Commercial management

Question 1

What RICS publication covers commercial management?

Answer 1

The ‘Black Book’ is a collection of technical practice documents which covers all processes throughout the construction project life cycle. The documents are essential development tools for junior professionals working through their APC and useful guides to best practice for more experienced professionals.

Question 2

What is covered in the Black Book?

Answer 2

• cash flow forecasting
• change control and management
• commercial management of construction
• conflict avoidance and dispute resolution
• construction security and performance
• cost reporting
• defining completion on construction projects
• e-tendering
• employers agent - D&B
• final account procedures
• fluctuations
• interim valuations and payment
• monitoring surveyor
• life cycle costing
• management of risk
• retention
• subcontracting
• tendering strategies
• termination of contract
• value management
• valuing change

Question 3

What does the guidance note on Cash Flow Forecasting (1st edition) include?

Answer 3

• explains what cash flow forecasting is, how to produce one, and how to use as a measure of progress

Minimum level of service includes:
* taking brief from employer for requirements of a cash flow forecast
* produce cash flow forecast at feasibility stage so employer has understanding of obligations
* update cash flow forecast throughout stages of construction
* monitor payments against cash flow forecast

Question 4

What are the two types of cash flow forecast?

Answer 4

There are two main types of cash flow forecast:
* The cash flow forecast of a company (i.e. a contractor or consultant) – otherwise known as organisational cash flow.
* The cash flow forecast of a particular construction contract or project – otherwise known as project cash flow.

Question 5

Why is knowledge of cash flow forecasts important?

Answer 5

In simple terms the purpose of a cash flow forecast is to ensure that the employer has an accurate assessment of what needs to be paid to the contractor and at what periods, therefore the employer’s bank or funder needs to be aware of draw-downs to manage the movement of funds to meet the contractual timescales of payment.

Various parties within a construction contract use cash flow forecasts for different reasons and it is therefore not uncommon to present cash flow forecasts in different ways to fit the requirement.

Question 6

What is a monitoring surveyor?

Answer 6

Banks will often employ bank monitoring specialists (often quantity surveyors) to ensure that the contractor’s drawdown requests are in line with the original cash flow forecast and to provide an explanation if it differs. The employer can be liable for penalties, interest charges and arrangement fees for securing an accelerated fund, from their funder if the drawdown is markedly less or in excess of the drawdown schedule.

Question 7

What is the most common use of a cash flow forecast?

Answer 7

The most common use of a cash flow forecast for a quantity surveyor is to monitor the progress of the works on site against the agreed programme. It is equally important that this done between the main contractor and their subcontractors. This becomes more accurate than using an S-curve as it is based on an agreed sequence of events rather than a formula. It is also therefore very useful in assessing whether a contractor is on programme or not. If the interim valuations are ahead of cash flow then this can signify that the works are ahead of programme. If the interim valuations are behind cash flow then this can signify that the works
are behind programme.

Question 8

How does a forecast affect cashflow?

Answer 8

All parties know their liability and when to expect payment. Delays in payments, disputes with clients or renegotiation of overdraft terms can have disastrous consequences to the future of businesses and affect the contract progress.

Question 9

What stakeholders may be involved in a cash flow forecast?

Answer 9

• funders
• shareholders
• client
• contractors
• subcontractors
• suppliers
• consultants

Question 10

How does an organisational (company) cash flow forecast help?

Answer 10

Cash flow forecasts are often used within a company to manage resources. Resources may include staff, training, equipment, premises, etc. Companies must be sure that they can meet the liabilities in terms of wages, insurances and other overheads before employing additional staff. An organisational cash flow forecast can help to inform these decision making processes.

Question 11

What are the types of valuation?

Answer 11

• stage payments - pre-agreed payments at set times regardless of progress
• milestone payments - pre-agreed payments at milestones
• payment against an activity schedule - At pre-agreed timescales progress against an activity schedule is monitored and pre agreed payments are made for activities which have been completed
• valuation of works to date - At pre-agreed periods the value of work on site is assessed

Question 12

What legislation refers to construction payments?

Answer 12

‘The Construction Act’, The Housing Grants, Construction and Regeneration Act (HGCRA) 1996 fundamentally attempted to improve payment practices in the construction industry by improving cash flow and helping to resolve disputes quicker.
* right to interim or periodic payments
* contract has a mechanism to determine what payments are due and when
* payer must provide payee early notification
* Providing that the payee may suspend performance where a sum due is not paid in full by the final date for payment
* Providing a statutory right to refer disputes to adjudication.

Question 13

What is the S-curve?

Answer 13

The S-curve stands for ‘standard’ curve but it also takes the shape of the letter ‘S’ when shown on a graph. This represents the lower level of periodic expenditure at the beginning of a contact (due to site set up and relatively inexpensive enabling works) and the lower level of expenditure at the end of a contact (due to the vast majority of materials being on site, reduced number of trades on site and reduction of contractor’s staff overhead). These S-curves are ascertained by formula, which uses data from previously similar construction projects.

Question 14

What is a good way to produce a cash flow forecast?

Answer 14

Wherever possible the cash flow forecast should be written in conjunction with the main contractor who will often be able to provide more detailed and specific information. It should be noted that there is generally a difference in the approach to producing a cash flow forecast between an employer and a contractor.

Question 15

Type of questions prior to producing a cash flow forecast?

Answer 15

• Is it for the employer or contractor?
• Should it be produced for the whole development or just the construction contract?
• Should it show values at valuation date, certificate date, invoice date or payment date?
• Should gross or net values be used?
• Should it show cumulative payments, monthly payments or both?

An employer must decide whether the cash flow forecast is to show the valuation date, certificate date, invoice date or actual payment date. Whatever is decided must be clearly noted in the cash flow forecast; otherwise a problem could arise if the employer assumed that the valuation date was shown when it was actually showing the payment date.

Question 16

When would you require separate cash flow forecasts?

Answer 16

There may be separate enabling works and main works contracts and these may even overlap in some scenarios. If any of the separate contacts are of substantial value then it is worth producing separate cash flows and merging the data to produce an overall development cash flow.

Question 17

What is important with cash flow forecasts?

Answer 17

Ensuring it reflects subcontractors stages i.e. 1st fix will be cheaper than 2nd fix of expensive fittings, similarly, testing and commissioning will be lower.

Holidays such as easter and Christmas will need to be reflected

Question 18

How is retention included in forecast?

Answer 18

An accurate cash flow forecast will have to take account of retention, especially when showing the net payment at the end of each month. It will also mean that there will be a long period between practical completion and the final certificate where the cash flow is static, with a final jump at the end, which signals the return of the final part of retention

Question 19

What is a rectification period?

Answer 19

Sometimes known as a defects liability period, a fixed term for the contractor to complete defects prior to final payment certificate.

Question 20

What is a payment period?

Answer 20

The payment period is the time lag between the payment certificate being issued and the payment being made. The standard time lag is normally 14 days in a standard form of contract but can substantially differ if client amendments have been made to the contract.

Question 21

How are variations covered in CF forecast?

Answer 21

Variations should be included along with likely costs and additional time if needed

Question 22

How are risks forecast?

Answer 22

The New Rules of Measurement for Estimating and Cost Planning calls for risks to be split between four categories:
* Design development risks
* Construction risks
* Employer change risks, and
* Employer other risks.

Question 23

How are materials on site included in CF forecast?

Answer 23

The quantity surveyor should not allow payment to be made for materials which are brought onto site well in advance just to boost the contractor’s cash flow. A cash flow forecast should be carried out on the assumption that materials will be brought onto site as and when required unless otherwise stated.

Question 24

How are materials off-site covered in CF forecast?

Answer 24

Pre-assembled items may be considered as complete and payment may be due earlier. This will need to be agreed.

Question 25

What is the minimum level of service for change control?

Answer 25

A chartered quantity surveyor is expected to be able to fulfil the following duties as part of the core competency Contract practice, notwithstanding the terms of any appointment or contractual obligation:
* demonstrate knowledge and understanding of the various forms of contract used in the construction industry and the change control procedures they contain, along with the digital portals available for some contracts that can be used to control change on projects
* apply that knowledge at a project-specific level while being aware of the implications and obligations of the parties involved in the change control procedure and
* provide reasoned advice on the effect of the change control procedure, be able to prepare and present reports to employers to determine the correct change control procedure to use and advise on the correct documentation and procedure at the various stages of a construction contract.

Question 26

How are changes actioned?

Answer 26

• procedures included in contract (who and how)
• identify the reason and and impact on costs and time

Question 27

What are the types of changes?

Answer 27

Changes can be divided into two principal categories as follows:
* changes from within the contractor’s own organisation that do not involve the employer (design change or change of spec)
* changes specifically requested by the employer.

Question 28

Examples of change

Answer 28

• request by employer or contractor
• value engineering
• unforeseen ground conditions or change to specified items
• scope gaps

Question 29

What is a risk register and who is responsible for risks?

Answer 29

A risk register helps manage risks and includes the probability, controls. Can be apportioned to the contractor in D&B contract

Question 30

When can changes be applied?

Answer 30

pre-contract at end of design concept or during tender process
post-contract - changes to scope or instruction of PS

Question 31

When can changes be applied?

Answer 31

pre-contract at end of design concept or during tender process
post-contract - changes to scope or instruction of PS

Question 32

How does a JCT contract refer to a change?

Answer 32

As a “variation”. With the JCT Standard Form of Building Contract the owner or employer generally carries the risk for changes, whereas in the JCT Design and Build Contract the contractor is responsible.

With JCT contracts the employer will generally introduce changes and instruct that a variation or change be issued in writing; likewise, with the JCT Design and Build contract, the contractor may propose a change to the employer’s requirements (ERs). For example, there could be a change in the specification of roof tiles to a type that still complies with the British Standards and meets performance requirements, but that can be delivered more quickly or is more economical; the contractor may well benefit from this saving under that contract. For a significant change that is outside the scope of the ERs, the contractor may share the saving with the employer. If the employer accepts this change, both parties may save costs.

Question 33

What is BIM?

Answer 33

Building information modelling (BIM) represents a managed approach to the use of shared and structured data in the design, construction and operation of projects, and can incorporate changes and value engineering by altering computer-aided design (CAD) information, as well as reducing waste and improving efficiencies.

Question 34

What is the process for a change order?

Answer 34

The client instructs, contractor records and instigates design/review, confirms costs, client agrees or disagrees. In my experience it can be agreed long after the works have been carried out.

Question 35

What is the JCT Design and Build Contract 2016 (JCT D&B)?

Answer 35

This type of contract is used where the employer and its consultants prepare ERs that set the basis of the contractor’s scope of work obligation. The contractor may produce a proposal document, but the ERs take precedence in the process, and the contractor’s proposal should reflect these. The JCT D&B Contract 2016 is based on the employer’s initial design, which the contractor completes, and is a lump-sum contract rather than being based on quantities.

Question 36

What is JCT Standard Building Contract without Quantities 2016 (SBC/XQ 2016)?

Answer 36

This type of contract is used where the employer has to provide the drawings, a description of the works, and either a specification or work schedules at the tender stage. The principal characteristic of this arrangement is that the price and payment structure of the contract is based on lump sums defining the quality and quantity of the work the contractor is to perform. This form is therefore sometimes referred to as a specification and drawings or lump-sum contract. The employer does not provide the contractor with a bill of quantities (BQ), and instead generally uses a contract-sum analysis, while the contractor bears the risk by virtue of quantifying its contract-sum analysis or schedule of rates correctly.

Question 37

How does a subcontract compare with main contract?

Answer 37

usually back to back to minimise risks

Question 38

How to evaluate a change?

Answer 38

• quicker construction
• improved performance
• more economical
• is safety impaired?

Question 39

Who is responsible for agreement of change order?

Answer 39

Contractually, the final decision or request is down to a nominated person. Under a JCT contract this will be the CA, although this may differ with a JCT D&B contract as the contractor may propose and make the changes if this is within its contractual remit.

Question 40

How are changes reported?

Answer 40

• distribution of change orders
• CAI schedule/register
• progress reports

Question 41

What is a successful project?

Answer 41

a successful construction project is one that is delivered ‘on time’, ‘on budget’ and ‘on quality’: for example, to quality standards defined within the contract documents.

Question 42

What is a commercial manager?

Answer 42

the role of a commercial manager is to maximise the potential of a business in terms of profitability. The commercial manager monitors, or controls, internal processes such as production, and manages external relationships with customers, clients and trading partners. At the same time, the commercial manager monitors financial performance (both forecast and achieved) and manages any risks there may be to achieving forecasts, whether these are known from the outset or introduced through changing circumstances.

Question 43

What types of contract are you aware of?

Answer 43

Lump sum or remeasurable

Question 44

What is a CVR?

Answer 44

Cost/value reconciliation: also known as cost/value comparison (CVC). The project’s profit and loss statement, comparing the internal valuation with the costs incurred, including liabilities and accruals for goods and services consumed in the works that have not yet been paid for.

Question 45

What are the project controls?

Answer 45

Mechanisms to assist the project team in monitoring the key items relating to the delivery of a project or contract. These controls provide valuable data to help the commercial manager forecast whether a project or contract will be delivered on time and on budget.

Question 46

What is a payment mechanism?

Answer 46

The way (mechanism) in which the contractor or subcontractor is paid for the work they undertake. These include the following mechanisms:
* lump sum
* bill of quantities, with or without remeasurement * target sum
* cost reimbursement
* guaranteed maximum price.

Question 47

What is a schedule of rates?

Answer 47

a list of prices for carrying out defined items of work (see also BoQ). An SoR is effectively a BoQ, without the quantities.

Question 48

What is estimating?

Answer 48

In construction, ‘estimating’ is the calculation of the likely final cost for any given project. This will form the basis of the budget for that project at all stages.

Question 49

What are the RICS New rules of measurement (NRM) types of estimate?

Answer 49

• NRM 1: Order of cost estimating and cost planning for capital building works
• NRM 2: Detailed measurement for building works
• NRM 3: Order of cost estimating and cost planning for building maintenance works.

Question 50

What is a detailed estimate?

Answer 50

A detailed estimate for advanced tendering, the estimator will ideally have a complete set of contract documents, which, depending on the client’s chosen procurement route, may or may not include a BoQ.

Question 51

What is a B of Q

Answer 51

a detailed statement of work, prices, dimensions, and other details, for the erection of a building by contract.

Question 52

What are the main types of B of Q?

Answer 52

• A detailed BoQ, measured in accordance with the NRM, with item rates built up from first principles, outputs and resource usages, or item rates from previous experience. The key benefit of this method is that as it follows a published standard, it will be obvious to any professional stakeholder what is included in each item.
• A ‘builders’ quants’ BoQ, again using rates from different sources. This is similar to a full BoQ, but does not follow published standard of measurement rules, relying instead on the same person producing the quantities and pricing the items, or on a very close co-ordination if the two activities are performed by different parties.

Question 53

What is value engineering?

Answer 53

Value engineering is a process designed to maximise value through either improved design, enhanced function, reduced cost, reduced risk or reduced whole life cost of the asset being constructed. It is carried out to improve the ‘value’ of a product: in construction terms, this could mean large parts of a project or any individual element of it.

Question 54

What is supply chain management/

Answer 54

Management of subcontractors and suppliers to ensure the projects meets dates.

Question 55

What is RICS guidance on valuing work?

Answer 55

The RICS guidance note Interim valuations and payment (2015) details the overall process of valuing work and the associated making of payment. e.g.
* To assess the value of work done against the project budget, for comparison with costs incurred to date
* To allow the contracting organisation to be paid for the work done, as an interim or final payment.

Question 56

How does contract administration cover commercial management?

Answer 56

The monitoring and assessment of the package is undertaken as an ongoing review of the work carried out by the subcontractor, including a review of progress on site against the original tender, variations and the formulation of an add and omit schedule.

Question 57

What is cost reporting?

Answer 57

The purpose of cost reporting is to inform the client in a construction project of the likely outturn cost of the construction project. Includes costs incurred to date, estimated costs, risk allowances,

Question 58

What is a construction cost report?

Answer 58

A construction cost report captures historic and forecast costs incurred under a construction contract.

Question 59

What is a project cost report?

Answer 59

A project cost report captures historic and forecast costs across a construction project. includes land costs, agencies, legal fees etc

Question 60

How would you treat variable costs?

Answer 60

By including a PS and including a contingency fee

Question 61

What is a loss and expense claim?

Answer 61

The form of construction contract may give rise to an entitlement for the construction contractor to be reimbursed for loss and/or expense for which they would not be reimbursed by a payment under other provisions of the contract. Example: where it suffers delay or disruption to the progress of the works, due either to matters within the employer’s control or to breaches of contract by the employer.

The JCT Standard Form of Building Contract provides for such payments to be made separately from the variations provisions of the contract.

Question 62

What is practical completion under the JCT?

Answer 62

Under the JCT contracts, completion of the works is generally referred to as ‘practical completion’. Some have tried to interpret the phrase as allowing a state of less than full completion. In this context, the phrase ‘beneficial occupation’ was often used to describe the standard of completion that was required by the phrase ‘practical completion’, meaning the client is physically able to take occupation of the works and use them for their intended purpose. There is, however, no legal basis for the use of such a test. Even if the works can be beneficially occupied, unless the contract provides otherwise, if the works are not finished the client is not obliged to take possession.

The test of completion is, however, subject to a limited test of reasonableness known as the de minimis principle. This means that certification of completion of the works should not be refused if there are only very minor defects in the works.

Question 63

Why is the certification of PC important?

Answer 63

+ The client takes possession and control of the building
+ Cessation of any further liability for delay damages, whether liquidated or unliquidated
+ Risk of loss or damage to the works passes to the client, which therefore terminates any further requirement on the contractor to insure and secure the works

Question 64

What is the difference between section completion and partial possession?

Answer 64

Sectional completion is usually anticipated by the contract documents and pre-planned with separate completion dates, extension of time provisions and liquidated damages.

The client can take partial possession of a defined scope of works (e.g. the completed flats) before the works as a whole are complete with the contractors permission

Question 65

How can a CA affect PC?

Answer 65

Sometimes the works will be offered up as complete by the contractor but the contract administrator will refuse to certify them as being complete.
The contract administrator will usually have authority to decide whether or not to accept the works as complete on behalf of the client, notwithstanding some small incomplete parts of the works.
The contract administrator will make a decision based on his or her own perception of the facts independently of any view expressed by the contractor. In so doing the contract administrator may come to a different view as to whether or not the works are complete.
If the contractor disagrees with the CA’s decision then the contractor’s best recourse will usually be through adjudication if informal methods do not work

Question 66

What are latent defects?

Answer 66

Latent defects are defects that are not apparent at the time of completion but which subsequently become apparent months or years later.

Question 67

What can affect PC?

Answer 67

• incomplete works
• works not to spec
• incomplete life safety systems

Question 68

Who is the Employer’s Agent?

Answer 68

The employer’s agent for the purpose of any contract must be one individual within whom the employer has entrusted his or her authority to manage the project. The contract provides for the employer to change this named party should that become necessary. Usually the CA

Question 69

What is the difference between a CA and EA?

Answer 69

CA - This is a party who is specifically identified within the contract and is solely responsible for administering the contract for the employer. It is an impartial role and only exists at the point the contract is entered into

Project Manager - This is again a party who is specifically identified within the contract and manages a team to develop and deliver a project for an employer, often from the project inception stage, making decisions on behalf of the employer
and giving instructions to the contractor. The project manager provides information, controls and manages communications from the team to the employer so that the employer can act as required.

EA - This is a party who is identified within the contract and who acts on behalf of the employer in all matters, effectively
as if the employer’s agent was the employer. In carrying out its certification and decision-making functions under the contract, however, the employer’s agent should act impartially.

Question 70

What are the fundamentals of a D&B contract?

Answer 70

Within the JCT Design and Build Contract, the fundamental obligations on the part of the contractor are:
* to carry out and complete the works, including the design
* in compliance with the contract documents, the construction phase plan and the statutory requirements and
* where applicable, using materials and workmanship of the quality and standards therein specified.

Question 71

What insurance is required by a contractor?

Answer 71

Employers liability
PL
PI
Insurance of the contract works

Question 72

What is a progress meeting?

Answer 72

Progress meetings are necessary to allow the contractor to report to the employer’s agent, who in turn reports to the employer on the project progress. Attendance of any specialists or interested parties should be by the agreement of the employer’s agent.

Question 73

Can a contractor refuse an instruction?

Answer 73

The contractor must comply within seven days or others may be employed at the contractor’s expense. The contractor has no right to refuse to comply with an instruction until a price is agreed. The contract already provides a mechanism for valuation, which is usually the issue in contention, rather than the instruction itself.

Question 74

What is a project status report?

Answer 74

Project status reports are a confidential document between the employer’s agent and the employer, and serve two purposes. Firstly, they provide a regular report to the
employer and show progress both against programme and cost. Secondly, the report provides a record of communication points between the employer and the employer’s agent.

It is important that each report follows on from the previous reports and cover the following points:
* contract progress
* financial position
* employer’s agent’s statement on the project * instructions issued
* project requests for information
* project responses to requests
* requested instruction
* employer’s agent’s queries
* employer’s responses and
* employer’s agent’s fiduciary actions.

Question 75

What is a patent defect?

Answer 75

At any point up until the final certificate has been issued, defects that are discovered by inspection (patent defects) may be reported to the contractor, who should rectify them within a reasonable time.

Question 76

What is an interim valuation?

Answer 76

Interim valuation involves a revaluation of the whole work, not the work done since the last interim certificate or payment notice was issued. An interim payment certificate is issued following an application for payment based on works completed since the last valuation.

Question 77

What is a pay less notice?

Answer 77

Pay less notices can be issued by either the employer or the contractor. The purpose of a pay less notice is to provide the employer with a method of notifying the contractor that he or she intends to pay less than the sum stated on a payment notice, or so that the contractor can notify the employer that he or she is demanding a lesser sum than that stated in his or her interim payment notice.

Question 78

What is the payment process?

Answer 78

Contractor issues an interim application min. 7 days prior to the due date. Interim cert issues 7 days after the due date. Final date for payment 14 days after due date.

Question 79

What is a cost plan?

Answer 79

A cost plan is prepared to include all construction costs, all other items of project cost including professional fees and contingency.