19 - Project Finance / Quantification and Costing (of Construction Works) / Design Economics and Cost Planning

Question 1

789 - What are the typical responsibilities of the cost manager on a construction project? (14)

Answer 1

Subject to the scope of service, typical responsibilities may include;

1) Manage risk allowance expenditure
2) Initiate action to avoid overspend
3) Prepare pricing documents for tendering
4) Evaluate and analyse tender bids
5) Prepare interim valuations
6) Value variations and compensation events
7) Assess the contractor’s financial claims
8) Negotiate and agree final accounts
9) Issue financial reports or statements
10) Provide initial cost advise on capital investment costs
11) Produce cost estimates and cost plans
12) Provide advice on whole life costs
13) Produce cost reports, estimates and forecasts
14) Prepare and maintain the cash flow forecast

Question 2

790 - If you are producing estimates and cost plans, which measurement rules represent industry best practice for capital building and building maintenance works in the UK?

Answer 2

New Rules of Measurement (NRM)

Question 3

791 - Can you name the 3 documents in the NRM suite? (3)

Answer 3

1) NRM 1 - Order of cost estimating and cost planning for capital building works
2) NRM 2 - Detailed measurement for building works
3) NRM 3 - Order of cost estimating and cost planning for building maintenance works

Question 4

792 - Can you provide a brief overview of each of the NRM documents please? (3)

Answer 4

1) NRM 1 - Provides guidance on the quantification of building works for the purpose of preparing cost estimates and cost plans. It is the cornerstone of good cost management of construction projects. enabling more effective and accurate cost advice to be given to clients and other project team members, as well as facilitating better cost control.
2) NRM 2 - Is written mainly for the preparation of bills of quantities and quantified schedules of works, although the rules will be invaluable for designing and developing standard or bespoke schedules of rates.
3) NRM 3 - Gives guidance on the quantification and description of maintenance works for the purpose of preparing initial order of cost estimates. The rules also aid the procurement and cost control of maintenance works.

(See book for QR code links to documents)

Question 5

793 - What is the structure of NRM 1? (5)

Answer 5

1) 1 - General introduction
2) 2 - Measurement rules for order of cost estimating
3) 3 - Measurement rules for cost planning
4) 4 - Tabulated rules of measurement for elemental cost planning
5) Appendices

Question 6

794 - What is the structure of NRM 2? (4)

Answer 6

1) 1 - General introduction
2) 2 - Detailed measurement of building works
3) 3 - Rules of measurement for building works
4) Appendices

Question 7

795 - What is the structure of NRM3? (7)

Answer 7

1) 1 - General introduction
2) 2 - Measurement rules for building maintenance works
3) 3 - Measurement rules for order of cost estimating
4) 4 - Cost planning of R and M works
5) 5 - Calculation of annualised costs for R and M works
6) 6 - Elemental cost planning
7) Appendices

Question 8

796 - Why is it important to measure the works according to industry standards and best practice? (2)

Answer 8

1) To provide consistency and greater accuracy of pricing
2) To ensure that all parties price on the sae basis and therefore reduce the risk of disputes

Question 9

797 - Is it mandatory for Chartered Surveyors to follow the procedures set out in NRM?

Answer 9

Following NRM is not a mandatory requirement. However, when an allegation of professional negligence is made against a surveyor, the adjudicator or court is likely to take account of the contents of any relevant guidance notes published by RICS in deciding whether the surveyor had acted with reasonable competence.

Question 10

798 - What are the key headings for contractor preliminaries identified in NRM2? (19)

Answer 10

1) 1 - PRELIMINARIES
2) 1.1 - Employers requirements
3) 1.1.1 - Site accommodation
4) 1.1.2 - Site records
5) 1.1.3 - Completion and post completion requirements
6) 1.2 - Main contractors cost items
7) 1.2.1 - Management and staff
8) 1.2.2 - Site establishment
9) 1.2.3 - Temporary services
10) 1.2.5 - Safety and environmental protection
11) 1.2.6 - Control and protection
12) 1.2.7 - Mechanical plant
13) 1.2.8 - Temporary works
14) 1.2.9 - Site records
15) 1.2.10 - Completion and post completion requirements
16) 1.2.11 - Cleaning
17) 1.2.12 - Fees and charges
18) 1.2.13 - Site services
19) 1.2.14 - Insurance, bonds, guarantees and warranties

Question 11

799 - How is risk dealt with under NRM?

Answer 11

NRM recommends that risk allowances are not a standard percentage, but a properly considered assessment of the risk, considering completeness of the design and other uncertainties such as the extent of site investigations undertaken.

Question 12

800 - Can you tell me the 4 risk categories identified in NRM? (4)

Answer 12

1) Employer change risk
2) Employer other risk
3) Design development risk
4) Construction risk

Question 13

801 - How does NRM define the ‘cost limit’ for the project?

Answer 13

NRM 1 definition - The maximum expenditure the client is prepared to make in relation to the completed building. Includes construction costs, the cost of professional services, certain other project costs, items required post completion and during its operation, and risk allowances

Question 14

802 - How does NRM define the ‘base cost estimate’ for the project?

Answer 14

NRM 1 definition - An evolving estimate of known factors without any allowances for risk and uncertainty, or elements of inflation. The base cost estimate is the sum of the works cost estimate, the project and design team fees estimate, and the other development and project costs estimate

Question 15

803 - What is an order of cost estimate?

Answer 15

NRM 1 definition - An estimate based on benchmark data for a similar type of project based on the clients strategic definition or initial brief. It’s purpose is to establish affordability of a proposed development for a client. It takes place prior to the preparation of a full set of working drawings or bills of quantities and forms the initial build-up to the cost planning process. Order of cost estimates are a method of cost prediction.

Question 16

804 - Which RIBA stage is the order of cost estimate typically produced?

Answer 16

RIBA stage 1 - Preparation and Briefing

Question 17

805 - What are the RIBA Stage of Work? (8)

Answer 17

1) Stage 0 - Strategic definition
2) Stage 1 - Preparation and briefing
3) Stage 2 - Concept design
4) Stage 3 - Spatial coordination
5) Stage 4 - Technical design
6) Stage 5 - Manufacturing and construction
7) Stage 6 - Handover
8) Stage 7 - Use

Question 18

806 - What is the difference between an order of cost estimate and cost plan? (2)

Answer 18

1) An estimate provides a possible cost based on the employers requirements and is the initial phase of the cost planning process. The estimate is usually completed using m2 areas or functional units.
2) A cost plan is a more detailed elemental breakdown and shows how the costs are distributed across the project. A cost plan is an estimate based on a specific design.

Question 19

807 - Can you explain the term ‘cost per functional unit’?

Answer 19

NRM 1 definition - The unit rate that, when multiplied by the number of functional units, gives the total building works estimate (i.e. works cost estimate minus main contractors preliminaries and main contractors overheads and profit). The total recommended cost limit (i.e. the cost limit, including inflation) can also be expressed as a cost per functional unit when reporting costs.

Question 20

808 - What typical information should accompany an order of cost estimate? (10)

Answer 20

1) Covering letter
2) Executive summary
3) Cost limit
4) Specification notes
5) Assumptions
6) Exclusions
7) Drawings and other information upon which the estimate is based
8) A schedule of value enhancing options
9) Risk register
10) Cash flow information

Question 21

809 - What is a cost plan?

Answer 21

NRM 1 definition - In the context of cost prediction, RICS professional statement, a cost plan is ‘an estimate based on a specific design.’ A statement showing an apportionment of an estimate of or an agreed budget between cost headings. This would not necessarily be in elemental form. Cost planning is a method of cost prediction.

Question 22

810 - Other than predicting the final project cost, what other benefits does the cost plan provide to the project and project team? (2)

Answer 22

1) Designers are aware of the cost implications of their proposals which enables them to arrive at practical and balanced designs.
2) Provides information upon which the employer can make informed commercial decisions.

Question 23

811 - Do you need a programme to complete the cost plan?

Answer 23

Preliminaries are typically presented as a weekly rate in developed cost plans, therefore, a programme or at least some high-level dates will be required.

The key information usually required is;
1) Design and tendering periods
2) Start on site date
3) Construction period
4) Completion date

Question 24

812 - How do you structure an elemental cost plan?

Answer 24

NRM 1 recommends using the following structure;

(See book for diagram)

Question 25

813 - What sources of cost information and data are available when preparing a new estimate or cost plan? (6)

Answer 25

1) Information produced by the BCIS (Building Cost Information Service); data is available on a wide range of building types.
2) Published pricing books such as Spons and BCIS (the information may need adjusting for inflation).
3) Pricing documents and other information from previous projects.
4) Cost analysis and cost models produced in-house.
5) Speaking direct to contractors, subcontractors and suppliers for cost information.
6) Existing client information - benchmark date from previous projects.

Question 26

814 - How do you take account of the project location and why?

Answer 26

A location factor is usually applied to recognise differences in construction prices. For example, a project in London is typically more expensive than a similar project in Nottingham.

Question 27

815 - What is a cost plan risk allowance?

Answer 27

NRM 1 definition - A quantitative allowance set aside as a precaution against risks and future requirements to allow for uncertainty of outcome.

Question 28

816 - What fees might be included in the fee estimate? (2 main types with 3 & 5 examples respectively)

Answer 28

1) CONSULTANT FEES;
a) Project and design team
b) Other specialist consultants
c) Survey fees

2) CONTRACTOR FEES;
a) Management and staff
b) Specialist support staff
c) Contractor’s design management fees
d) Contractor design team fees (is applicable)
e) Framework fees (if applicable)

Question 29

817 - What benefit does the client get out of accurate cost planning? (3)

Answer 29

1) The cost plan confirms to the client the scheme is affordable (or not).
2) Cost planning places the client in an informed position to make commercial decisions.
3) The cost plan can act as a value management tool to ensure the client gets a building which meets their needs, but also represents best value.

Question 30

818 - How would you deal with a cost plan which is over budget? (2)

Answer 30

1) Communicate the matter to the client and project team in a clear and concise manner.
2) Identify areas where potential savings can be made, possibly in terms of material specification or re-design.

Question 31

819 - How can the cost manager help control the design to keep the project within budget? (5)

Answer 31

1) Explain to the design team where the cost plan sits against the budget and discuss the limitations.
2) Identify and communicate areas of design which may not be economical.
3) Regular project risk reviews and ask the design team to focus on mitigating key design risks.
4) Explain how changes in the design will impact the cost plan.
5) Contribute to value engineering and / or cost saving sessions.

Question 32

820 - In your view, what are some of the key reasons we have cost overrun on a project? (9)

Answer 32

1) Ambiguous client brief or changes in the later stages of the project.
2) Unrealistic cost estimates.
3) Project risk is realised or not properly managed.
4) Inadequate management control or processes.
5) Uncoordinated design.
6) Unknown external factors (for example global pandemics).
7) Unsuitable tendering and / or procurement strategy selection.
8) Statutory authority influences such as onerous planning permission conditions.
9) Inflation or changing market conditions.

Question 33

821 - What is BWIC? (2)

Answer 33

1) BWIC stands for builders work in connection and is usually set as a percentage of the services cost.
2) BWIC refers to builders work that is necessary to allow other works to proceed (typically mechanical and electrical services but also other specialist installations).

Question 34

822 - Why is VAT usually excluded from the cost plan?

Answer 34

Employers may incur different levels of VAT (some might be exempt), therefore, VAT is usually excluded to ensure the incorrect tax rate is not applied.

Question 35

823 - Can you tell me what you understand by the term benchmarking? (3)

Answer 35

1) Benchmarking is the use of historical data from projects of a similar nature.
2) Can be used as a comparison or check for cost planning purposes.
3) Benchmarking can highlight areas of design that are not value for money, or, if the price offered by the contractor is in line with market conditions.

Question 36

824 - How would you undertake a benchmarking exercise for your client?

Answer 36

Produce a clear document which shows the various cost plan elements side-by-side with the benchmark project(s). This process will identify items which are considered abnormal. I would then endeavour to justify cost anomalies for flagged items.

Question 37

825 - What is wall-to-floor ratio? (2)

Answer 37

1) The wall-to-floor ratio of a building is calculated by dividing the external wall area by the gross internal floor area. This indicates the proportion of external wall required to enclose a given floor area.
2) This may reveal how efficient the design is and may also help inform the construction cost.

(See book for diagram)

Question 38

826 - How are subcontractors preliminaries captured in the cost plan?

Answer 38

Costs associated with subcontractors preliminaries should be included in the unit rates applied to sub-elements and individual components.

Question 39

827 - Can you define contractor overhead and profit (OH&P) please? (2)

Answer 39

1) Profit can be defined as the money the contractor makes after accounting for all costs and expenses. The percentage of profit a contractor might apply will vary according to risk, workload and economic climate.
2) General overheads are those not readily chargeable to one particular project, they constitute the contractors cost of doing business. These costs may include head office expenses, marketing, administration, IT equipment etc.

Question 40

828 - What allowance would you make for contractor OH&P in the cost plan?

Answer 40

The percentage will vary due to various factors such as;
1) Project location
2) Level of perceived work
3) Project type and value
4) Market conditions

Question 41

829 - What is a provisional sum?

Answer 41

Provisional sums are generally an allowance or estimate included within the contract price that are;
1) Not sufficiently defined, designed or detailed to allow an accurate determination of its cost at the time the contract is entered; and / or
2) Work that the employer may or may not wish to be carried out.

Question 42

830 - How are provisional sums expended? (2)

Answer 42

1) The contract administrator (JCT contracts) should issue an instruction for its expenditure.
2) Where a contract includes a provisional sum, the final amount payable will be adjusted (the provisional sum is omitted and replaced with the actual cost of the work).

Question 43

831 - How are provisional sums dealt with in the final account?

Answer 43

By the time the project has reached final account stage, the contract administrator will have issued instructions to expend all provisional sums. The instruction will show an add and omit (add actual costs and omit the provisional sum). the instructions are then accounted for in the usual way.

Question 44

832 - How does the NEC contract incorporate provisional sums? (2)

Answer 44

1) Unamended NEC contracts do not provide for the use of provisional sums.
2) NEC approach - if the scope of works is so unclear that a price cannot be provided with a level of certainty, the item should be excluded until it can be properly defined.

Question 45

833 - What types of provisional sum are there? (2)

Answer 45

1) Defined
2) Undefined

Question 46

834 - Please explain the difference between defined and undefined provisional sums? (2)

Answer 46

1) DEFINED - The contractor is deemed to have allowed for programming and preliminaries within the contract.
2) UNDEFINED - The contractor does not allow for planning, programming and preliminaries implications. This means the contractor may be entitled to an extension of time and / or additional preliminaries when the actual works are undertaken.

Question 47

835 - Would the contractor be entitled to claim additional preliminaries and / or an extension of time when expending a defined provisional sum?

Answer 47

No, since the provisional sum is defined, the contractor should have allowed for programme and preliminaries within their price.

Question 48

836 - What are prime cost sums (PC sums)? (3)

Answer 48

1) A sum of money included in a unit rate to be expended on materials or goods from suppliers (e.g. supply-only ceramic wall tiles at £50/m2).
2) It is a supply-only rate for materials or goods where the precise quality of those materials and goods is unknown.
3) PC sums exclude all costs associated with fixing, installation, fees, OH&P etc.

Question 49

837 - What is the difference between prime cost sums and defined provisional sums? (2)

Answer 49

1) A prime cost is limited to the cost of supplying the relevant item and does not include the cost of any work that relates to it (such as its installation).
2) In contract, defined provisional sums include allowances for supplying the item and all related work to be performed by the contractor.

Question 50

838 - Can you name some of the pricing documents we might use at tender stage? (5)

Answer 50

1) Bill of quantities (BoQ)
2) Schedule of rates (SoR)
3) Contract sum analysis (CSA)
4) Schedule of work (SoW)
5) Priced activity schedule

Question 51

839 - Can you name some of the pricing options for construction contracts? (5)

Answer 51

1) Lump sum
2) Cost plus (also known as cost reimbursable)
3) Remeasurement
4) Target cost
5) Guaranteed maximum price (GMP)

Question 52

840 - What is a lump sum contract? (2)

Answer 52

1) Fixed price lump sum pricing, as the name indicates, provides for payment of a set amount.
2) The amount of the fixed price or lump sum is determined by a contractor by estimating their cost to provide the work, and then adding overhead and profit margin.

Question 53

841 - What are the key advantages of lump sum contracts? (2)

Answer 53

1) The contractor takes on the pricing risk but stands to benefit from increased profit if actual costs turn out to be below the estimated costs.
2) Cost certainty for the employer.

Question 54

842 - What are the key disadvantages of lump sum contracts? (2)

Answer 54

1) A lump sum agreement presents a higher risk to a contractor. If the contractor underestimates their cost, the profit margin decreases and may disappear altogether.
2) As a result of the additional risks faced by the contractor, they may increase their tender price.

Question 55

843 - What is a cost plus contract?

Answer 55

Cost plus contracts, otherwise known as cost reimbursable contracts, involves the employer paying the contractor for the cost incurred during the project, plus a pre-agreed percentage for profit.

Question 56

844 - What are the key advantages of cost plus contracts? (2)

Answer 56

1) Since cost plus contracts are flexible by nature, inaccuracies in the initial bid aren’t as detrimental as they are with lump sum contracts.
2) Cost plus contracts allow employers to make design changes along the way, contractors know they’ll be paid for the extra time or materials which those changes incur.

Question 57

845 - What are the key disadvantages of cost plus contracts? (2)

Answer 57

1) The final contract price is uncertain until the end of the project .
2) Contractor may deliberately incur higher costs to increase profit (no incentive for efficiency).

Question 58

846 - When might a cost plus strategy be appropriate to use? (2)

Answer 58

1) A cost plus strategy might be used where the nature or scope of the work to be carried out cannot be properly defined at the outset.
2) This pricing strategy would suit emergency work such as infrastructure repairs or immediate reconstruction following a fire.

Question 59

847 - What is a re measurement contract? (3)

Answer 59

1) Works are carried out based on pre-agreed unit rates.
2) The actual quantities of work carried out are measured and the tendered rates are applied to those quantities.
3) The contractor is paid for the actual work they have done soo the final value of the project will be derived based on the unit prices and exact quantities.

Question 60

848 - What are the key advantages of remeasurement contracts? (2)

Answer 60

1) Since the work is tendered on approximate quantities, the contractors will submit competitive prices in their tender.
2) The contractors risk is comparatively low (compared to a lump sum contract).

Question 61

849 - What are the key disadvantages of remeasurement contracts? (3)

Answer 61

1) There is less cost certainty until the project is complete.
2) General accuracy of cash flow forecasting.
3) The risk for the employer is higher (compared to a lump sum contract).

Question 62

850 - What is a target price contract? (2)

Answer 62

1) The main difference between a target and conventional contract is the mechanism for sharing risk and opportunity.
2) The target cost is set early in the project, upon completion, cost savings or overruns are shared between the contractor and employer based on a pre-agreed formula or percentage. This is often termed the “pain & gain” mechanism.

Question 63

851 - What are the key advantages of target price contracts? (2)

Answer 63

1) The contractor and employer are incentivised to reduce costs.
2) Encourages active and equitable risk sharing, based on a clearly defined allocation of risk agreed at the outset of the project.

Question 64

852 - What are the key disadvantages of target price contracts? (2)

Answer 64

1) The employer and contractor must share pain and gain, this exposes the employer to greater risk.
2) Complex target price, pain / gain share may not easily be understood by all parties.

Question 65

853 - If the employer wanted a target cost contract using the NEC form, which main option(s) would you use? (2)

Answer 65

1) Option C - Target cost contract with activity schedule
2) Option D - Target cost contract with bill of quantities

Question 66

854 - What is a guaranteed maximum price (GMP) contract? (3)

Answer 66

1) A guaranteed maximum price contract (GMP) sets a limit that the employer will pay their contractor, regardless of the actual costs incurred (i.e. the contract sum will not exceed a specified maximum).
2) If the actual cost of the works is higher than the guaranteed maximum price, then the contractor must bear the additional cost.
3) If the cost is lower than the guaranteed maximum price, the contract should set out which party will benefit from the savings. Usually, the savings will be split between the employer and contractor using a pre-agreed formula or percentage.

Question 67

855 - What are the key advantages of a GMP contract? (2)

Answer 67

1) Establishes the employer’s maximum financial commitment (subject to employer variations). If the contractor’s costs exceed the target cost, only the target cost sum is paid.
2) Both the contractor and employer have potential to benefit from savings.

Question 68

856 - What are the key disadvantages of GMP contracts?

Answer 68

The contractor will have to share any savings made while taking on the risk of cost overrun.

Question 69

857 - What are contractor preliminaries? (3 + 6 examples)

Answer 69

1) Items which cannot be allocated to a specific element, sub-element or component.
2) Preliminaries are typically items which are necessary for the contractor to complete the works but will not actually become part of the works once the project is complete.
3) Contractor preliminaries may include items such as;
a) Management and staff
b) Site establishment
c) Temporary services
d) Security
e) Safety and environmental protection
f) Insurances

Question 70

858 - When assessing the costs for contractors preliminaries (at tender stage) what are the key considerations to determine if they are fair and reasonable? (7)

Answer 70

1) Length of contract
2) Type of project (e.g. new build, refurbishment, infrastructure etc.)
3) Size of project and overall build cost
4) Need for temporary works
5) Security requirements
6) Method and sequencing of works (e.g. working hours, supervision, management etc.)
7) Extent of the contractors design responsibilities

Question 71

859 - Can you give me examples of contractors preliminaries which might be considered abnormal (over and above ‘standard’ project)? (4)

Answer 71

1) Tower cranes
2) Evening / weekend working
3) Road closures / traffic management
4) Closing train lines

Question 72

860 - What is the difference between fixed and time related preliminaries? (3)

Answer 72

1) Fixed preliminaries are one-off costs whereas time related preliminaries are dependent on duration.
2) Time related - tower crane weekly hire.
3) Fixed - purchasing site security equipment.

Question 73

861 - What is inflation?

Answer 73

NRM 1 definition - Sustained increase in the general price level of resources (ISO 15686-5) i.e. the opposite of deflation.

It is included as an allowance in the order of cost estimate or cost plan for fluctuations in the basic prices of labour, plant and equipment and materials.

Question 74

862 - What are the two types of inflation as defined in NRM 1? (2)

Answer 74

1) Tender inflation - An allowance included in the order of cost estimate or cost plan for fluctuations in the basic prices of labour, plant and equipment, and materials during the period from the estimate base date to the date of tender return.
2) Construction inflation - An allowance included in the order of cost estimate or cost plan for fluctuations in the basic prices of labour, plant and equipment, and materials during the period from the date of tender return to the mid-point of the construction period.

Question 75

863 - What does TPI stand for?

Answer 75

Tender price indices

Question 76

864 - What do TPIs show? (2)

Answer 76

1) They measure the movement in prices agreed between clients and contractors at ‘commit to construct’ normally when the tender is accepted.
2) These indices are typically used for adjusting estimates and budgets to different dates.

Question 77

865 - What is a bill of quantities? (4)

Answer 77

1) Bills of quantities are a means of breaking a project down into exact quantities which are measured in an industry-wide recognised format.
2) Includes all components of a building (or project) as well as preliminaries.
3) Usually based on mature drawings and specifications, at tender stage, the contractor inserts their cost or rate against each item.
4) The document then forms a precise tool for pre and post contract cost control (such as managing variations, project expenditure and cash flow).

Question 78

866 - Why would you use a BoQ instead of a schedule of work? (2)

Answer 78

1) Schedules of work break the works sections down in less detail than a BoQ and do not contain any quantities for specific work items.
2) The BoQ simplifies the tender process because tendering contractors will be pricing the same quantities (rather than taking-off quantities from the drawings and specifications themselves). This also simplifies the tender analysis.

Question 79

867 - What are the key disadvantages of using a BoQ? (2)

Answer 79

1) Expensive and time consuming to produce.
2) Potential for errors when measuring the project.

Question 80

868 - What are the key advantages of using a BoQ? (5)

Answer 80

1) Ideal for post-contract cost control.
2) Simplified tender analysis.
3) Very detailed and comprehensive.
4) All the tenderers are pricing the same items and quantities.
5) Effective document for interim payments and preparing the final account.

Question 81

869 - What are the two key types of BoQ? (2)

Answer 81

1) FIRM BoQ - NRM2 definition - The reliability of the tender price will increase in relation to the accuracy of the quantities provided (i.e. the more precisely the work is measured and described). In theory, if there were no design changes, a firm BoQ would provide a price at the tender stage, which would equal the final cost.
2) APPROXIMATE BoQ - NRM2 definition - Approximate BoQs are used when there is not enough detail to prepare a firm BoQ, or where it is decided by the client that the time or cost of producing a firm BoQ is not warranted. Such contracts do not provide a lump sum price, but rather tender price totals (i.e. a quantified schedule of rates), since the quantities are subject to remeasurement on completion by the quantity surveyor / cost manager.

Question 82

870 - When would a BoQ with approximate quantities be used?

Answer 82

Since the quantities are approximate, this type of BoQ is suitable for a remeasurement form of contract.

Question 83

871 - What is a cash flow projection? (2)

Answer 83

1) A cash flow projection (or forecast) is a financial planning tool that shows the predicted flow of cash in and out of a project. This is typically shown month-by-month, for the duration of the project.
2) When the construction phase is underway, the cash flow projection for contractor payments will typically form an “S” curve.

(See book for example diagram)

Question 84

872 - What are the key differences between employer cash flow and contractor (or construction) cash flow projects? (2)

Answer 84

1) Contractor cash flow projections will typically show construction costs (materials, labour, plant, preliminaries etc).
2) Employer cash flow projections will usually consider the project in a much broader context and might include costs such as, but not limited to;
a) Statutory authority fees
b) Consultant and legal fees
c) Lan acquisition charges
d) Marketing and sales charges
e) Financing
f) Employer capital salaries

Question 85

873 - How will the employer benefit from accurate cash flow projects? (4)

Answer 85

1) Cash flow projections will assist with planning expenditure and ensure that an appropriate level of funding is in place for future payments.
2) The projection will enable the employer to plan and anticipate for periods of cash shortage and take corrective action where necessary.
3) Allows the employer to gain an understanding of the potential financial commitment at a specific point in the future.
4) The projection can also act as a sense check for monthly contractor valuations.

Question 86

874 - Construction cash flow projection - if payments to the contractor are behind the projection, what might this indicate?

Answer 86

This could be an indication that construction works are behind programme.

Question 87

875 - Construction cash flow projection - if the contractor’s monthly valuation is ahead of the cash flow projection, what might this indicate?

Answer 87

The project is ahead of programme, or the contractor is overclaiming.

Question 88

876 - What is the purpose of post-contract cost reporting? (3)

Answer 88

The key purposes are;
1) To provide an overview of the client’s current financial commitment.
2) To inform the client of the likely outturn cost of the project, including forecasting the outturn cost as a variance against the budget and / or tender sum.
3) To give the client an understanding of potential savings or additional monies required.

Question 89

877 - What information would you include in a post-contract cost report? (13)

Answer 89

1) Executive summary
2) Contract sum
3) Instructed variations / compensation events
4) Potential future variations as advanced warnings
5) Status of any claims
6) Cost plan
7) Value engineering options
8) Anticipated final account (forecast)
9) Risk allowances
10) Final account progress (if applicable)
11) Total of certified payments
12) Cash flow forecast
13) Recommendations and next steps

Question 90

878 - What is the difference between cost and price? (2)

Answer 90

1) Cost is the total of labour, plant, materials and management deployed in relation to building work.
2) Price is the amount the employer will ultimately pay for the work to be completed.

Question 91

879 - The contractor on your project has made a large (and in your opinion) unrealistic claim for loss and expense. How would you deal with it within your cost report? (3)

Answer 91

1) I would report the contractor’s claim and highlight my concern with the figure submitted.
2) Assuming the contract administrator has agreed the loss and expense claim is valid, I would carry out my due diligence checks and assess the claim.
3) I would update my client on a regular basis until the conclusion was reached.

Question 92

880 - What is life cycle costing (LCC)? (2)

Answer 92

1) Life cycle costing (LCC) is an objective method for measuring and managing the lifetime costs of any project or asset. In construction, it enables design options to be compared from a lifetime perspective with a view to understand and reduce overall costs associated with owning and / or operating the asset.
2) For example, anyone buying a car would want to know the purchase price, but also its ongoing costs such as fuel consumption, the likely maintenance and the residual value on disposal.

Question 93

881 - What are the key advantages of LCC (life cycle costing)? (3)

Answer 93

1) LONG TERM VALUE - LCC ensures that the project has the highest possible value, even if upfront costs are not significantly reduced. It provides a mechanism for identifying and addressing issues with the original design. The process will promote better durability, reduced maintenance, fewer risks, operational efficiency and can even lead to an increased building lifespan.
2) GREEN BUIDLING CERTIFICATION CREDITS - LCC credits are included in many green building certification schemes such as BREEAM.
3) RELIABLE PLANNING AND REDUCED RISK - LCC is an excellent planning tool that covers long spans of time. With a properly conducted LCC, you can effectively avoid surprises and reduce financial risks. LCC will also promote;
a) Consideration of the long-term implications of a decison.
b) Enables informed decisions to be made on a material selection.
c) Can be used to plan future maintenance requirements.

Question 94

882 - What are the key disadvantages of LCC? (4)

Answer 94

1) Components are not always replaced due to end of life. Changes in style and fashion for example, are almost impossible to assess in the design process.
2) Cost associated with defects (caused by poor workmanship or design faults) cannot be predicted.
3) Uncertainty in inaccurate data may influence the decision-making process.
4) Choosing the wrong discount rate will heavily affect the accuracy.

Question 95

883 - What is the typical analysis period to calculate LCC?

Answer 95

The LCC period of analysis should be determined by the client. It might be the length of a private finance initiative (PFI) concession, the length of a lease, the anticipated functional life of a whole building, or time to first refurbishment, etc.

Question 96

884 - What are the key cost categories to consider when calculating WLC? (8)

Answer 96

1) Construction costs
2) Maintenance costs
3) Operation costs
4) Occupancy costs
5) End of life costs
6) Non-construction costs (land, fees, etc.)
7) Income
8) Externalities

Question 97

885 - In your opinion, how accurate is LCC?

Answer 97

Various assumptions based on trends, inflation, historic data etc. must be made; therefore. the precision relies on the accuracy of the assumptions. If LCC is calculated over a long analysis period, the accuracy is likely to fall.

Question 98

886 - Where can you get information about maintenance costs? (5)

Answer 98

1) Building Cost Information Service (BCIS)
2) Pricing books such as SPONs
3) Contractors and sub-contractors
4) In-house data
5) Previous projects

Question 99

887 - How can LCC be used in a value engineering exercise?

Answer 99

It may be the case that a component or element of the design has a high capital cost, but its maintenance and replacement costs are significantly less than a cheaper capital cost alternative.

Question 100

888 - What are advanced payments? (2)

Answer 100

1) Payments issued to the contractor in advance of completing works or procuring materials.
2) The usual rationale for these payments is to assist the cash flow required to cover initial expenses. A typical example would be for the procurement of items with a long lead-in period (e.g. passenger lift or structural steelwork).

Question 101

889 - What are the key disadvantages of advanced payments? (3)

Answer 101

1) There may be a commercial risk for the employer, e.g. the contractor or supplier could go into liquidation after the payment is made.
2) The payment will affect the employers cash flow.
3) Subject to the nature of the advanced payment, there could be a concern why the contractor is unable to fund the expenditure (potential cash flow issues).

Question 102

890 - Assuming the employer is happy to proceed with the advanced payment, what measures could be put in place to protect the employer’s commercial risk?

Answer 102

An advanced payment bond may be required to protect the payment in advance of the works being completed.

Question 103

891 - What is an interim valuation? (2)

Answer 103

1) An interim valuation is a document put forward by the contractor which contains their progress against each of the works elements.
2) The interim valuation involves a revaluation of the whole work, not the work done since the last interim certificate or payment notice was issued. The document acts as a precursor to issuing the next interim payment certificate.

Question 104

892 - What are the main elements of an interim valuation? (12)

Answer 104

1) Preliminaries
2) Measured work
3) Variations / compensation events
4) Extension of time and acceleration costs (JCT contracts)
5) Materials on site
6) Materials off site
7) Loss and expense (JCT contracts)
8) Adjusted provisional sums (JCT contracts)
9) Retention
10) Fees
11) Prime cost sums
12) OH&P

Question 105

893 - How would you assess the interim valuation? (statement + 6 key points)

Answer 105

It normally involves the quantity surveyor visiting site and checking the works by visual inspection and / or measurement. The key steps are;
1) Review the valuation prior to visiting site.
2) Go to site and review the valuation with the contractor.
3) Check work completed, materials on site and materials off site.
4) Liaise with the clerk of works (JCT) or the supervisor (NEC).
5) Value preliminaries, agree variations / compensation events and any claims.
6) Finally, send the recommendation to the contract administrator or project manager who will issue the payment certificate.

Question 106

894 - What are the implications of over or under valuing the works?

Answer 106

An interim valuation must be a realistic assessment. A low valuation creates unreasonable financial problems for the contractor, whereas a high valuation creates a risk to the employer of paying sums for which he or she obtains no benefit.

Question 107

895 - What would you do if the contractor claims for paint in their 1st interim valuation?

Answer 107

Assuming the project is a new build, the contractor is likely to be front-loading. I would assess if they had done any painting during the site visit and adjust the valuation accordingly.

Question 108

896 - What are the key things you should consider prior to valuing materials off-site? (4)

Answer 108

Subject to contract requirements;

1) Request a vesting certificate.
2) Check that insurance is in place until the materials arrive on site.
3) Ask for evidence that the materials (stored off site) are clearly marked for the project and are set apart from other materials.
4) Check the material off site bond has been provided.

Question 109

897 - What needs to be in place to make payment for materials on site? (3)

Answer 109

1) Materials should be adequately protected.
2) Should be covered by the works insurance.
3) Materials should be on site within a reasonable period when they are actually needed i.e. doors being delivered on the 1st week of a new build project may not be appropriate.

Question 110

898 - What is a vesting certificate?

Answer 110

A vesting certificate is a document evidencing that ownership of goods or materials will transfer from one party to another on payment.

Question 111

899 - What does the term ‘payment on account’ mean? (2)

Answer 111

1) The term ‘on account’ means a payment for an item of work (or materials) for which no instruction has been issued but is anticipated.
2) Payments ‘on account’ are used by the quantity surveyor for any item in a valuation that cannot be agreed under the contract rules, but both sides agree that some payment is due.

Question 112

900 - Can you explain what is meant by the term ‘daywork’? (2)

Answer 112

1) The basic principle of daywork is that the work done is recorded on a daywork sheet together with the labour, material and plant resources utilised to carry out the work.
2) It is generally used when work cannot be priced in the normal way or for uneconomical work.

Question 113

901 - What is a variation?

Answer 113

A variation is an alteration to the scope of work originally specific in the contract, whether by way of an addition, omission, or substitution to the works, or through a change to the manner in which the works are to be carried out.

Question 114

902 - What information is typically shown on a payment certificate? (12)

Answer 114

1) Date of certificate
2) Contract date
3) Key payment timeline dates (due date, assessment date, final date for payment etc.)
4) Employer, contractor and contract administrator details (company, name, address etc.)
5) Site address and project number
6) Contract sum
7) Certificate reference number
8) Gross value
9) Retention
10) Cumulative value of previous payments
11) Amount due / notified sum (excluding VAT)
12) Director and contract administrator signature

Question 115

903 - What happens if the employer fails to pay the amount due (identified on the payment certificate) on or before the final date for payment? (2)

Answer 115

1) The employer will be liable for interest on the amount due (subject to contract conditions).
2) The contractor may wish to exercise their right to suspend works.

Question 116

904 - What is a ‘pay less notice’?

Answer 116

The purpose of a pay less notice is to give the paying party the right to pay less than / withhold all or part of the notified sum.

Question 117

905 - What are the employers obligations if they wish to withhold the notified sum, but fail to issue a pay less notice?

Answer 117

If the paying party does not serve a valid pay less notice timeously, they are obliged to pay the notified sum without deduction, regardless of whether they have a valid challenge to the sum.

Question 118

906 - Can you explain the payment timeline for the JCT Design & Build 2016 contract? (5)

Answer 118

1) Contractor makes Payment Application before each interim Valuation date.
2) Payment becomes due within 7 days.
3) Not later than 5 days from the due date Employer issues Payment Notice
4) Final Date for Payment is 14 days from the Due Date
5) Employer may issue a Payless Notice no later than 5 days before the Final Date for Payment

(See book for diagram)

Question 119

907 - Can you explain the payment timeline for the NEC3 ECC contract? (5)

Answer 119

1) Assessment Date - Contractor submits interim application not less than 7 days before the Due Date valued up to the Due Date.
2) Due Date 7 days after Assessment Date (assuming application submitted as above and not before)
3) Interim Certificate issued no later than 5 days after Due Date.
4) Final Date for Payment no later than 14 days after Due Date.
5) Pay Less Notice issued can be issued no later than 7 days before Final Date for Payment.

Question 120

908 - What is a final account?

Answer 120

The final account is the conclusion of the contract sum (including all necessary adjustments) and signifies the agreed amount that the employer will pay the contractor.

Question 121

909 - What are the usual components of a final account? (13)

Answer 121

1) Summary
2) Measured work
3) Variations / compensation events
4) Adjusted prime cost and provisional sums
5) Claims
6) Fluctuations
7) Total of all previous payments made to the contractor (total of interim certificates)
8) Delay damages
9) Retention
10) Fees
11) OH&P
12) The original contract sum
13) Final account sum