Commercial management Flashcards
How would you manage / monitor overall project costs?
- Cashflow forecasting
- Operate change control processes
- Regular cost reporting
- Manage the expenditure of provisional sums
Can you tell me what you understand by the term cost value reconciliation?
Cost Value Reconciliations (CVR) are carried out to monitor and measure expenditures against budgets on construction projects
How would you go about undertaking financial due diligence of a contractor?
- Credit check report at PQQ or tender stage - identify % risk of going insolvent
- Request financial company reports
- Consider the structure of the company - can a PCG be obtained
How can you protect the client from the insolvency of a contractor?
Prior to insolvency:
- Consider the structure of the company and if a PCG can be obtained
- If no Parent Company, obtain a performance bond
- Conduct a credit check e.g. Dun & Bradstreet / Experian
- Obtain references and observe if there are any industry rumours about impending insolvency
- Oblige the contractor to obtain collateral warranties from subcontractors with appropriate step-in rights to allow the employer recourse for any defects
- Open a specific project bank account to safeguard money
On insolvency:
- Discuss mutually beneficial options to complete the Contract with the insolvency practitioner without resorting to termination
- If no viable option, terminate the Contract and pay no further sums
- Secure the buildings site
- Review consultant and subcontractor agreements for any payment obligations
- Retender the project, retaining existing subcontractors where possible
How can you protect the client from the insolvency of a consultant?
- Employers must ensure that consultant appointments contain a robust ‘termination at will’ clause so they can terminate the appointment immediately
- The appointment should also allow for important rights, such as copyright licence and the provision of all design documents (unfettered by any dispute over unpaid fees) to continue beyond termination
- Consultant appointments should contain a comprehensive payment schedule rather than just a single fee for the whole project
- Employers should liaise with their project managers to ensure that all payment requests are in line with that agreed in the consultants’ appointments, as they do not want to find that they have paid an insolvent consultant for services that have not been carrier out, especially as it is unlikely they will recover the overpaid fees
- Use a project bank account
How can we proactively control costs during construction for a client?
- Robust change control procedure
- Regular attendance on site to keep track of the works
- Regular dialogue with design team and contractor to keep informed of progress and issues
- Risk management meetings
- Rigorous payment process - interim valuations - payment certificate
- Hold retention on payments
- Use of cashflows to forecast future payments
What is a purchase order?
- A PO is a commercial document issued by a buyer to a seller
- Client arranges for a PO to be raised
- Sending a PO to a supplier constitutes a legal offer to buy product / service
- Acceptance of a purchase order by a seller usually forms a contract between the buyer and seller, so no contract may exist until the purchase order is accepted
What are capital allowances?
Capital allowances is the practice of allowing a company to get tax relief on tangible capital expenditure by allowing it to be expensed against its annual pre-tax income
What is the reason for capital allowances?
Capital allowances are used by government as an investment incentive to encourage businesses to spend money on assets that are desirable for policy reasons
Is there any legislation relating capital allowances?
Capital Allowances Act 2001
What is capital expenditure?
- Known as CAPEX
- Funds used by a company to acquire or upgrade physical assets such as property or equipment
What is operational expenditure?
- Known as OPEX
- Expenditure a business incurs performing its normal business operations
Businesses typically split expenditure into capital and revenue - why?
You can claim capital allowances on qualifying capital expenditure but not on revenue expenditure. Capital expenditure goes onto your balance sheet whereas revenue goes onto the profit and loss account
What is BOT?
Build-Operate-Transfer. Build (infrastructure) and operate for a certain period. During this period, the private party has responsibility to raise the finance for the project and is entitled to retain all revenues generated by the project. The facility will be then transferred to the public administration at the end of the concession agreement
What is BOOT?
Build-Own-Operate-Transfer. Private entity owns the works. During the concession period the private company owns and operates the facility with the prime goal to recover the costs of investment and maintenance while trying to achieve higher margin on project
