11. Commercial Management Submission Questions

Question 1

What is a Cost Value Reconciliation?

Answer 1

• Cost value reconciliation is used to measure the projects ongoings costs and income against budgeted
  values at the start of the project.
• This allows the profitability of the project to be determined at a given point in time throughout the
  project lifecycle.

Question 2

How would you prepare a Cost Value Reconciliation?

Answer 2

1. I would determine the cumulative costs and value of the project to a set given point in time.
2. The cut-off date may coincide with an agreed accounting period or month end period which I would establish with the project management team.
3. I would carry out cost checks to ensure that:-
   o No high value fluctuations in costs or value are expected during the reporting period.
   o That all work in progress is accounted for and the reported values are inline with
   subcontractor’s measures and liabilities.
   o Risk and contingency items have been included for items not yet agreed.
   o When all costs and value items are finalised I would then determine the current profitability of
   the project and compare this against the original budgeted values.

Question 3

How do you ensure your Cost Value Reconciliation is accurate and up to date?

Answer 3

• The forecast revenue on variations is only reported when variation items are agreed.
• A reduced percentage profit is assumed if variations are paid on account or partly agreed.
• Contingency items are retained with the CVR for any unknown or pending cost items.
• I regularly arrange meetings to conclude the agreement of variations for each of the sub-contract
  packages so a backlog of items pending does not form.

Question 4

What is a Cash Flow Analysis?

Answer 4

• A cash flow analysis highlights the movement of income and expenditure into and out of a business
  over time.
• If the level expenditure going out of the company is higher than the income, the cash flow is classed as cash negative and may highlight the need to make additional funding arrangements.

Question 5

How would you compile a cash flow?

Answer 5

• To calculate the project incomes I would look to utilise the agreed payment schedule set out under the
  terms of the contract, the programme and the BoQ or Activity schedule.
• I would then accurately profile when the income is anticipated to be received and plot these dates on the cash flow forecast.
• If this information is not available it may be possible to use information cash flow analysis software to plot a typical S-curve.
• For the outgoings I would liaise with the supply chain to gain an insight of when invoices and payments are expected to become due taking extra care to account for any long lead items.

Question 6

Please explain your understanding of the term ‘Accruals’?

Answer 6

• Accruals are made within the financial accounting systems that are operated to take into account anticipated invoices that are not yet paid.
• The accrual can be calculated as the difference in the total liability that is due to a sub-contractor or supplier against the amount already paid to date.
• The accruals are retained as anticipated cash outflows not yet incurred and in theory the older the accruals are, the less likely they are to paid and may be released at a given point in time.

Question 7

Please explain your understanding of the term ‘Contra Charge’?

Answer 7

• Contra charges are issued as a deduction to a sub-contractors works package as a result of a cost item
  that has been incurred due to their activity on site.
• For example a contra charge could be issued due to damage of property or equipment due to a
  subcontractor’s failure to put in place adequate protection of their working area.

Question 8

What processes would you put in place when making a contra charge?

Answer 8

• I would attach supporting photographs, invoices and site records to the contra charge.
• Any replacement materials or attendances provided to assist the subcontractor would also be recorded.
• I would issue an early warning to the subcontractor’s commercial representative to make them aware of
  the contra charges being made and provide then with an opportunity to rectify the damages if possible.
• I would try to ensure the contra charge is agreed with the sub-contractor prior to making adjustments
  to any payment certificates or running final accounts.
• When issuing subsequent payment certificates, pay less notices or final account adjustments, I would
  clearly set out the contra charges as an individual line item for transparency with supporting substantiation attached.

Question 9

What is a Risk and Opportunity Register?

Answer 9

• A risk and opportunity register summaries the potential or hypothesised risks that are specific to the project.
• Whilst the format and content may vary depending on the nature of the project, its size and value, they will typically include an assessment of the likelihood of each risk and the potential impact it may have on the project if it is realised.

Question 10

What does a Risk and Opportunity Register look like?

Answer 10

• The register will typically be compiled in a tabulated form with columns provided for:-
  o The name and description of the risk item.
  o An explanation of how the risk will impact the project.
  o The likelihood of the risk occurring.
  o A risk grade based on the probability multiplied by the impact.
  o A risk classification of either High, Medium or Low.
  o A summary of mitigation actions to be taken.
  o The risk owner.
  o The potential cost of the risk.
  o A deadline date of when the risk is to be closed.

Question 11

What is Company Overhead?

Answer 11

• Company overheads are ongoing expenses incurred as a result of the day-to-day operations of the
  business.
• They are items that need to be incurred in order to provide critical support to the revenue generating
  arms of the company for example factory rental costs, heating and lighting.
• They are classified as fixed overheads which do not change for example monthly rental costs and
  variable overheads which do change depending on business activity for example heating costs.

Question 12

What is the purpose of maintaining cumulative accounts and payment procedures?

Answer 12

• Reporting, invoicing and processing of payments is done on a cumulative basis to ensure the full extent
  of the financial information is accounted for.
• If this is not adopted and invoices are made ‘in the period’ mistakes can be made and double counting
  may take place.
• It is much safer to work on a cumulative basis as the risk of double counting or missing invoices is
  reduced.

Question 13

Please explain your understanding of the term ‘Earned Value Analysis’?

Answer 13

• Earned Value Analysis is a technique used to forecast the final financial position of a project.
• The technique compares the current progress achieved to date with the planned progress at a given
  point in time.
• It also considers the current costs incurred with planned costs over the same time period.
• The EVA determines what value of work would have been achieved and what costs would have been
  incurred if the works had been on programme to forecast future performance and to highlight potential
  cost overspends and time overruns.

Question 14

What Contract Administration Controls do you implement?

Answer 14

• Utilisation of payment and valuation schedules to ensure all parties are aware of key dates in accordance
  with the contract and Housing Grants Construction and Regeneration Act.
• Running final accounts to ensure each party is informed of any adjustments, claims and variations.
• Regular review of revised drawings and contractor’s instruction to ensure all variation and claims items
  are captured.

Question 15

What procedures do you adopt for supply chain and sub-contractor management?

Answer 15

• My company maintains a database of potential suppliers that allows categorisation of specific trades
  with a current status of either pending approval, authorised or not to be used.
• These categories are based on previous performance in combination with undertaking regular checks
  on items such as insurance certificates being provided, credit checks, maintenance of accident records
  and obtaining copies of quality management accreditations.
• Performance checks will include items such as Health & Safety track record, quality reviews, remedial
  work requirements, programme delays, commercial and contract administration performance.

Question 16

What procedures do you undertake to resolve sub-contract final accounts?

Answer 16

• Throughout the project I would maintain a running final account of the sub-contract package and look
  to agree any variation items with the sub-contractor on an ongoing basis.
• Having the running final account in place in my experience has supported with reaching a swift final account agreement.
• Prior to arranging the final account meeting I would collate the following items to support the discussion:-
  o The subcontract order agreement including the BoQ or pricing schedule.
  o The final account submission or final subcontract application for payment.
  o Details of all variations or changes with full substantiation
  o Supporting quantities or take-offs for any re-measurable items.
• During the meeting I would run through the agreed and any pending adjustments with the sub-
  contractor.
• Following discussions and agreement during the meeting I would circulate the final account statement
  for signature by both parties and hold this on file.

Question 17

Please provide some examples of commercial decisions you have taken to improve the cost efficiencies of your projects?

Answer 17

• On an industrial scheme I negotiated with a local land owner who agreed to dispose the inert excavated
  topsoil which was more advantageous than using local earthwork removal subcontractors.
• The local landowner was also able to provide access across their land to a local water source which was
  much more efficient than using imported water and bowsers on site.
• I have also undertaken comparisons between the outright purchase of plant and equipment vs. short
  term hire to realise cost efficiencies for my projects.
• I have also recently undertaken a comparison between the use of temporary power leasing of
  generators and fuel against the use of a permanent local power sources to realise cost efficiencies.

Question 17

Could you please provide some examples of mitigation strategies you could implement if the project was behind programme?

Answer 17

• With input from the project manager, I would review team the current status of the programme and
  consider our options.
• This could include selection of different construction methodologies or programme sequencing.
• It may also be possible to explore the option of reviewing staffing and resource levels to gain further
  efficiencies.
• Out of hours, weekend working or additional resources may also be utilised to bring current progress
  back in line with programme requirements.
• Programme sequencing or acceleration options would need to be balanced against the additional costs
  that are likely to be incurred.
• It may be the case that programme float is sufficient to absorb the delay that has been forecast.
• I would also look to determine the origin of the delay to establish whether an extension of time or
  acceleration claim is applicable.

Question 18

How did you create the resourcing profile as part of your cost forecasting on Mercury House project?

Answer 18

By understanding the programme I was able to understand and liaise with the delivery team to understand how many hours they will spend.

By sitting down with the delivery manager I asked him on an average hour per week certain members of the team will be committing themselves to such as a commercial manager would be needed once a week, or a project manager 5 days a week and then this was tweaked.

I then ran an expenditure report to understand various rates and ensure cost is realistic.

For a sense check also I looked at another project of similar value to check how much resource that project had.

Question 19

What factors did you consider when establishing the timing for contractors’ work and associated costs?

Answer 19

I had to understand if their proposals are realistic and ensure their programmes are reviewed by the delivery team to ensure I am not being over optimistic with the cost forecasts and being more realistic.

I also had to ensure the quotes provided are sufficient in resource so a lot of reviewing of proposals had to go into it.

Things such as asbestos works on Mercury House had the programme pushed back by 3 weeks due to the contractor not taking into account site inductions were required.

Question 20

How did you ensure that the cost forecast was adjusted accurately each month based on progress on site?

Answer 20

By constant monitoring of various packages I was able to determine if adjustments need to be made to the cost forecast as I ran expenditure reports.

To give you an an example I had only allowed for one project manager based on all information I had however a new scheme senior project manager begun also working on the project about 6 weeks into it.

This then increased our spend and I had to ensure based on this new information I adjusted the cost forecast to increase the resource profile.

Question 21

Did you encounter any challenges or difficulties while preparing the cost forecast for the Mercury House project? If so, how did you address them?

Answer 21

On Mercury House, particular elements such as relocation of the ECR room proved difficult to estimate as this was delivered by in house works delivery. They provided me with an initial estimate of 25k based on various roles, however in reality they only billed 17k and this made forecasting difficult.

Question 22

Can you provide an example of a situation where you had to revise the cost forecast based on unexpected changes or developments during the project?

Answer 22

On Mercury House, particular elements such as relocation of the ECR room proved difficult to estimate as this was delivered by in house works delivery. They provided me with an initial estimate of 25k based on various roles, however in reality they only billed 17k and this made forecasting difficult.

Question 23

Can you describe the process you followed to carry out the cost value reconciliation for the Horton in Ribblesdale project?

Answer 23

On the Horton in Ribblesdale project I had an estimate from the works delivery team built on a programme where each activity had resources assigned to it, such as PMs, on site managers, overheads, materials delivery and this allowed me to cumulatively plot a forecasted line. As the project kicked off I was able to monitor timesheets and materials delivered to site etc .

I implemented the prudent concept of not overstating value and was very careful

Question 24

How did you break down the initial budget figure into components such as overheads, plant, and labor?

Answer 24

These were broken down into quantities of labour on a weekly basis and multiplying it by a rate.

Materials were accounted when they would be delivered to site

Prelims and overheads were an average weekly figure built on a resourcing profile.

Expenditure reports were then ran as the project progressed to get a cumulative figure and I was able to determine we are behind 200k but this was due to efficincies

Question 25

What specific efficiencies did you identify in labor and plant costs during the project?

Answer 25

There was an overstatement of project management and a scheme project manager was not working full time on the scheme but only once a week

Question 25

Did you encounter any challenges or limitations in conducting the cost value reconciliation for the Horton in Ribblesdale project? If so, how did you overcome them?

Question 26

Can you provide an example of how your findings from the cost value reconciliation influenced decision-making or project management on the Horton in Ribblesdale project?

Question 27

Can you describe the process you followed to carry out the cashflow forecast for the Gigaclear project?

Answer 27

Sure, so I really wanted to identify where do the new payment terms leave us in terms of cash.

This particular change allowed my company to apply for payment upfront based on a forecast which extended to 45 days.

This effectively would be an accrual based on a forecast and then following on the next AFP the forecasted progress would be updated with actuals so the aim was to deliver more than forecast so it doesn’t drop the cashflow

By plotting this on the proposed payment date by the contractor, I then went onto understanding when my company pays for materials and sub contractors.

I looked at the average unit per meter dug to work out the forecast and sub contractor payments.

Question 28

How did you determine the projected outgoings and incomings for the project?

Question 29

What methods or tools did you use to liaise with contractors and suppliers to understand their payment terms?

Answer 29

I effectively identified their contract orders and when they get paid.

Majority of contractors got paid every Friday so this was considered along the simulation model.

Question 30

What specific changes were made to the payment terms of the NEC 4 contract, and how did these changes impact the project’s cashflow?

Answer 30

This particular change allowed my company to apply for payment upfront based on a forecast which extended to 45 days.

This effectively would be an accrual based on a forecast and then following on the next AFP the forecasted progress would be updated with actuals so the aim was to deliver more than forecast so it doesn’t drop the cashflow

Question 31

Can you explain how you assessed the potential impact of the amended payment terms on the project’s cashflow?

Answer 31

I needed to understand how cash upfront on a 45 day payment term impacted the project. It led me to understanding that if the cost forecast is realistic, the project should be sufficient with cash.

However it was also important to note I advised on various different scenarios. For example if the forecast was overstated and then the project delivered way below the forecast, this showed that this could leave us short, so this highlighted the importance of a good forecast.

Question 32

Were there any challenges or uncertainties you encountered in analysing the impact of the new payment terms, and if so, how did you address them?

Answer 32

Not many challenges at this stage, as this was purely a high level in effect simulation of what the payment terms may potentially look like

Question 33

Did you identify any potential risks or challenges related to the project’s cashflow, and if so, how did you mitigate them?

Answer 33

I identified what would happen if the forecast would be overstated. In short term there would be a sufficient amount of cash available, but then under delivery would reduce that cash in the the next AFP and effectively the project would be playing catch up.

The figure also had to be based on. a sufficient forecast

Question 34

On Mercury House can you tell me about how you reduced cost forecast from 1.3m to 900k.

Answer 34

Whilst the number of 1.3m was a pure commitment of spend, I wanted to create a plan of how much realistically the project will spend in the financial year.

Therefore I began by compiling all activities that the programme showed such as enabling works, design packages, I had to understand my clients overheads by creating a resourcing profile or project managers and commercial managers

By plotting this along an activity line I was then able to predict how much value each month will be delivered and this gave me an overall figure

Question 35

In the absence of a programme or costs, what could you have done to to create a cost forecast?

Answer 35

I could have looked at similar projects and created an S curve however this would not have been as accurate.