 173 /sq.m
Rate of second plot = (Rs. 55,000)/360 = Rs. 153/sq.m
Note: Plot size increases - rate decreases
Take a rate as Rs. 125 /sq.m
Value of the plot = 700 x 125 = Rs. 87,500
Value of the land = Rs. 87,500 – (200 x 125) = Rs. 62,500
Value of the premises (Residential property):
= Rs. 62,500 (land value) + Rs. 1,01,186 (building)
= Rs. 1,63,686
05/12/21 48
Numerical Problem – Value of the office Block
Determine the value of a premises consisting of an office block let for Rs. 400/- per
month inclusive of all taxes and electric charges up to Rs. 50/- per month. The office
block was constructed only few months back and is in very good condition. The rent
is fair as compared to other buildings in the locality.
Assumptions:
It is a free hold property and rate of interest can be taken as 7%.
05/12/21 49
Solution– Value of the office Block
Gross rent of premises – Rs. 400 /- per month

Deductions:
Taxes at 15% = Rs. 60 /- per month
Insurance charges = Rs. 8/- per month
Collection charges @ 2% = Rs. 8/- month
Vacancies and bed debts @ 2% = Rs. 8/- per month
Repairs and Maintenance @3% = Rs. 12/- per month
Electric Charges given Rs. 50 /- per month (given explicitly)
Total Deduction = Rs. 146/- per month
Net Rent: (400/- per month) – (146/- per month) = Rs. 254/- per month
Net Rent per annum = (Rs. 254 x 12) = Rs. 3048 /- per annum
Years purchase (100/7)
Value of the property = (Rs. 3048) * (100/7) = Rs. 43,543 /-
05/12/21 50
Rent -
Standard Rent:
Rent which can be lawfully charged from a tenant under relevant rent control act
is known as standard rent.
Concessional Rent:
When the property is let out at rent lower than the prevailing market rent, the rent is
known as concessional rent.
Annual Gross Rent: It is the total amount of the rent received from a property during
the year.
Annual Net Rent: It is the net amount of the rent deducting the outgoings from the
annual gross rent.
05/12/21 51
Ground Rent – (Secured vs.
Unsecured)
Ground Rent: When only land is given on lease for construction of buildings or any
other use by the lessee, the periodic payment by the lessee under the covenants of
the lease to the lessor is called "ground rent".
The ground rent is of two kinds :
1)Secured ground rent : If under the lease agreement, the lessee is required to
construct a building on the plot, the ground rent is said to be secured one.
2)Unsecured ground rent : When under the lease agreement, the plot remains
open without any construction of building, the ground rent is said to be an unsecured
one.
05/12/21 52
Outgoings
Out-Goings:
The amount of taxes levied by local authority/state govt. and other recurring
expenses in respect of a house property such as repairs & maintenance, collection
charges, insurance, ground rent, service charges etc. is known as "outgoings".
Service Charges: It is the expenditure incurred by the owner for maintenance of

common services like watch and ward, operation of lifts and illumination of the
common spaces, fire fighting arrangement, for proper enjoyment of the properties by
the users.
05/12/21 53
Numerical Problem – Value of the property
A plot of land measuring 4 acres is let (for 99 years lease) on a ground rent which is
four times secured since the lessee has constructed a permanent residential building
over it and is in very good condition. The fair rent (Rack rent) for this type of
premises is Rs. 12,000 /- per annum.
Compute the value of the property

a)When the owner’s share of taxes is 10%
b)When all the taxes are borne by the lessee.
Assume 5% as rate of interest.
05/12/21 54
Solution– Value of the property
Solution:
The fair rent (Rack rent) = (Rate of land) + (Building on it) = Rs. 12,000 /- per annum
Rack Rent
-------------- = x ; “x” is said to be number by which the Ground rent is secured.
Ground Rent
Ground Rent = (Rack Rent) /4 = (12,000)/4 = Rs. 3000/- per annum
Case (a): Owner’s share of taxes is 10% (all taxes, insurances): 300
Net rent = Rs. 3000 – (300) = Rs. 2700
Value of land = Net Rent x Y.P.

Value of land = (Rs. 2700) x 20 = Rs. 54,000/-
Case (b): If taxes are borne by lessee, then

Value of land = (Rs. 3000) x 20 = Rs. 60,000
05/12/21 55
Dilapidations
 When the building demands heavy repairs, it is said to be in dilapidated state. The
term dilapidation is used to indicate the injuries to a property on account of neglect
by owner.
 The term waste is used to indicate such injuries by tenants.
 The permissive waste indicates the essential repairs to a building and allowing the
building to pass into the state of disrepair.
 The voluntary waste indicates a wrongful action of a tenant such as removal of

partition wall between adjacent rooms, providing rolling shutter in shop etc.
05/12/21 56
Depreciation vs. Obsolescence:
 Depreciation is a physical loss in the value of property due to its use, wear, and
tear.
 Obsolescence is the loss in the value of property or profit from that asset due to
change in design, utility or any other similar reason.
Annual Sinking Fund:

Sinking fund is the notional fixed sum of money allocated annually at the
prevailing rate of interest to create the necessary capital for the replacement of
an asset after the economic life span of the asset is over.
05/12/21 57
Numerical Problem – Sinking Fund:
An old building was purchased by a person for Rs. 80,000 /-. Calculate the co-
efficient of sinking fund, amount of sinking fund and yearly instalment of sinking fund.
The future life of the building is 20 years. Rate of interest is 5%. The scrap value can
be taken as 10% of the cost of the purchase.
Solution:
Purchase value: Rs. 80,000/-
Scrap value: 10% = 8,000/-
Net value (value of sinking fund) = (Rs. 80,000) – (8,000) = Rs. 72,000/-
Future life of building (n) = 20 years
Rate of interest (i) = 5% (0.05)
Coefficient of sinking fund (I) =
i
----------- = (0.05) /(1+0.05) ^20 – 1 = 0.03
(1+i) ^n – 1
Yearly instalment = Coefficient of sinking fund x Value of sinking fund

Yearly instalment = (0.03 x 72,000) = Rs. 2160 /-
05/12/21 58
Numerical Problem – Sinking Fund
and Rent per month:
A newly constructed building stands on a plot costing Rs. 60,000 /-. The construction
cost of the building is Rs. 2 Lakhs and the estimated life of the building is 66 years.
The investor desired to have 8% return on the construction cost and 5% return on the
land cost. Assuming annual repairs to be at 0.5% of the cost of construction and the
other outgoings at 30% of the gross rent, calculate the annual rent that will have to
be charged for the building. The annual instalment of the sinking fund for a life of 66
years of the building at 3% may be taken as 0.5 paisa per rupee.
Solution:
Purchase value: Rs. 60,000/-
Life of building (n) = 66 years
Amount of return required on the land cost per annum = Rs. 3000/ - (5% of land
cost)
Amount of return required on the construction cost per annum = Rs. 16000/ -
(8% of construction cost)
Net income = (3000 + 16000) = Rs. 19000 /- per annum
05/12/21 59
and Rent per month:
Outgoings:
Amount for annual repairs = Rs. 1000/-
Amount for other outgoings = Rs. 30% of gross rent = (0.30) x (X)
X = Gross rent per annum
Amount of sinking fund per annum:

i
----------- = 994/- which is approximately equal to Rs. 1000/-
(1+i) ^n – 1
Net income = (X) – (1000) – (0.30 X) – (1000)
0.70 X -2000 = 19000
X = Rs. 30,000/-
Rent per month = (Rs. 30,000)/12 = Rs. 2500/-
05/12/21 60
Numerical Problem – Constant Depreciation Method
The plinth area of building constructed 15 years back is 150 sq.m. The replacement
rate is Rs. 5000/sq.m. Total life is estimated as 50 years. Calculate the depreciated
value as on date using
a)Straight line adopting 10% as the salvage value
b)Constant % of depreciation method by adopting 2%
Solution:
Replacement value = (150 sq.m x 5000/sq.m) = Rs. 7,50,000/-
Age of the building = 15 years
Total life of the building = 50 years
Rate of depreciation = 2%
(a)Using Straight Line Method:

Depreciation per year = (7,50,000 – 75,000)/50 = Rs. 13,500/-
Depreciation for 15 years = 2,02,500/-
Depreciated value (at the end of 15 years) = Rs. 7,50,000 – Rs. 2,02,500
Depreciated value = Rs. 5,47,500
05/12/21 61
Numerical Problem – Constant Depreciation Method
Depreciated value by Constant % method:

n
  r 
D  P 1   
  100 
r = Rate of Depreciation
n = Age of building
P = Replacement value
15
  2 
D  7,50,000 1   
  100 
Depreciated Value of the Property = Rs. 5,53,926/-
05/12/21 62
Numerical Problem – Determination of Fair Rent
The size of the plot is 20 m x 12 m. The cost of the land is Rs. 400/sq.m. Area of the
building is 140 sq.m. Replacement rate is Rs. 5,000/sq.m. The present value of the
supply, sanitary and electrical arrangements is Rs. 50,000/- Allowing a depreciation
of 1.5% per year, calculate the fair rent.
Solution:
Size of the plot = (20 x 12) = 240 sq.m.
Rate/sq.m. = Rs. 400/-
Value of the plot = (Rs. 240 x 400/sq.m.) = Rs. 96,000/-
Depreciated value of the building:

n
  r 
D  P 1   
  100 
Plinth area = Rs. 140 sq.m; Replacement value = Rs. (140 x 5000) = Rs. 7,00,000/-
05/12/21 63
Numerical Problem – Determination of Fair Rent
15
  1.5 
D  7,00,000 1   
  100 
D = Rs. 5,58,009/-
The present value of the services = Rs. 50,000/-
Total value = Rs. 50,000 + Rs. 5,58,009 +Rs. 96,000 = Rs. 7,04,009/-
Rate of rent = 9%
Fair rent/year = (9%) of Rs. 7,04,009 = Rs. 63,361/-
Fair rent/month = (Rs. 63, 361/-) /12 = Rs. 5280/-
Why is it called Fair rent?
05/12/21 64
Numerical Problem – Lease
Premise was given on lease for 33 years in 1970 at a rent of Rs. 600/- per month
with a premium of Rs. 25,000/-/ Find the interest of lessor and lessee as on 1980. A
net return for a similar property in 1980 was Rs. 1100/- per month. Assuming a rate
of interest on this with a rate of 7.5% and assuming a rate of interest of 5% for
redemption of capital (sinking fund). Ignore the premium.
Solution:
From Lessee's viewpoint:
Profit enjoyed by the lessee – (Rs. 1100) – (Rs.. 600) = Rs. 500/-
He will receive this for a period of (33 – 10) = 23 years
Assuming a rate of interest on this with a rate of 7.5% and assuming a rate of interest
of 5% for redemption of capital (sinking fund).
100 100
  10Purchase
Years .10 (Y.P) =
(i  S ) 7.5  2.4
Capitalized Value of the income = Rs. (500 x12) x 10.10 = Rs. 60,600/-
The premium of Rs. 25,000/- has not been taken into account..
05/12/21 65
From Lessor's viewpoint – During the lease period:
During the lease period, the lessor’s interest is limited to receive the rent
@Rs. 600/- per month or Rs. 7,200 per month per annum for the unexpired period
of lease is (33 -10) = 23 years.
Rate of capitalization will be less than what is adopted for lessee’s interest.
Rate of interest = 6.5% (instead of 7.5%)
Years Purchase (Y.P.) for 23 years @6.5% on capital and redemption

100 100
Years Purchase =   11 .77
(i  S ) 6.5  1.996
Capitalized Value = Rs. 7200 x 11.77 = Rs. 84,744/-
05/12/21 66
From Lessor's viewpoint – After the lease period:
After the expiry of the lease, the lessor (owner) will get Rs. 1100/- per month or
Rs. 13200/- per annum for remaining period of life.
Y.P. = (100/7) = 14.3
Capitalized value = Rs. 13,200/- x 14.3 = Rs. 1,88,760/-
Deferring the value for 23 years its value = 0.21 x 188760 = Rs. 39, 639/-
The value of free-hold property = Rs. 84,745 + Rs. 39,639 = Rs. 1,24,384/-
05/12/21 67
and Capitalized Value:
A building of replacement value of about Rs. 70,000 /- stands on a main road on a

leasehold plot. The ground rent per annum Rs. Rs. 295/-. The building is of RCC
framed structure type. It is estimated that the building will have a future life of 70
years. The rent of the building is Rs. 400/- per month. The taxes payable are 18% of
the gross rent and insurance premium is 0.5% of the gross rent. Repairs = 10%;
Management charges = 5%; Light charges = 2%, determine the capitalized value of
the property on the basis of a 5% net yield.
Sinking Fund coefficient for the replacement of the capital in 70 years at 3% of the
replacement value.
Note: The term replacement cost or replacement value refers to the amount that an
entity would have to pay to replace an asset at the present time, according to its
current worth. In the insurance industry, "replacement cost" or "replacement cost
value" is one of several method of determining the value of an insured item.
05/12/21 68
and Capitalized Value:
Solution:
Gross income per annum = (Rs. 400/- ) x (12) = Rs. 4800/-
Deduct Outgoings:
Ground rent for the use of land = Rs. 295/-
Taxes = (0.18 x 4800) = Rs. 864/-
Insurances = (0.005 x 4800) = Rs. 24/-
Repairs = (0.10 x 4800) = Rs. 480/-
Management charges = (0.05 x 4800) = Rs. 240/-
Light charges = (0.02 x 4800) = Rs. 96/-
Sinking Fund = 0.0043 x 70,000 = Rs. 301/-
Total amount of outgoings = Rs. 2300/-
Net income = (Rs. 4800) – (Rs. 2300) = Rs. 2500/-
Capitalized value of the property = (Y.P.) x (Net income) = (100)/(i+S)
Capitalized value of the property = (100/5) x 2500 = Rs. 50,000 ???
05/12/21 69
Ownership – Indian Evidence Act (1872)
Registration Act, 1908:

The purpose of this Act is the conservation of evidence, assurances, title, publication
of documents and prevention of fraud. It details the formalities for registering an
instrument.
The Indian Evidence Act, 1872:
Under the Act, whenever the status of any person as the owner of a piece of
immovable property of which he is shown to be in possession is questioned, the
burden of proving that he is not the owner lies on the person who asserts that he is not
the owner.
Easement Right:
It is right to a person to get light and ventilation both ‘horizontally’.
The word horizontally is more important.
05/12/21 70
Registrar of Companies (ROC)
 Registrar of Companies appointed under section 609 of the Companies Act

covering the various States and Union Territories are vested with the primary
duty of registering companies and LLPs floated in the respective states.
 The Companies Act 2013 is an Act of the Parliament of India which regulates
incorporation of a company, responsibilities of a company, directors, dissolution
of a company.
 The provisions of the Companies Act, 1956 is still in force.
 One-Person Company (OPC) – An OPC means a company with only one

person as its member. OPC provides opportunities for those who look forward
to start their own ventures.
 A person cannot form more than 5 OPCs.
 For formation of an LLP, a minimum of 2 partners (no maximum limit) are

required.
05/12/21 71
Need for LLP:
For a long time, a need has been felt to provide for a business format that would
combine the flexibility of a partnership and the advantages of limited liability of a
company at a low compliance cost.
The Limited Liability Partnership format is an alternative corporate business

vehicle that provides the benefits of limited liability of a company but allows its
members the flexibility of organizing their internal management on the basis of a
agreement.
05/12/21 72
The Factories Act - 1948
o The Indian Factories act was passed first time in the year 1881.
o The present act was passed in 1948 after various amendments.
o Act is applicable to all the factories employing 10 or more workers and using any
type of power.
o Factory means a premise wherein 10 or more workers are working or were

working on any day of the preceding 12 months, and in any part of which, a
manufacturing process is being carried on with the aid of power.
o Act prescribes various provisions for maintaining health of workers. Cleanliness,

ventilator, lighting, drinking water facilities, toilets must be provided as per the
norms.
o The temperature inside the factory where workers are working must be maintained
within tolerance limit.
05/12/21 73
The Factories Act - 1948
 Overcrowding should be avoided.
 Welfare provisions like working facility, sitting facility, first-aid appliances, canteen,
shelter, lunch rooms must be made available (depending on the number of
workers).
 Workers should work sincerely.
 As per the Factories Act 1948, every adult (a person who has completed 18 years
of age) cannot work for more than 48 hours in a week and not more than 9 hours in
a day.
05/12/21 74
The minimum wages Act - 1948
 This act was passed in 1948.
 This act dictates terms that no worker or employee should be paid an amount less
than that required for survival of that worker.
 The worker must be in a position to fulfil his minimum needs.
 This act is applicable to almost all the employees whether in industry or elsewhere.
 This act empowers the central government and state government to fix minimum
rates.
 These rates are modified by time to time as per market index rate.
05/12/21 75
The Industrial Dispute Act - 1947
 This act was made for any sort of industrial dispute between employers and
workmen.
 The basic reason for industrial dispute between the labour and the management is
o Low wages
o Non-payment of bonus
o Non-payment of overtime, medical etc.,
o Favouritism
o Exploitation
o Improper working conditions
 Various types of strikes:

o General strike
o Sit-down strike
o Tool down strike
o Go-slow strike
o Sympathetic strike
05/12/21 76
Capital Gains vs. Income Taxes
Capital Gains:
When any immovable property is sold/transferred by any individual, any profit or gains
arising from the transfer of capital asset is immovable property is called capital gains.
It is chargeable to Income Tax under the head “Capital gains” and is deemed to be
the income of the year in which transfer took place (as per section 45 of Income Tax
act).
Income Tax including Capital Gains, Wealth Tax and Gift Tax are the direct taxes
levied by Govt. of India.
Any person having a property has to prove its valuation under the provisions of those
taxes whenever the property is built, purchased, sold, inherited or gifted.
To prevent undervaluation of land and building for tax evasion, valuation cell was
created in 1968. The objective was to assist the assessing officers to ensure proper
valuation of the properties for tax realizations.
05/12/21 77
Floor Area Ratio/Floor Space Index:
Floor area ratio/Floor space Index:

It is the ratio of the total area of all floors of building including area of walls as well as
area of mezzanine floors but excluding staircase, passages elevators and other
services areas as permitted by local building bye-laws, to the area of plot.
05/12/21 78
The Right to Fair Compensation and Transparency in Land
Acquisition, Rehabilitation and Resettlement Act, 2013
o To Secure a legal guarantee for the rights of all those individuals and
families affected by the process of land acquisition
o To Strengthen the rights based approach
o To ensure greater transparency in the land acquisition process.
When ever the appropriate government intends to acquire a land for public purpose it
shall consult concern Panchayat or Municipality or Municipal corporation and carry
out a social impact Assessment.
Social impact Assessment is not necessary- In case the land proposed to be

acquired under urgency provision
05/12/21 79
o Government constitute a multi disciplinary Expert Group.
o Report /recommendation is to be made two months from the date constitution.
Expert Group
Two non official scientist
Two representatives from local bodies
Two expert on rehabilitation
A Technical expert
05/12/21 80
 Irrigated multi-cropped land shall not be acquired.
 It can be done in exceptional circumstances.
 Where multi cropped land is acquired equivalent area of waste land to be

developed for agricultural purposes.
 Acquisition agricultural land shall not exceed prescribed limit in a district.
 In case of Railways ,major district irrigation canals power lines, etc this
provision is not applicable.
05/12/21 81
Rehabilitation and Resettlement

Sec 31- Sec 42
05/12/21 82
Building and Other Construction Workers (BOCW) Act - 1996
 28 Million skilled and unskilled workers engaged in the constructor sector (in India).
 BOCW (Regulation of Employment and Conditions of Service) Act, 1996 addresses

the concern over poor health and safety standards in the real estate industry.
 Building or other construction work includes the construction, alteration, repairs,

maintenance or demolition of the following.
o Buildings, Roads, Railways, Tramways, Airfields, Irrigation, Drainage
o Embankment, Navigation works, Flood Control works
o Generation, Transmission and distribution of power
o Water Works (including channels for distribution of water)
o Oil and gas installations, Electric lines, wireless, Radio, Television
o Television, Telephone, Telegraph and overseas communication
o Dams, canals, reservoirs, water courses, tunnels, bridges, viaducts, aqueducts
o Pipelines, Towers, Cooling Towers, Transmission towers.
05/12/21 83
THANK YOU VERY MUCH FOR THE KIND
ATTENTION
05/12/21 84

Valuation - April 22nd, 2021

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BITS Pilani

CE F242 CONSTRUCTION MANAGEMENT

For the following data of a project

Earthwork m3 500 50 25,000 500

Brick Work m3 2000 1,000 2,000,000 500 600 900

Sanitary Works L.S ----- ----- 2,00,000 50% 50%

Electrical Works L.S ------ ----- 2,00,000 50% 50%

Wood Work L.S ------ ----- 2,50,000 50% 50%

Finishing Work m2 4,750 200 9,50,000 4750

 The cost of a particular item is 90% of the quoted rates.

Earthwork m3 500 50 25,000 25,000

Brick Work m3 2000 1,000 2,000,000 500,000 600,000 900,000

Sanitary Works L.S ----- ----- 2,00,000 100,000 100,000

Electrical Works L.S ------ ----- 2,00,000 100,000 100,000

Wood Work L.S ------ ----- 2,50,000 125,000 125,000

Finishing Work m2 4,750 200 9,50,000 950,000

1,525,000 2,600,000 2,225,000 1,275,000

Total work 1,525,000 2,600,000 2,225,000 1,275,000

Towards advance 500,000 125,000 125,000 125,000 125,000

Retention @10% 152,500 260,000 222,500 127,500

Payment due 1137,000 2083,000 1753,000 917,000

Release of 381,250 381,250

Item 1st RA Bill 2nd RA Bill 3rd RA Bill 4th RA Bill

Work done by measurement 1,525,000 2,600,000+ 2,225,000+ 1,275,000 +

Payment already made Nil 1137,000 3220,000 4973,000

Payment due to be made now 1137,000 2083,000 1753,000 917,000

Cash Inflow diagram for the contractor

Total work Progress 1,525,000 2,600,000 2,225,000 1,275,000

 These are also useful for updating the construction estimates.

Cn = approximate material cost (present cost estimate)

Cr = material cost of similar project four years ago = Rs.1,12,64,000

In = material cost index now = 625

An escalation clause is a provision in a contract that calls for adjustments in fees,

For cost estimating, work breakdown structure (WBS) serves as an important

 Parametric cost estimate is prepared during early stages of project development.

 The cost estimate is based on various parameters which define characteristics of

 The parametric cost estimate is based on cost-estimating relationships those use

Post-tender negotiations are strictly discouraged. This is specifically stated in government

 Valuation is the process of determining the current worth of an asset or a company;

 Valuation is different from pricing.

 Value comes first, valuation to follow – Most of the times, unfortunately.

 Once you know the outcome, all is lost

 Financial balance sheet is different from accounting balance sheet

Six Methods of Valuation

 Immovable Property (Land)

 Agricultural Lands/farm Lands

 Non-agricultural Lands/Urban Lands

Property and Property Rights:

 May refer to the real property or personal property

Property Rights: Sell, lease, occupy or use.

Raw land: Land with no improvement

Worth of a lessor’s right to possess leased property at the termination of lease.

Value of a property at the end of a holding period

Land ratio – Ratio of Land value to the total property value.

Building ratio – Ratio of building value to the total property value

Immovable property does not include standing timber, growing crops.

Mortgage: A legal document in which real estate is named as the security or

Valuation of a building depends on the

 The fair market value excludes sentimental value advertisement, brokerage,

Scrap Value/Residual Value:

A valuer of land and buildings needs the knowledge of.

(i)Purpose, time and place of valuation.

(ii)Laws relating to valuation.