Commercial Management Of Construction Flashcards
1
Q
What is a Cost Value Reconciliation?
A
- Cost value reconciliation is used to measure the project’s ongoing 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.
2
Q
How would you prepare a Cost Value Reconciliation?
A
- I would determine the cumulative costs and value of the project to a set given point in time.
- The cut-off date may coincide with an agreed accounting period or month end period which I would establish with the project management team.
- 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 in line 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.
3
Q
How do you ensure your Cost Value Reconciliation is accurate and up to date?
A
- 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.
4
Q
What is a Cash Flow Analysis?
A
- 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.
- The cash flow analysis will typically be based on a number of factors such as:-
o Under or over valuation of works complete and the impact this may have on cash flow.
o The contractual payment process so that the incoming payments can be accurately profiled.
o Month end dates for payments of salaries, leases and other fixed costs.
o Credit arrangements with subcontractors and suppliers. - It is important for contracting organisations to maintain positive cashflow where possible in order to avoid the need for expensive borrowing arrangements.
5
Q
How would you compile a cash flow?
A
- 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.
6
Q
Please explain your understanding of the term ‘Accruals’?
A
- 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.
7
Q
Please explain your understanding of the term ‘Contra Charge’?
A
- 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.
8
Q
What processes would you put in place when making a contra charge?
A
- 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.
9
Q
What is a Risk and Opportunity Register?
A
- 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.
10
Q
What does a Risk and Opportunity Register look like?
A
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.
11
Q
What is Company Overhead?
A
- 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.
12
Q
What is the purpose of maintaining cumulative accounts and payment procedures?
A
- 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.
13
Q
Please explain your understanding of the term ‘Earned Value Analysis’?
A
- 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.
14
Q
What Contract Administration Controls do you implement?
A
- 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.
15
Q
What procedures do you adopt for supply chain and sub-contractor management?
A
- My company maintains a database of potential suppliers that allows the 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.
