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APC - March 2022 > Project Finance > Flashcards

Project Finance Flashcards

1
Q

What is cost control?

A

The process of managing a projects finances and planning for potential financial risks.

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2
Q

How do you control and monitor cost during a project?

A
  • Regular cost reports in format agreed with the client
  • End of stage cost reports by QS
  • Contractor cash flow monitoring
  • VE exercises
  • Minimising change and defining provisional sums
  • Regularly update cost plan
  • Monitor construction risks
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3
Q

What is a cost plan?

A
  • Plan that determines the fiscal feasibility of a project
  • Sets out the life cycle budget - provides an estimate of what the project cost will be
  • Sets out cost control methods
  • Set over a certain period of time
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4
Q

Why is it important to effectively manage cost during the construction phase of a project?

A
  • Role of PM is to ensure project success in regards to time, cost and quality
  • Important to deliver the project within the agreed budget through controlling and monitoring costs
  • Advise the client of appropriate risk allowances with the QS and project team and capture these within the CapEx
  • Ensures client can plan their internal finances effectively
  • Assist with staying on top of project costs - risk mitigation
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5
Q

What are the processes / mechanisms for establishing a project budget?

A
  • CapEx and reporting
    • Cash flows
    • Value management and engineering
    • Design reviews
    • Early warning process
    • Change control procedures
    • Clear project brief
    • Project execution plan
      • Cost plans and cost trackers
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6
Q

How do you report and forecast during the construction phase? Think L2 - Blossom Street e.g.

A
  • QS produces a cost report, tracking spend vs agreed sum
  • Identifies monthly burn rate driven by programme - what works are being done and associated cost
  • Contractor issues cashflow forecast, aligning with works programme
  • Monthly review meetings of programme and cost review, with work inspections
  • Payment process includes mechanisms to ensure works have been done (and in line with ER’s / works information)
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7
Q

How would you reduce costs in a project?

A
  • Value engineering
    ○ Process of reducing cost without affecting function or quality
    ○ Achieving best value design in line with strategic objectives identified in the value management process
    ○ Value engineering focuses on:
    § Building space/ area
    § Building elements and components
  • Can be done in RIBA stage 2,3 and 4
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8
Q

What is value management?

A
  • Conducted in the initial stages of a project to define what value means to the client and how this will be achieved
  • RIBA stages 0 & 1
  • Defining what value means to the client in the briefing process e.g. quality of fit out or functionality of the building
  • Setting objectives and carrying out options appraisals that help identify how value can be maximised
  • Understanding what aspects of the brief can and cannot be changed
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9
Q

Impact of legislation on project cost?

A
  • Legislation may change the design requirements or which products can be used, therefore driving up costs and requiring contingency
  • For example, new legislation came in after Grenfell banning the use of combustible materials on external facades, driving up design costs e.g. ‘the bug’ on Fitzroy Street
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10
Q

Tell me about payment under construction contracts and any relevant legislation you are aware of?

A
  • Payment under construction contracts / invoicing is defined by the construction acts:
    ○ Housing Grants, Construction and Regeneration Act 1996
    ○ Local Democracy, Economic Development and Construction Act 2009
  • Relatively uniform across construction contract forms, this is in order to maintain solvency down the supply chain and to eradicate ‘pay when paid’ culture
  • Allows for interim, periodic or stage payments
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11
Q

What is the typical payment process under a construction contract?

A
  • Application made by contractor for works done since last interim
  • Site walk held with PM/ QS/ contractor QS and EA/CA
  • PM or EA/CA will review application and either certify it or issue a pay-less notice
  • Invoice issued in line with the valuation
  • Payment must be made in line with payment date as outlined in the contract
  • If payment not made by the date then contractor has the right to suspension under Construction Act ‘09
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12
Q

What did the Housing Grants, Construction and Regeneration Act 1996 do?

A
  • Includes provisions to ensure that payments are made promptly through the supply chain. Provision includes ‘the right to be paid in interim, periodic or stage payments’
  • Payment due date – the date provided within the contract as the date on which payment is due.
  • If payment is not made on or before the final date for payment the payee can give notice under section 112 of the Act to suspend performance of the contract.
  • The payer (Client) must issue a payment notice within five days of the due date for payment, even if no amount is due, setting out the sum that the payer considers to be or to have been due at the payment due date, and the basis on which that sum is calculated.
  • Key changes included:
    • Remove ‘pay when paid’ culture.
    • Allows for interim, periodic or stage payments
      • Gave all a right to arbitration
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13
Q

What is change control?

A

The tools to record change

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14
Q

Why is change control important?

A
  • Change can be managed through a system including: undertaking SI, confirming client brief, identifying risks, considering relevant legislation
  • Managed through compensation events/ relevant events & matters
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15
Q

Where would a change control process be documented on a project?

A
  • The change control process would be set out in the project execution plan
  • It would then be formally documented either:
  • Through the project brief - until RIBA stage 2
  • Post RIBA stage 2:
    Change control tracker
    EW system
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16
Q

Process for agreeing change control processes on a project?

A
  • Building contract wouldn’t usually stipulate a process for implementing change
  • Good practice to agree a process with the contractor pre-contract and this should be include agreeing the contents of a pro-forma, means of controlling and recording requests and the process for signing off costs before any changes are instructed
  • QS should provide initial cost estimates for any proposed change to inform the client of likely costs
  • EA should always obtain written confirmation from the client of acceptance of the contractors price before issuing an instruction
  • On major projects - regular change control meetings are recommended to discussed progress on change requests and to agree instructions
  • Duty of EA to confirm if an instruction constitutes a change
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17
Q

Talk me through a typical change control process? (D&B)

A

Employer led change

  • EW raised
  • EA fills out change request form and issues to contractor
  • EA logs change with CRF number
  • Contractor confirms any cost, programme and quality implications within typically 10 days of initial CRF being raised
  • EA reviews with employer, QS and CMT
  • Approved / rejected
  • Instruction issued

Contractor led change
- EWN raised and issued to EA
- EA reviews to assess whether a change under the contract
- EA rejects / approves
- If approved
§ Contractor completes CRF and issues to EA
§ EA logs change and provides CRF number
§ Contractor confirms any cost, programme and quality implications within typically 10 days of initial CRF being raised
§ EA reviews with employer, QS and CMT
§ Approved / rejected
- Instruction issued

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18
Q

What is a cost plan?

A
  • Presents the estimated cost into a structural elemental or functional format
    Shows how the design team proposes to distribute the funds available on the elements of the proposed building.
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19
Q

What is the purpose of a cost plan?

A
  • Used by the cost consultant to control the development of the design
  • Identifies the client’s agreed cost limit and how the money is to be allocated to the different parts of the building.
20
Q

When would you do a cost plan?

A
  • A formal cost plan is to be issued at each key stage of the RIBA plan of work
  • Stage 2 - concept design
  • Stage 3 - developed design
  • Stage 4 - technical design
  • A pre-tender estimate and post tender estimates are also to be issued but it no longer relates to any RIBA stage.
21
Q

What are preliminaries?

A

The cost of administering a project and providing general plant, site staff, facilities, and site based services and other items not included in the rates.

22
Q

How do you derive appropriate risk allowances?

A
  • Consult with the design team
    • Benchmarking
    • Procurement route
    • Client attitude/ approach to risk
    • Market considerations
23
Q

What would you include on a risk register?

A
  • Risk
    • Type of risk
    • Likelihood of occurrence
    • Impact of risk
    • Risk mitigation
      • Cost estimate should risk occur
24
Q

What is a contingency?

A
  • Provision included to cover for risks, unknown costs of known activities
  • Usually expressed as a % of base cost
  • Typically will reduce throughout a project life cycle, as costs become known. For example, business planning stage 15%, cost plan stage - 10% of fees / construction costs, construction stage - 5% of contract value
25
Q

What types of contingency do you hold?

A
  • Client contingency budgets:
    ○ Developers contingency - for client changes to the project (a % of the overall project budget)
    ○ Construction contingency - for construction risks held by the client (a % of the construction cost)
    ○ Fee contingency - for fees in relation to client changes (a % of the project fee budget)
  • QS contingency budgets:
    ○ Design - to capture design development from the set of drawings their costs are upon
    ○ Construction - to capture any market fluctuation from the rates their costs are based upon
26
Q

How would you calculate contingency?

A
  • Depends on project stage
    • Risk appetite of client
    • Level of uncertainty
      • Degree of importance of remaining in budget (if budget must be kept then a larger contingency is needed)
27
Q

How would you create a cashflow?

A
  • Establish construction programme and contract value
  • Costs from the contract sum would be allocated to each of the activities shown on the programme
  • Fee drawdown schedules could also be used to plot expenditure on the cashflow
  • Alternatively, historic project cashflows / computer programmes could be utilised to undertake a high level cashflow forecast typically based on an S-curve graph
28
Q

What is a cashflow?

A
  • Record of cash receipts and cash payments
  • Benefits :
    ○ Allows client to gain an understanding of financial requirements over the duration of the project
    ○ Can serve as a benchmark to check valuations against
    ○ Lag of expenditure can be an indication of project progress
    ○ Can be compared against the valuations to determine if the contractor is behind or ahead of programme
29
Q

What type of unforeseen risks can arise on a project?

A
  • On-site discovery

- Delayed/ prolonged planning risks

30
Q

How are unforeseen risks mitigated?

A
  • Contingencies
  • Insurances
  • Site investigations
  • Due diligence
31
Q

What is a CapEx?

A

A tool that tracks project spend and projected cashflow against an agreed budget

32
Q

Talk me through how you would build a CapEx?

A
  • Start with the work breakdown structure (WBS), allocate costs to each activity
  • Fees based upon % of construction cost (architects 3% to 10%, QS 0.5% to 2%, PM 1% to 2.5%)
  • Construction cost based upon benchmark rates or BCIS data
  • Construction contingency based upon % of overall budget
33
Q

Tell me about how you managed and reported cost to the Client on the Whitechapel project?

A
  • On a monthly basis I would update the capex document which shows the budget for all project cost items, including consultants and other fees
  • Reporting included budget movements in the period, any draws on contingency and spend to date against budgets
  • Introduced an invoice procedure that was issued to consultants with dates for them to invoice against to ensure they were paid in line with their appointment
34
Q

Talk me through how you prepared the budget for post-planning works on Whitechapel?

A
  • Started with the work breakdown structure, allocated costs to each activity
  • Fee based on construction cost and previous project experiences from the team
  • Set out a cash flow projection based on programme and key milestones
  • Applied a client contingency on the base cost
    Presented to the client for sign off
35
Q

Tell me about how you monitored spend against progress on Blossom Street?

A
  • The contractor issued the valuation to the cost consultant
  • I met with the contractor, QS and EA on site to review the works undertaken and confirm the works had been completed in line with the valuation.
36
Q

Talk me through the contractor payment process?

A
  • Contractor will submit an application for payment to the EA and QS
  • QS will review through site inspection to assess quantum of works applied vs what has been completed on site
  • QS will also inspect materials that are offsite and form part of the application to ensure that the vesting arrangements have been complied with i.e. the correct materials (EA / CMT should join this)
  • QS confirms to the client and EA their assessment of the valuation and make recommendation for payment
  • CMT needs to confirm in writing if any compliance issues and whether a pay less notice is required
  • Responsibility of the EA to issue a formal certificate to the client, QS and contractor confirming payment due
  • Payment notice should record
    ○ Name and address of client & contractor
    ○ Project title
    ○ Payment no & date of issue
    ○ Gross amount certified, amount of retention deducted, previous payments made and net amount due to contractor
37
Q

How would project finance/budget differ depending on procurement route?

A
  • Less risk allowance needed under the D&B route, e.g. as design risk has been transferred to the contractor
  • Greater level of construction contingency held in traditional and CM - less certainty on end cost as design risk not transferred to contractor
  • Focus of how cash flow is put together is different under CM - greater interface with subcontractors
38
Q

What is a provisional sum?

A
  • Defined provisional sums are estimates from a QS which are inserted into tender docs for works not yet defined accurately enough to be priced properly
  • This estimate may change (or be omitted entirely if works don’t take place) and be replaced with an exact cost at a later date, depending on how the contract is written)
    • e.g. a quantity of a material may be known but not the exact product details so an exact price cannot be included. Therefore leading to a defined provisional sum.
  • Sufficient information so the contractor should make allowances within the programme, planning and pricing prelims.
  • Undefined provisional sums are less known, with little design work done. These mean that the contractor cannot be expected to have allowed for it within the programme, planning or pricing
  • This allows the contractor to come back for an EOT or additional payment
  • Design not developed sufficiently. Contractor may request EOT or additional monies to complete works. Contractor cannot be expected to include allowances for programme, planning or pricing within prelims. Employer will be liable to pay for the full final cost including any programme impact. If undefined provisional sums are included in the contractors price, the employed should consider making a suitable allowance for the risk of exceeding the allowance in their risk register.
39
Q

Do risk allowances change during projects?

A

Typically contingencies will reduce through a project life cycle as costs become known.

40
Q

What is benchmarking?

A

Process by which the estimated performance (often cost) of a project is compared to other similar projects
Can highlight areas of design that are not offering good value for money and can help in the assessment of tenders from suppliers / contractors

41
Q

How do you manage change on a project?

A
  • Change control
  • Change trackers to monitor changes to the brief after RIBA Stage 2 - for the client to review, sign off and update the brief
  • Change control processes during construction - for employer led or contractor led changes
  • Key milestone sign offs i.e. end of design stage client sign off
42
Q

How would you minimise change?

A
  • Carry out thorough site investigations and condition surveys
  • Ensure the project brief is comprehensive enough and approved by all stakeholders
  • Identifying and managing risk
  • Coordinating the design team before tendering
43
Q

Examples of cost planning tools?

A
  • Benchmarking - comparing the project (through the design stages) with best practice examples
  • Whole life costing - consider the cost of a building from construction to disposal (initial capital costs, running costs, maintenance costs, disposal costs)
  • Tender price inflation forecasts - predicting construction prices at time of going to tender
44
Q

What is risk?

A

An uncertain event that if occurs will impact upon the development

45
Q

Why is risk management important?

A
  • Helps to inform decisions, avoid surprises and increases awareness, allowances can be prepared for both cost and time
  • Minimises the impact and maximises value for the client
  • Determine the risk owner for each risk
46
Q

What is risk management?

A
  1. Identification
    • Via discussions with stakeholders and those who have undertaken similar projects
    • Via checklists to ensure all key areas of the project are considered
    • Classify the risk (i.e. design, construction, property, planning, commercial)
  2. Assessment
    • Determine the likelihood - qualitative / quantitative
  3. Mitigation
    • Prevent
    • Mitigate
    • Transfer
    • Contingency
    • Accept
    • Insure
    • Decline
  4. Control
    • Monitor the risks to ensure they remain within the limits accepted by the client
    • Report progress against each risk
    • Re-evaluate the project risks as it develops

APC - March 2022 (23 decks)

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