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James' APC Revision > Project Finance > Flashcards

Project Finance Flashcards

1
Q

What is post contract cost control?

A

Managing the contract sum and any variations during the programme, so that the project remains affordable and funds are available when needed

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2
Q

Why do we need post contract cost control?

A

Ensures:
- project remains affordable
- risks are managed throughout the project

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3
Q

What is an Interim Payment Application?

A
  • A document prepared by the contractor containing their progress against each of the work elements
  • Revalues the whole work, not just the work done since the last valuation
  • Precursor to the issue of an interim payment certificate

(basis of contractor’s application for payment varies depends contract type used)

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4
Q

What are interim valuations?
Why do we do them?

A
  • Payment for completed works at agreed regular intervals during the project, rather than a lump sum at completion
  • Used on larger projects to ease contractor’s cash flow, as project finance is cheaper for the client than the contractor (unrealistic to expect contractor to finance project)
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5
Q

What are the 4 valuation rules?

A
  1. Use BoQ rates
  2. Star rates (adjust BoQ rates)
  3. Day works
  4. Fair and reasonable price
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6
Q

What are the main elements of an interim valuation?

A
  • Measured works to date
  • Materials on/off-site
  • Preliminaries
  • Variations
  • Retention
  • Payments on account
  • Extension of time (JCT)
  • Loss and expense (JCT)

(adjustment of prime cost sums, provisional sums (JCT))

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7
Q

What are the key considerations of an interim valuation?

A

Frequency/timing - see payment schedule

What the contract says about:
- Payment timeline (notice to withhold etc)
- Materials
- Variations
- Retention

Approach: setting up the spreadsheet so it
- clearly shows movement in the month
- breaks items down so they’re easier to value (e.g. floor types)

Relationship with the contractor’s QS

(common QS mistakes: using wrong previously cert value, no certificates)

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8
Q

How would you assess the interim valuation?

A
  • Review contractor’s application – identify any movement in the month
  • Walk around site with contractor: check work completed, materials on-site
  • Carry out my assessment - apply appropriate %s
  • Agree valuation with contractor (negotiation)
  • Create a recommendation letter based on my assessment, issue to the EA who issues the payment certificate

(liaise with the clerk of works (JCT), value preliminaries, agree variations, check materials off-site)

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9
Q

How are works valued?

A

Contractually:
- Interim payments: payment for completed work at agreed regular intervals during the project, rather than a lump sum at completion (can be based on a BoQ, Pricing Schedule or Activity Schedule)
- Stage payments: payment for completed work upon reaching an agreed milestone

(Calculations can be based on:
- Activity Schedule: assessed in terms of % achieved or completion of activity.
- Milestones reached on a pre-agreed programme
- Measurement against a BoQ/CSA
- Stage payments against calendar date)

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10
Q

What are the implications of over or under valuing the works?

A
  • Overvaluing the works puts the employer at risk of paying sums in exchange for no benefit
  • Undervaluing the works creates unreasonable cashflow issues for the contractor

(interim valuation must be a realistic assessment)

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11
Q

What would you do if the contractor claims for paint in their 1st interim valuation?

A
  • Assuming the project is new build, the contractor is probably front-loading
  • I would assess if they had done any painting during the site visit and adjust the valuation accordingly
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12
Q

What are the key things you should consider prior to valuing materials off-site?

A

Depends on contract:

  • Request a vesting certificate
  • Check materials are clearly marked for the project and are separate from other materials
  • Check insurance is in place until the materials arrive on site
  • Check material off-site bond has been provided
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13
Q

What needs to be in place to make payment for materials on-site?

A

Materials should:
- be adequately protected
- be covered by the works insurance
- arrive on-site within a reasonable time before they’re needed e.g. delivering doors in the first week of a new build project wouldn’t be appropriate

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14
Q

What is a vesting certificate?

A

A document evidencing that ownership of materials will transfer from one party to another on payment

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15
Q

What is a ‘payment on account’?

A

Payment against an item of work (or materials) for which no instruction has been issued but is anticipated, and both sides agree that some payment is due

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16
Q

Can you explain what is meant by the term ‘daywork’?

A
  • Contractor is paid for their work based on the materials, plant, labour used plus OH&P
  • Used when work cannot be priced in the normal way
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17
Q

What is a variation?

A

An alteration to the scope of work originally specified in the contract through addition, omission or substitution of the works, or changing the way in which the works are carried out

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18
Q

What information is typically shown on a payment certificate?

A
  • Certificate and contract date
  • Contractor, employer and EA’s details
  • Site address and project number
  • Contract Sum
    .
  • Gross valuation
  • Less retention
  • Less works not in accordance with contract
  • Net valuation
  • Less cumulative value of previous payments
  • Amount due (excluding VAT)
    .
  • EA’s signature
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19
Q

What happens if the employer fails to pay the amount due (on the payment certificate) on or before the final date for payment?

A
  • Employer will be liable for interest on the amount due (subject to contract conditions)
  • Contractor may exercise their right to suspend part or all of the works
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20
Q

What is a ‘pay less notice’?

A

Gives the paying party the right to withhold all or part of the notified sum

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21
Q

What are the employer’s obligations if they wish to withhold the notified sum, but fail to issue a pay less notice?

A

If the paying party doesn’t serve a valid pay less notice timeously, they are obliged to pay the notified sum in full, regardless of whether they have a valid challenge to the sum

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22
Q

Can you explain the payment timeline for the JCT Design & Build 2016 contract?

A

(a) INTERIM VALUATION DATE - contractor required to make an Interim Payment Application before this date

(b=a+7) DUE DATE - date up to which the works are valued

(b+5) Payment Notice - employer issues contractor a ‘Payment Notice’, stating the sum they consider to be due to the contractor at the due date, otherwise application becomes the Interim Payment Application

(c-5) Payless Notice - if the employer will pay less than the sum in the Interim Payment Application, they must notify the contractor

(c=b+14) FINAL DATE FOR PAYMENT - employer must pay contractor on or before this date

(NB: Interim Payment Application (or Payment Notice) = contractor’s assessment of money employer owes them)

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23
Q

What are change control procedures?

A
  • Ensure variations are identified, costed and approved prior to issuing instructions
  • This ensures value for money and impact (e.g. disruption to current work) are considered before a variation is either approved, pending or rejected

Changes include:
- PM or architect instructions
- design development
- site instruction or RFIs
- client changes
- VE

(include contingency in variation cost build-up)

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24
Q

How is change captured in a cost report?/
How do you report change to the client?

A

Under the EAI section (change control log), each variation has a:
- description
- cost
- funding source e.g. risk allowance, budget transfer or external source to project

AI section describes variations that haven’t yet been approved through change control, e.g. mentioned at progress meetings or informal discussion with contractor and design team

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25
Q

What’s included in a change control form?

A

Depends on project, but generally:
- change request number
- date raised
- change type
- change description incl. impact on cost, time and area (GIA/NIA loss/gain)
- change justification
- authorisation section
- distribution section

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26
Q

Why does the QS typically fill out the change control form?

A

The QS can be perceived as an impartial “intermediary” between the contractor and design team

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27
Q

What is a cost report?

A
  • An interim update on the financial status of a project
  • It describes the starting position (contract sum), the current position (expenditure to date) and the anticipated final account value
28
Q

What information would you include in a cost report?

A
  • Executive summary (includes anticipated final account)
  • Project information
  • expenditure of provisional sums
  • Employer’s Agent Instructions (EAI’s)
  • Anticipated Instructions (AIs)
  • early warnings
  • expenditure of contingency
  • cashflow projection
29
Q

What’s the purpose of cost reporting?

A
  • Provide an overview of the client’s current financial commitment
  • Informs client of anticipated final account, and variance between this and the budget
  • Gives client understanding of potential savings or additional money required
  • Enables client to make informed commercial decisions
30
Q

Cost report key considerations?

A
  • audience and purpose
  • accurate content that is clear and easy to understand
  • agree frequency/timing
  • aligns with valuations and EAIs
31
Q

The contractor on your project has made a large (and in your opinion) unrealistic claim for loss and expense. How would you deal with it in your cost report?

A
  • I’d report the contractor’s claim and highlight my concern with the figure submitted
  • Assuming the CA has agreed the claim is valid, I would assess the claim and regularly update my client until a conclusion was reached
32
Q

What is the difference between cost and price?

A
  • Cost is the amount the contractor spends on completing the works (includes plant, labour, materials etc)
  • Price is how much the client ultimately pays for the completed works
33
Q

What is a final account?

A
  • Conclusion of the contract sum (including all necessary adjustments)
  • It signifies the agreed amount that the employer will pay the contractor

(agreed between the contractor and QS and is contractual).

34
Q

What is a rolling final account?

A
  • Continually agree the contract sum with the contractor after each variation or milestone
  • Good practice because when it comes to agreeing the final account it should be almost fully agreed already

(cost reports effectively show a rolling final account as the committed expenditure each month is updated, accounting for all agreed and instructed variations)

35
Q

What are the usual components of a final account?

A

Original contract sum &

Final project cost (contract sum adjusted to account for):
- Variations
- Fluctuations
- Prime cost sums
- Provisional sums
- Loss & expense
- Releasing any remaining retention

(final project cost is basis for: Final Certificate & alinea analysis)
(total of all previous payments made to the contractor (total of interim certificates));

36
Q

What are the key considerations for final accounts?

A
  • Rolling final account: agree variation values with contractors as you go along to avoid agreeing them all at the end
  • Relationship with the contractor’s QS
  • Disagreements with contractor: usually meet halfway (cheaper than adjudication)
37
Q

What is a loss and expense claim?

A

A claim made by the contractor for loss incurred due to the occurrence of a relevant matter

38
Q

When should you assess a loss and expense claim?

A

AFTER the actual loss has been incurred

39
Q

What is the key thing to remember when assessing loss and expense claims?

A

The claim should be the ACTUAL loss incurred by the contractor

(prices in the contract BoQ, contract schedule of rates or preliminaries shouldn’t be used because actual costs may vary from these)

40
Q

How would you assess the validity of a loss and expense claim?

A

I’d consider:
- is the client responsible for the delay under the contract? (otherwise its not a relevant matter)
- is the loss claimed the ACTUAL loss incurred?
- has the contractor provided sufficient information?
- has the contractor tried to MITIGATE the effect? (has the loss been ‘necessarily’ incurred?)
- is the loss ‘direct’ or ‘too REMOTE’? (establish effects of relevant matter on progress on site, labour and plant)
- ensure there is no duplication of cost claimed through other contract clauses

I’d ignore:
- acceleration costs
- pricing errors
- costs associated with preparation of the claim

41
Q

Do you need an extension of time for a loss and expense claim?

A

No, loss and expense can be due without an extension of time

42
Q

What is included in a typical claim?

A
  • Prolongation costs (increased prelims i.e. staff/labour, plant, site accommodation costs)
  • Out of sequence working
  • Inflation (increases in labour, plant and material costs during the delay)
  • OH&P
  • Interest
    .
    (disruption causing plant and labour to be underutilised)
43
Q

What are prolongation costs?

A

The cost of time-related resources (e.g. site management, site accommodation, key items of plant) incurred by the contractor due to delay of the works for which the contractor is not responsible

44
Q

What is risk management post contract?

A

Managing risk allowance post contract involves:
- Expending risk allowances on the occurrence of the identified risk only
- As a risk is expended, the associated cost moves from the risk allowance into the anticipated out turn cost, and is recorded through the change control process
.
(change control also covers any risks that occur which aren’t in the original risk register, or if a risk overspends the allowance in the register)
.
(remaining risk allowance vs project’s remaining time period indicates project’s financial health)
(advice: regularly monitor risks to close them out and update risk register)

45
Q

How much contingency is required for a project?

A

Depends on:
- project stage when contract placed
- project type: new build, refurb
- procurement route
- design completeness
- site conditions
- market conditions

46
Q

How do you come up with a risk allowance?

A

List all risks in a risk register, then price them all

47
Q

What is the difference between risk allowance and contingency allowance?

A

Risk allowance is for the known risks, contingency is for the unknown risks

48
Q

How is risk management monitored?

A

For each contingency fund, the cost report may:
- identify the original allowance
- monitor the drawdown against it during the reporting period
- identify the remaining amount

49
Q

How are provisional sums managed?

A

Provisional sum tracker:
- description
- amount in CSA
- expenditure instructed to date
- amount still to be expended
- saving/extra

Any savings can either be:
- reported as a cost reduction to the forecast final cost, or
- transferred out of the cost report into a contingency fund (agree with client first)

50
Q

What is a cash flow projection?

A
  • A tool that shows planned expenditure over a period of time
  • The total cost of the works is distributed over the programme into monthly sums of expenditure

(crude tool for monitoring programme, shows the predicted cash flow in and out of a project)

51
Q

Why do cash flow projection for contractor payments typically form an ‘S curve’?

A
  • Early and late stages usually have less trades on site at one time and are typically lower value works
  • Middle section is typically when construction activity is at its highest, with multiple trades on site carrying out higher value packages e.g. frame or services installations
52
Q

Cash flow key considerations?

A
  • materials on & off site
  • variations
  • retention
  • advance payments
  • LADs
53
Q

What are advance payments?

A
  • Payments to the contractor in advance of completing works or procuring materials
  • Usually to assist the contractor’s cash flow required to cover initial expenses
  • Typical example: procuring items with a long lead-in period (e.g. passenger lift or structural steelwork)
54
Q

What are the key disadvantages of advance payments?

A
  • Commercial risk to employer e.g. if contractor or suppliers goes into liquidation after payment is made
  • Affects employer’s cash flow
  • Could be concern why contractor cannot fund the expenditure (potential cash flow issues)
55
Q

Assuming the employer is happy to proceed with the advance payment, what measures could be put in place to protect the employer’s commercial risk?

A

Advance payment bond

56
Q

What are the key differences between employer cash flow and contractor (or construction) cash flow projections?

A
  • Contractor cash flow projections typically show construction costs (materials, labour, plant, preliminaries etc)
  • Employer cash flow projections usually consider the project in a much broader context, such as consultant and legal fees, land acquisition charges etc
57
Q

How will the employer benefit from accurate cash flow projections?

A
  • Helps to plan expenditure and ensure sufficient funding is in place for future payments
  • Used as a sense check for monthly valuations
58
Q

Why might actual payments be behind the cash flow?

A
  • works behind programme (e.g. due to site conditions or adverse weather)
  • re-sequencing works: lower value works carried out earlier
  • materials delivered late or stored off-site (not paid for)
  • inaccurate cashflow
59
Q

Why might actual payments be ahead of the cash flow?

A
  • works are ahead of programme (e.g. accelerating works to complete earlier and therefore reduce prelims)
  • contractor front-loading
  • re-sequencing works: higher value works carried out earlier
  • materials delivered to site early
  • includes variations
  • inaccurate cashflow
60
Q

What is value engineering?

A

A structured process aiming to reduce costs without detriment to the function or quality of the building, or the ‘value’ it has to the client

61
Q

Why would you do VE post contract?

A

Gives client comfort that if the project starts to overspend at any stage then there’s room to reduce expenditure

62
Q

How is VE reported post contract?

A
  • Cost report may include schedule of VE opportunities, listing potential areas of saving plus impact (time, cost, quality & area)
  • Any accepted VE should be introduced through the change control process
    .
    (care should be taken to investigate all potential implications of the change - a change intended to make a saving but leads to uncertainty, delay and disruption is unhelpful)
63
Q

What is the difference between value engineering and value management?

A

Value engineering is reactive, value management is proactive (always looking for best value, e.g in the design)

64
Q

What is benchmarking?

A
  • Using data from similar past projects as a comparison or check for cost planning purposes
  • Can highlight areas of design that are not value for money or estimates which may be incorrect

(or if tender submitted by contractors or suppliers align with market conditions)

65
Q

What considerations should you make when benchmarking?

A
  • What I’ll benchmark e.g. £/sqft GIA
  • Which projects I’ll benchmark against
  • Sources of information I’ll use (state these)
  • How I’ll analyse and use the information
    • Indices (location, time etc)
    • Level of detail: depends on client requirements and elements being benchmarked
    • Ensure data is split correctly, watch for anomalies e.g. all-in rates, shared basements
  • Submit benchmark data to in-house team to maintain accurate and varied database

(does the basis recorded represent CSA or agreed final account? Can be significant difference due to variations or claims. Record both if there’s understanding of why project’s cost profile changed, this can positively affect procurement advice given on future projects)

66
Q

What sources of cost information and data are available when benchmarking?

A

External:
- BCIS online (Building Cost Information Service) - data on wide range of building types
- Pricing books e.g. Spon’s and BCIS (information may need adjusting for inflation)
- Speaking directly to contractors, subcontractors and suppliers for cost information

Internal:
- Benchmark data
- Pricing documents from past projects
- Cost models

James' APC Revision (10 decks)

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