Level 3 - Project Financial Control and Reporting Flashcards
What is receivership in administration?
Receivership is a process in which a creditor assumes ownership of a debtor’s business operations
What is the position on insolvency in a JCT contract?
Section 8
8.5 - insolvency of contractor
Employer may at any time terminate the Contractor’s employment by notice
What’s CVA?
Company Voluntary Arrangement
Why would a contractor opt for CVA?
- Directors remain in control
- Costs involved are cheaper than going into administration/receivership
- No requirement to tell customers/to go public
- Creditors are prevented from threatening or taking legal action against the company as long as the agreed terms are adhered to
- A CVA avoids company liquidation and, therefore, requires no investigation of directors’ conduct leading up to insolvency.
- 75% of creditors have to agree to it
What would you do after a contractor goes into liquidation?
- Secure site
- Value works on site
- terminate contract
- invoke performance bond (if applicable) to cover losses
- KEEP SITE INSURED
- Use retention to cover losses
What EXTRA costs would the client have to cover if the contractor goes insolvent?
- Prelims for setting up site again
- site security
- costs associated with delays (loss of income)
- insuring vacant site
- professional fees
- make good any damages
What’s the difference between liquidation and administration?
Liquidation is the process of bringing a business to an end and distributing its assets to claimants
Administration is a very powerful process for gaining control, when a company is insolvent and facing serious threats from creditors. The Court may appoint a licensed insolvency practitioner as administrator. This places a moratorium around the company and stops all legal actions
How can you avoid a contractor going into liquidation?
Do financial due diligence before appointment to ensure they have the financial capacity/cashflow to run the project
Pay contractor on time
Keep on top of variations
Have a retention bond instead of holding retention
Is retention good?
- It does a job of protecting the client
- However it is bad for cash flow for the contractor and ultimately if they fall into liquidation that is an issue for the client
- Retention bond can replace retention however will come at a premium for the client
How did you negotiate your final account?
- Ran rolling FA anyway
- Late/outstanding variations negotiated as FA
- Prepared evidence/position on all outstanding variations, agreed them with contractor
- Statement of Final Account approved by client and signed by contractor
What is retention?
It’s a contractual mechanism that holds back a %age of interim payments to the contractor
This is used to protect the client in the case the contractor fails to fulfill his obligations
How do you decide on retention amount?
Project specific
Generally smaller/riskier project will have higher retention amount
What is the default retention &age in JCT DB 16?
3%
Same for DB 2011
What is a retention bond?
A performance bond that protects the client in the case the contractor fails to fulfill his obligations
How are retention bonds utilised in the case of non performance?
- On demand (not often used)
- Conditional
What was a change on the Dulwich project that the client was responsible for?
Extra scope, e.g. new rooms to be decorated, access control on doors where it was not specified within ERs
What was a change on the Dulwich project that the contractor was responsible for?
Design development e.g. anything that was in the ERs that they have just developed
Where in the JCT DB 2011 does it state who is responsible for what changes?
Section 5 Change
States changes are change to ERs or PSUMs
What is change control?
The administrative process that implements the contract mechanism for instructing change.
MUST adhere to contract requirements for notification & approval of change
What does effective cost control require?
Agree variations as they come out, rolling final accounts
Cost Reports to monitor progress
How do you control project costs pre contract?
- Between cost plans we run change trackers
- As design develops we review drawings/releases or pick up on things in meetings
- Prepare cost uplift/reduction estimate and add it to the tracker
- Present to the client every 2 weeks advising new likely outcome of costs or just flag the item and state info we require before cost can be allocated
- For new basement, I prepared an alternative basement estimate to the one being designed to advise alternate options
How would you structure a cost report?
- Introduction/exec summary
- Project Financial Summary showing Budget vs current position vs previous position
- EAIs
- AEAIs
- Early Warnings
- PSUM adjustments
- VE items
- Cashflow
What RICS guidance is there on cost reporting?
RICS Cost Reporting 1st Edition 2015 (guidance note)
RICS Valuing change 2010 (practice Standards)
Can you have JCT IC without quantities?
No - only SBC
What are valuation rules?
Rules in a contract for valuing change
The Valuation Rules are set out in the Contract
Conditions and reflect a sliding scale of options,
based on how closely the varied work resembles
work that is part of the Contract Documents
What are valuation rules?
Rules in a contract for valuing change
What are the valuation rules in JCT DB?
- Allowance must be made for addition/omission of relevant design work (professional fees)
- If varied work is similar of character/conditions/quantity to work in CSA, CSA values must be used
- If work is similar in character but not conditions/quantity, reasonable allowance made based on CSA
- If not similar in character, fair rates & prices will be agreed
- Any change will incl allowance for prelims
- Daywork shall be used to value work that cannot be measured
- Check Contract Particulars - if Contractor’s Quotation provision applies, Contractor must provide this (schedule 2)
What are the valuation rules in JCT SBC/IC?
- Work should be measured and quantified using same rules of measurement as BoQ
- Allowance shall be made for lump sum/percentage adjustments applicable e.g. directors discount
- Adjustment to prelims
- If an approx. quantity is a reasonable forecast of the quantity of works then the BoQ rate will be used
- If an approx. quantity is not a reasonable forecast then the rate in the BoQ is used as the basis for
When using variation rules, what are the issues to consider?
- Character of change
- Conditions of change
- Quantity
- Prelims
- What are “Fair rates and Price”
- Daywork
- CDP
- Change of conditions for other work
- Contractor’s Quotations
- PSUMS
What are “Fair rates and Price”?
Case law does not provide a definitive position.
Fair rates and price = fair valuation.
What is daywork?
Method of valuing additional/substituted work which cannot properly be valued by measurement.
Records need to be prepared to document labour, plant and materials used in operation to verify work conducted.
Records of labour/plant etc are multiplied by rates from the “definition of Prime Cost of Daywork carried out under a Building Contract” at Base Date.
How do you present your monthly cost updates?
Submit cost report, follow it up with a phone call or face to face meeting to run through key headline points and any detail client wishes to delve into
What is an S curve?
Standard Curve
A generic cash flow forecast in the shape of an “S” typical of most projects
Why would you ask for the contractor to produce their own cash flow based on the programme?
It will be more accurate than an S curve as it will account for anomilies relevant to the project, whereas the S curve is generic.
It is important to watch out for front-loading
What is front loading?
This is where the contractor forecasts costs at the start of the project to be greater than they actually will be, in order to coerce the PQS into thinking higher payments are due early.
What are the risks of over-payment?
This improves the contractor’s cash flow but leaves the client at risk, as they may be paying more than has actually been carried out.
If the Contractor stops working/goes into liquidation, the Employer may lose out as they have paid for more than they have received.
What is the most accurate form of measurement of works completed on site to date?
Not judging by the cash flow forecast, but by visiting the site and conducting an assessment
Who is responsible for extreme weather?
In some contracts, force majuere is considered a ‘relevant event’, though if they continue to perform their duties they may not be able to claim
What are relevant events and what clause in DB are they?
- 2.26
- Changes
- Employer’s instruction (bar instructions relating to discrepancy/divergence in CPs)
- Deferment of possession of site
- Suspension by contractor of performance
- Adverse weather
- Loss/damage to any specified peril
- strike
- delay in receipt of permission by statutory body in which contractor has taken all steps to avoid
- force majeure
What are relevant matters in DB?
- Changes
- EMployer instructions
- delay in receipt of permission by statutory body in which contractor has taken all steps to avoid
- any impediment by the Employer
What did you say in the DTMs for Dulwich project?
- Listened to progress update
- Discussed alternatives to variations/early warnings
- Discussed any outstanding variation info I was waiting for
- Updated client on where the costs sat, when next cost report is due, when the next valuation will be
How did the contractor request change?
- Issued description of change
- Where it came from (client/contractor)
- cost implications
- programme implications
- HS implications
- risks
- time that response is required by
What did you do if you didnt agree with the contractors change request?
If I didn’t believe it was a client cost I would write an email as to why, referring to contract if necessary, then follow up with a phone call
What’s the difference between JCT DB and IC in terms of post contract change?
- design development was responsibility of the client in IC, unless it was developing the design for those handful of CDP items
At final account, why were some of the variations not agreed?
Contractor was late to issue the change request
What happens to leftover PSUM?
- transferred into contingency once item was closed
What happened to variations neither party agreed on?
- Fortunately in this contract that didn’t happen, we agreed all variations
- Next step would have been mediation or adjudication
Give an example of a change on the project in central London?
- 30 yard trucks could no longer go into loading bay because it caused vibrations as they drove over light well
- It was agreed that that was their strategy during tender
- Cost for omission of large trucks and addition of smaller trucks
What is a final account?
What is a final account?
The conclusion of the contract sum including all adjustments.
Signifies the agreed value the Employer will pay the Contractor.
Will a final account typically include VAT, interest on overdue payments, LADs, or loss and expense?
Loss and expense YES
LADs, VAT and interest NO
When does preparation of a final account occur?
Throughout the contract period
How would you structure a final account?
No firm defined format, but an example would be:
- Contract Sum (CSA of BoQ)
- Variable costs (PSUMS, PC Sums, Daywork allowances)
- Variations/Contract Instructions
- Loss and expense
- Fluctuations
- Risk allowance
At final account, must all variations be instructed?
All changes should have a contract instruction, but it is not uncommon at final account stage for some variations to not have received a formal instruction still.
It is good practice to ensure the architect/CA are aware of all variations.
What is the final certificate?
After the defects liability period is over, the final certificate is issued by the CA allowing the release of the remaining retention monies.
Final Account must be agreed before final certificate.
What happens to the retention release if the final account has not been agreed at PC?
The employer is entitled to release half retention only up to the amount agreed thus far.
Another payment certificate may be issued once FA is agreed.
What happens if the FA is not agreed after the DLP is over with regards to retention?
The employer is entitled to release full retention up to the amount that has been agreed thus far
What happens if the contractor does not fix the defects during the DLP?
Most standard forms of contract allow the Employer to use retention money to employ a different Contractor to fix the defect.
The Contractor is allowed to rectify the issue themselves first, and usually this is defined by a timescale after notification by the CA.
What are patent defects?
Can be discovered by reasonable inspection
What are latent defects?
Cannot be discovered by reasonable inspection
What are contra charges?
Where the Employer recovers costs from the Contractor that the Contractor has caused the Employer to incur.
In JCT contract suite, how long does the Contractor have to provide information for the final account?
6 months
