Project Finance

Question 1

What is a cash flow?

Answer 1

The net balance of cash moving into and out of a business at a specific point in time
i.e. A view of expenditure over a programme

Question 2

What are the two main types of cash flow?

Answer 2

Company - organisational cash flow
Project - particular to a construction contract or project

Question 3

What is profit?

Answer 3

The balance that remains when all of a business’s operating expenses are subtracted from its revenues

Question 4

What is cash flow forecasting?

Answer 4

A forecast used to inform the employer of when their monetary commitments under the contract will be.
i.e. money moving in and out of the business

Question 5

What is a company cash flow forecast used for?

Answer 5

• To review and analyse the predicted incoming and outgoing cash for a set period of time
• Business and resource planning
• Analysing the financial health of companies.

Question 6

What is a project cash flow forecast used for?

Answer 6

• Inform the Client of when their monetary commitments under the contract will be.
• Ensures that the employer has an accurate assessment of what needs to be paid to the contractor and at what periods
• Used as a method of establishing progress & any serious deviations from the original forecast could represent problems/delays to the contract or even financial difficulty for the contractor.

Question 7

What are the considerations when preparing a project cash flow forecast?

Answer 7

Pre-Contract
1. Consider what period to forecast for – just DDS phase? Whole lifecycle?
2. At the early stages, valuations from previous similar projects to ascertain ‘best fit’ profile
3. Prepare a resource utilisation forecast for internal resources
4. Consider any land, planning, equipment, materials, plant etc. costs.

Post-Contract
5. Use the project programme to determine when costs contained within the activity schedule are likely to be incurred

Question 8

What is an accrual?

Answer 8

Accounting entries for the expenses/revenue for which payment hasn’t yet changed hands (recording costs when they are incurred not when they are billed) to keep records of revenue and expenses that have not been received or incurred

Question 9

How would you graph a cashflow forecast?

Answer 9

By plotting % of value of work completed / projected to be complete (y=axis) against time (x-axis). In preparing a forecasted graph, you have a baseline to work with which can be used to track progress.

The graph will likely take an ‘s-curve’ shape.

Question 10

What is a cost report?

Answer 10

Informs the client of a construction project of the likely outturn cost at a specific point in time. It reflects the current position of the project & the Anticipated Final Cost.

Question 11

What would you include in a cost report?

Answer 11

a) Executive Summary (inc. original contract sum)
b) Financial Summary (inc. contingency spend profile, spend to date and anticipated final total)
c) Project Manager’s Instructions (inc. anticipated)
d) Agreed CE’s
e) Notified early warnings
f) Cash Flow Forecast vs. Actual Spend
g) Risk Register
h) Claims
i) Opportunities Register

Question 12

What is the difference between cost management and cost control?

Answer 12

1. Cost Management - Total concept for managing & controlling cost on a project from start to finish to ensure contract sum remains within budget. Helps design team prepare design based on cost.
2. Cost Control - Part of the cost management process & occurs post contract

Question 13

Why is project cost control important?

Answer 13

• Helps manage the delivery of the project within the approved budget
• Risks can be identified faster as well as opportunities for potential cost savings
• Monitor the effectiveness and efficiency of site operations and provide feedback to estimating teams for future projects.

Used to provide the best possible estimate of:
* Established project cost to date.
* Anticipated final cost of the project.
* Future cash flow.

Question 14

What is contingency?

Answer 14

Costs that are held in reserve to deal with unforeseen circumstances. These costs will be added to the base cost estimate to arrive at the cost limit.

Question 15

How do you arrive at a suitable contingency value?

Answer 15

• Carry out a workshop w/ various project team members to identify the likely risks on the project & produce a Risk Register
• Once risks are identified they are assessed in terms of probability & impact (T&C) to develop a contingency.
• Review regularly - close, remove, reassess, mitigative measures etc.

Question 16

What are NRM’s four categories of risk?

Answer 16

Found in NRM1:
1. Design Development Risks e.g. statutory requirements and legal agreements
2. Construction Risks e.g. existing services and unforeseen ground conditions
3. Employer Change Risks e.g. change in scope
4. Employer Other Risks e.g. early handover, acceleration or special contract arrangements

Question 17

How would you introduce better pre-contract cost control to a project?

Answer 17

• Hold regular meetings with the design team as well as the wider project team to identify potential change. The design team should be aware of any implications that change may bring
• Regularly review the cost plan to ensure each cost element is within its limits
• Setup a change control log

Particularly at the tender stage:
* Compare the contract sums returned by contractors to the internal pre-tender estimate
* Ensure all bidders’ exclusions, qualifications, or clarifications are dealt with to reduce the risk of any significant variations that may be the result of a scope of work error

Question 18

How would you introduce better post-contract cost control to a project?

Answer 18

• Carry out regular forecasts using the interim payments issued and programme to anticipate future costs
• Issue monthly cost reports to the client
• Apply value engineering where possible

Question 19

What is an interim valuation?

Answer 19

An interim valuation involves a, typically monthly, revaluation of the whole work, not the work done since the last interim certificate or payment notice was issued.

Question 20

What is retention?

Answer 20

Retention is a percentage (usually up to 5% of the contract sum) of each payment made under a construction contract which is withheld in order to try and ensure that works under the construction contract are completed to the required standard

Question 21

When is retention released?

Answer 21

Typically 50% on completion of the Scope and the remaining 50% on issue of the Defects Certificate (Retention = X16 NEC4)

Question 22

What is final accounting?

Answer 22

The conclusion of the contract sum (including all necessary adjustments) and signifies the agreed amount that the employer will pay the contractor

Question 23

Why carry out lifecycle costing?

Answer 23

a) to predict a cash flow (perhaps to construct a budget); or
b) to carry out an option appraisal (to decide which option is preferable in cost terms).

Question 24

Why is cash flow forecasting accuracy important?

Answer 24

It enables the client to make informed decisions based upon costs against the budget, highlights areas of potential overspend and allows preparation of mitigating actions.

Question 25

What is earned value (management)?

Answer 25

A technique used to assess project progress/performance by comparing the amount and cost of work that was planned to have been done by a particular stage with the amount that has actually been done and what it has actually cost.

i.e. a quick way to tell if you’re behind schedule or over budget on your project.