Commercial management of construction

Question 1

What are the different aspects that make up the commercials on a construction project?

Answer 1

Provisional sums
Preliminaries
Build costs
Variations
L&E

Question 2

What are preliminaries?

Answer 2

May appear in the tender documents. Items do not form part or the works but are required by the method and circumstances of the works. They might include, method statements, PCI, approvals, testing and completion. They describe what is required to complete the works required by the contractor.
Site prelims include: welfare, offices, plant, waste clearance, water, electricity, protective clothing, site transport.

Question 3

What is a contractor cashflow and what should you do if the contractor is invoicing less than its cashflow?

Answer 3

Ideally I would want to see a contractor invoicing against it forecast. If it was invoicing less, it may raise red flags i.e. is there a programme delay or an issue with procurement or manufacture. There may be a legitimate reason for this, such as resequencing but it should always be investigated.

Question 4

What does a development budget include that a drawdown will not?

Answer 4

The client’s total budget for the entire project – which is useful to deem whether the project is viable and profitable:

• Construction cost
• Land and property acquisition costs
• Approval fees
• Planning costs – S106 and CIL
• Financing costs
• Site investigations
• FFE
• Moving staff
• Insurance
• Consultant fees
• Inflation
• Contingency
• VAT

Question 5

What is contingency?

Answer 5

Allowance for unknown risks and risks becoming issues.

• Contingencies are downside risk estimates that make allowance for the unknown risks associated with a project.
• Sometimes based on a percentage
• Adverse weather, unforeseen circumstances, disputes, supplier failure, variations, unexpected site conditions

Question 6

What makes up the costs of the project to the contractor?

Answer 6

• Preliminaries
• Build costs
• Contingency for unknowns costs
• Provisional sums
• OH&P
• Inflation
• Pricing schedule

Question 7

What effect does the design and construction processes have on costs:

Answer 7

• Changes to ERS
• Design development
• Increased costs
• Material selection
• Techniques for construction
• Quality
• Availability

Question 8

What techniques are used to reconcile the costs against income:

Answer 8

• Cost value reconciliation
• Monitor and measure expenditure and budgets
• Cashflows or tracking
• Actual costs v budget/ value of works - variations

Question 9

What is a cashflow?

Answer 9

A forecast of payment and a tracker shower actual receipts and expenditure.

Question 10

What is a valuation?

Answer 10

• Guidance note is - Interim valuations and payment 1st edition August 2015
• Process by which the QS arrives at the value. Normally involves visiting site and checking that the work has been carried out by visual inspection and or measurement.
• Must be realistic – too low creates unreasonable financial problems for the contractor. Too high, creates a risk to the employer of paying sums for which he or she obtains no benefit.
• Interim payments up to practical completion
• Interim application – contractor submits payment application to the QS not less than seven days before the ‘due date’

Question 11

What is the payment timeline?

Answer 11

I’m more familiar with the payment timeline for the D&B 2011 contract and this was outlined as follows:

1. Contractor submits its application for payment on or before the due date. Work is to be valued up to the due date only.
2. QS values the works and makes it recommendation.
3. 5 calendar days after the due date, the employer’s agent is to issue its certification.
4. If a pay less notice is to be issued, the latest date will be 5 days prior to the final date of payment.
5. Payment to be made by the final date for payment.
6. From receipt of the contractors application, there is a 14 days turnaround time for the final date of payment.

Question 12

When is retention released?

Answer 12

1. 50% at PC

2. 50% are the end of defects liability period - usually 12 months but will be outlined in the contract.

Question 13

What is the process for releasing the final retention monies?

Answer 13

• Final inspection
• Final payment certificate
• Defects list – Defects must be made good in a reasonable time
• Once all items have been made good, a Certificate of Making Good Defects can be issued with the final certificate to release the retention.

Question 14

What is the final account?

Answer 14

The final figure of the construction works. It is the contract sum, plus or minus any adjustment made from variations.

Question 15

What is a preamble?

Answer 15

• Explanation of a document.
• Help to interpret the document.
• Tendering procedures, negotiations, objectives, quality

Question 16

What are build costs?

Answer 16

• Those costs incurred by the actual construction works themselves.

Question 17

What is a provisional sum?

Answer 17

• An allowance usually estimated by a cost consultant, that is inserted into tender documents for a specific element of the works that is not yet defined in enough detail for tenderers to accurately price.

Question 18

What is value engineering?

Answer 18

• Solve problems and identify and eliminate unwanted costs, while improving function and quality. The aim is to increase the value of products, satisfying the product’s performance requirements at the lowest possible cost.
• Should start at project inception but the contractor may also have a significant contribution.

Question 19

What are OH&P?

Answer 19

Overheads and profits.

• Overheads are the costs of running the company contracted to carry out a project i.e. office administrative costs. E.g. property costs, finance charges on loans, insurances, staff, taxes, external advisors, marketing and tendering activities
• Profit is the money made after accounting for all costs and expenses.

Question 20

What is a pay less notice?

Answer 20

• Issued by either contractor or employer.
• Method of notifying the contractor that he or she intends to pay less than the sum stated on a payment notice of certificate of payment.

Question 21

How do you monitoring and report on financial aspects of a project

Answer 21

1. Review cost reports from the QS to ensure their figures align with mine in terms of variations.
2. Report on the position of finance within the monthly report, summarising the cost report and drawdown profession fees.
3. Review cashflow position and ensuring it reflect invoices to date.

Question 22

What is the change control process?

Answer 22

It is the process for which must be followed for a change to become part of the works. it includes the originator raising and RFC, the contractor pricing this and confirming programme implications. The PM and QS reviewing the affects, passing to the client for authorising and then instruction if accepted.

Question 23

What is a cashflow?

Answer 23

A document which shows actual receipts and expenditure. Shows when bills are due to be paid and where income is being generated from.

Question 24

What is a construction cash flow?

Answer 24

A forecast of payments due each month based on works carried out and materials procured.

Question 25

What can a construction cash flow tell you?

Answer 25

1. Whether the project is behind schedule.
2. Whether subcontractors are behind programme.
3. Whether the contractor is having difficulty paying its bills resulting in subcontractors not committing materials or labour.
4. Whether the contractor is recouping the financial effects of change.
5. Whether the tender has been front loaded.
6. Whether the programme is wrong.

Question 26

What is the drawdown process?

Answer 26

It is the process to manage and monitor professional and contractor fees.

I set out a cashflow based on fee proposal and cashflows, so the forecasted monthly payment based on the work carried out. I record the forecast and the actual invoice received each month and review this to ensure the consultant has not invoices more than forecasted.

Other documents in the drawdown include a master schedule which outlines cumulative payments and highlights how much the consultant has left to bill.
The invoice statement shows the invoices included in this particular drawdown and the payment recommendation statement is a certificate to confirm that the invoices have been checked and are authorised for payment. I now also include an invoice list to identify all invoices that consultants have sent previously which helps with dealing with discrepancies.

Question 27

What is retention?

Answer 27

It is a percentage of each interim certificate deducted and retained by the employer from each interim payment to the contractor.
it provides an incentive for the contractor to complete the works promptly and offer a limited financial cushion to the employer in the event of contractor default.
Standard retention rate is 3% but can be amended to suit risk profile.

Question 28

What items doe not have retention taken on them?

Answer 28

• Loss and expense amounts
• Statutory fees and charges
• Some additional insurance premiums

Question 29

What is the final account?

Answer 29

The final account is the conclusion of the contract sum including all adjustments and signifies the agreed amount that the employer will pay the contractor. It includes any works that are paid to the contractor through the main contract.

prepared by the QS

Question 30

How is the final account prepared?

Answer 30

• EA should ensure that all contracts instructions have been accounted for and that all other potential cost related items are schedule out. This may include:
• Provisional sums
• agreeing prime cost sums
• any loss and expense associated with EOT
• Adjustment of provision/ approximate quantities
• Fluctuations

Question 31

How can a provision sum be expended?

Answer 31

The EA/ CA has to issue an instruction for its expenditure.

Question 32

What are the risks associated with provisional sums?

Answer 32

That the actual cost and time exceeds that allowed for in the provisional sum because the nature of the item changes between tender and instruction.

Question 33

What are the principal components of a cost estimate?

Answer 33

• Construction cost
• Preliminaries
• Contractor’s OHPs
• Contingency
• Inflation
• Assumptions - programme
• exclusions
• area schedule
• Basis of estimate drawings/ specifications list.

Question 34

What is cost planning?

Answer 34

Cost planning is a management process that seeks to control design development in line with the client’s budget. It does this by helping the client decide how it wants to allocate the budget to the various parts of the project. Cost planning covers:

• Establishing the budget
• Cost modelling ahead of any design.
• Establishing a cost plan
• benchmarking
• Obtaining sign off by the client and the project team.
• Cost checking design development against the cost plan
• Value engineering the design to meet the cost plan
• Reassessing the cost plan at key design stages.

Question 35

What is value engineering?

Answer 35

VE is an organised approach aimed at providing the necessary functions at the lowest cost, without detrimental effect to quality, reliability, performance or delivery.

Question 36

What happens during the VE process?

Answer 36

• Design team is brought together
• Pool expertise, guided by a team leader
• Higher chance of identifying and solving problems at an earlier stage - better value for money.
• not a cost cutting exercise, this leads to reduced quality and value.

Question 37

What is the purpose of a Commercial Manager and how do they support the Project Manager?

Answer 37

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. 
A successful construction project will usually be one that produces or exceeds the anticipated return for a client or business, with the client relationship maintained or improved as a result. The probability of this outcome rises as the project’s commercial controls and commercial management improve. Successful controls are provided through the exercise of mature and practical commercial management techniques, which are closely aligned to traditional quantity surveying skills, such as:
•	understanding estimates
•	value engineering
•	supply chain management
•	valuing work
•	understanding cost
•	cost/value analysis
•	cash and cost flow analysis and
•	commercial decision making.

Question 38

What is a Parent Company Guarantee?

Answer 38

A PCG is a guarantee by a parent company of a contractor’s performance under its contract with its client, where the contractor is a subsidiary of the parent company

Question 39

What is a Performance Bond and what are the advantages/disadvantages of such a bond?

Answer 39

A performance bond is a surety bond issued by an insurance company or a bank to guarantee satisfactory completion of a project by a contractor.
For example, a contractor may cause a performance bond to be issued in favour of a client for whom the contractor is constructing a building. If the contractor fails to construct the building according to the specifications set out by the contract (most often due to the bankruptcy of the contractor), the client is guaranteed compensation for any monetary loss up to the amount of the performance bond.
Performance bonds are commonly used where an owner or investor may require the developer to assure that contractors guarantee that the value of the work will not be lost in the case of an unfortunate event (such as insolvency of the contractor). In other cases, a performance bond may be requested to be issued in other large contracts besides civil construction projects.
Usually come at a premium though and will only guarantee around 10% of the contract value.

Question 40

What measures can be taken to effectively control costs during the construction phase of a project?

Answer 40

• Proactive risk and contingency management
• Implementing a robust change control process
• Management of provisional sums within budget
• Regular cost reporting which is also forward looking
• Rolling final account with closure process for financial impact of change

Question 41

Where would you find guidance on estimates & types of estimates and rules for measurement

Answer 41

The RICS New rules of measurement (NRM). The NRM suite comprises three volumes and should be referenced for further detail:
• 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 work

Question 42

What information would you expect to see or include within a cost report for a project procured under a single stage traditional procurement route?

Answer 42

• Executive summary, which may include:
o Current budget and forecast
o Contingency position
o Level of cost ‘certainty’, i.e. agreement of provisional sums
o Total commitment and expenditure to date
o Final account progress
o Contract position
o Cash flow position
o Progress in the period and current financial position
o Outstanding information
o Major risks or causes for concern
o Next steps and recommendations
• Analysis of contingency and risk status
• Register of approved changes/ instructions and pending changes
• Summary of provisional sums and progress against these
• Value engineering or opportunities register
• Risk register
• Cash flow forecast