Engineering and construction projects are capital intensive, and some of the tallest skyscrapers in the world cost several billion dollars. Even if project budgets are reduced with smart engineering decisions, developers can expect to deal with multi-million-dollar investments on an ongoing basis. For this reason, engineering projects often combine funding from several sources.
Although many companies have enough capital to cover the full cost of their projects, they typically use other funding sources to avoid a sudden dent on their cash flow. There is also an opportunity cost: any funds that are committed to an engineering project are funds that can also be used to expand business operations or to deploy new technologies.
Debt Financing in Engineering Projects
Large-scale developers often have access to excellent financing conditions, and they take maximum advantage of it. For example, a developer may use a loan to build commercial spaces, and then cover the loan with rent payments from tenants. Even if the developer has enough capital to fund the project completely, it can pay for itself with debt financing.
Although debt involves interest payment, large companies have access to low interest rates and long repayment periods. If an engineering project is well planned and design, profits are normally much higher than interest payments.
Debt financing is also an excellent strategy for energy efficiency measures and renewable generation. These engineering projects can often cover loan payments by themselves, while leaving significant savings from the first month of operation.
Incentive Programs: Cash Rebates and Tax Benefits
Depending on their scope, engineering projects may be eligible for incentive from local governments or utility companies. Two common types of incentives are cash rebates and tax benefits.
Cash rebates cover part of the upfront cost of a project, and in some cases they may cover the full cost. Rebates are often used to stimulate projects that have a positive impact, such as energy efficiency measures, water conservation measures and renewable energy systems.
- For example, if the local government offers a solar power rebate of $300 per kilowatt, a 200-kW installation will get a total rebate of $60,000.
- Assuming the quoted price is $400,000, the net cost is reduced to $340,000.
Rebate programs often have stringent requirements, since the organizations providing funds want to ensure they are used in high-performance projects. However, this is not an issue if the project developers get professional engineering services.
Tax benefits are another common type of incentive for engineering projects, and in most cases they take one of two forms: exemptions or credits.
- As its name implies, a tax exemption removes a tax that would normally apply for an engineering project. For example, local authorities may remove the sales tax from certain energy efficiency products to stimulate their purchase.
- A tax credit does not reduce the project cost directly, but owners can claim a deduction from their normal tax burden. For example, renewable energy systems in the US can get a federal tax credit for 30% of their cost if they are deployed before the end of 2019.
An engineering project becomes much easier to pay when debt financing is combined with incentive programs. As previously mentioned, this has been a common approach for energy efficiency measures and renewable generation systems.
Public-private partnerships are a common approach for large infrastructure projects, where the financial burden and risk are split between the government and private companies. This approach is useful for projects that would be very difficult to develop with public funds alone, or when the private sector can improve the outcome by bringing additional expertise to the table.
Development projects under public-private partnerships have become common in New York City, where limited access to land makes the concept attractive. In many cases, real estate developers are given access to public land, zoning benefits, funding and tax benefits. In turn, they agree to improve the surrounding infrastructure, or to include a specified number of affordable housing units in the project.
Michael Tobias PE is a visionary in the construction industry. His passion resonates as the
Founding Principal of New York Engineers, an Inc 5000 fastest growing company. New York
Engineers is the most innovative construction engineering firm focusing on Mechanical,
Electrical and Plumbing (MEP) engineering designs in Chicago and New York. Michael has overseen the design of over 1000 construction projects in all market sectors, including LEED certified and Passive House certified projects. He leads a global team of 50 top performers.