Project Finance Flashcards
What is the contract sum?
- Amount specified at the outset (ex VAT) for completion of the works
- Can only be altered as the work proceeds according to the contract conditions (changes, loss and expense, expenditure against provisional sum, acceleration, fluctuations)
- Errors in the computation of the contract sum, whether arithmetic or not, are deemed to be accepted by both parties
What are preliminaries and what are included as standard (NRM2)?
Items that are not directly related to any component, element, or work section (i.e. measured works). Split in contract between:
1) Information and requirements
2) Pricing schedule
Includes as standard:
- management/staff
- site establishment
- security
- safety and environmental protection
- control and protection
- mechanical plant
- temporary works
- site records
- completion and post-completion requirements
- cleaning
- fees and charges
- insurances, bonds, guarantees and warranties
What is an order of cost estimate?
A high-level cost estimate usually based on a single quantity (e.g. cost per m2)
- Determines possible construction costs of project
- Used to establish whether project is viable
- Makes employer aware of likely financial commitment
- Completed in RIBA Stages 0&1
- % for professional fees
What is a provisional sum and how is it expended?
A provisional sum is an allowance included at tender for a specific element of the works that is not yet defined in enough detail to accurately price.
Needs to be instructed (JCT) by Contract Administrator and should be add/omit on instruction.
Defined: PS accounted for in contractor’s price and programme. Prelims assumed to be included.
Undefined: Might relate to work not designed. PS not accounted for in contractor’s price, client takes the risk and contractor may be entitled to EoT and loss/expense.
No PS in NEC contracts.
What is the purpose of cost planning?
- Ensure employers are provided with value for money
- Make employers and designers aware of the cost implications of their proposals
- Keep expenditure within cost limit approved by the employer
- Provide robust cost information upon which the employer can make informed decisions
What is a cost plan?
- Estimated cost into a structural element or functional format
- Provides a comprehensive economic picture of the whole building project
- Used by the QS to control the development of the design
- Identifies the client’s agreed cost limit and how the money is going to be allocated to different parts of the building
What are the key cost planning stages?
- RIBA 0/1: Order of cost estimate
- RIBA 2: Formal cost plan 1 - based on £/m2 elemental breakdown
- RIBA 3: Formal cost plan 2 - based on detailed measured quantities, £/m2 per item
- RIBA 4: Formal cost plan 3 - send to tender
- Pre-tender estimate
- Post-tender estimate
Name some factors that can impact project costs?
Procurement:
- Proportion of risk allocation (contractors will price for risk)
- Contract type - lump sum / target / reimbursement
Design:
- Complexity
- Specification
- Use of BIM
- Value engineering
Construction:
- Construction method
- Volume of variations
External:
- Legislation / planning obligations
What benefit does client get out of cost planning?
- Affordability
- Helps develop design to meet budget
- Value management tool
What risk allowances should be included within a cost plan?
- Design development risks
- Construction risks
- Employer change risks
- Employer other risks (e.g. acceleration, postponement, availability of funds, etc.)
What is benchmarking and what sources of benchmark cost data can be used?
The use of historical data from projects of a similar nature as a comparison or cost check of the cost of a project.
- In house (previous projects)
- Building Cost Information Service (BCIS)
- Benchmark from previous client projects
- Pricing books (SPONS)
- Cost models / published data
What are the options for different types of pricing documents?
- Bill of Quantities
- Schedule of Rates
- Contract Sum Analysis
- Schedule of Work / Activity Schedule
What are the different ways to price a project?
- Lump Sum
- Cost reimbursable
- Re-measurement
- Target Cost
- Guaranteed Maximum Price (GMP)
What is a lump sum contract?
- Fixed sum
- Used when the employer can define what is required, e.g. drawings and specifications, or performance specifications
What is a re-measurement contract?
- Contractor paid for the actual work done (quantities)
- Price based on approximate quantity rates in BoQ or Schedule of Rates provided
- Actual work is priced against agreed rates
What is a reimbursable / prime cost contract?
- Contractor completes work then is paid for their costs plus a pre-agreed mark up
- Used where the definition of work is inadequate for the contractor to price, yet an early start is required
- Suitable for maintenance / refurbishment / emergency work
What is a target price contract?
- Reimbursable contract with target price to incentivise the contractor
- Target price includes contractor’s cost plus % for OH&P
- Risk is shared through pain/gain
- At end of contract the contractor is paid (or pays) his share of difference between target and actual cost plus OH&P
What is a Guaranteed Maximum Price (GMP) contract?
- A lump sum contract under which there is no adjustment of tender price unless the scope changes
- Contractor includes additional risks involved in the design development process in tender price
- Savings made on packages are shared on an agreed basis - gain share - but extras are the contractor’s responsibility
What are the advantages and disadvantages of a reimbursable contract?
Advantages:
- Flexibility to alter design, programme and quantum of work
- Enables early start on site
- No premiums for abnormal risks in tender
Disadvantages:
- No time or cost certainty
- No incentive for efficiency
- Difficult to monitor true costs
What are the advantages and disadvantages of a Guaranteed Maximum Price (GMP) contract?
Advantages:
- Greater price certainty, contractor carries development risk
- Greater cost control; contractor’s interest to alert team to expensive items of design development
- Quicker settlement of final account
Disadvantages:
- Client may pay too much; contractor’s risk allowance could be inflated
- Scope changes are expensive
- Adversarial
What are prime cost sums?
- Allowance for the supply of work or materials to be provided by a contractor or supplier that will be nominated by the client
- Allowance is exclusive of any profit mark up or attendance by the main contractor
What is a Bill of Quantities?
- Document consisting of all items which make up components of a building as well as preliminaries
- Includes measures and rates for each items
- Usually based on full production of drawings and project specifications
- Used to manage variations (provide rates) and monitor expenditure
- Contractor paid on basis of BoQ not quantities used
- Any inconsistency between BoQ and drawings would be a variation
Consists of:
- Preliminaries
- Preambles (description of works / workmanship)
- Measured works
- Provisional sums
- Prime Cost sums
- Dayworks
- Appendices (bonds, warranties, etc)
What’s the benefit of cashflow forecast for the Employer?
- Understanding of financial requirements over duration of project
- Check against valuations
- Can indicate whether the project is ahead/behind schedule
- Plan expenditure
- Ensures appropriate level of funding in place / suitable draw-down facilities available
What would payments being either behind or ahead of the cashflow forecast imply?
Behind: Project behind programme or under-budget
Ahead: Ahead of programme or contractor has been claiming more than due/ahead of when due
What is the purpose of a financial report?
- Report against budgeted values and act as a working cost check on the project budget
- Give client an understanding of any savings or additional monies required
- Report on contract progress against pre-contract predictions
What should be included in a financial report?
- Executive summary
- Contract sum
- Instructed variations
- Potential future variations
- Provisional sums
- Claims
- Anticipated final account (forecast)
- Risk allowances
- Cashflow forecast
- Next steps and recommendations
How is a risk register used in the post contract phase of a project?
- Any risks that have not materialised can be closed down
- Risk register can be used to reallocate client risk allowances, or obtain additional risk allowances if required
Why might a project have a cost overrun?
- Employer’s requirements unclear or changed
- Unrealistic cost estimates
- Risk allocation is ambiguous
- Inadequate management control
- Design doesn’t meet Statutory requirements
- Uncoordinated design
- Buildability of design
- Design doesn’t meet procurement strategy
- Unforeseeable events
What is a valuation?
- A detailed breakdown of the works
- Appraisal of the price of the works carried out to date
- Pre-cursor to issuing an Interim Certificate
What are the main elements of a valuation?
- Preliminaries
- Measured work
- Variations
- Materials on/off site
- Loss and expense
- Provisional sums (JCT only)
- Retention
How are interim valuations evaluated?
- Site review of valuation with contractor
- Check work done, materials on/off site
- Value preliminaries, agreed variations and any claims
- Valuation amount is gross valuation, less retention, less previous payment
- Send a recommendation to Contract Administrator to issue the payment certificate
What is a gross valuation?
- Calculating the total amount of works completed to date, then deducting the previous month’s total
- Gives the value of work completed in the current month
When would Dayworks rates be used to value the works?
- Used when work cannot be priced in the normal way
- No comparative rates in a bill of quantities
- Fair and reasonable rate cannot be agreed
What is a variation?
An alteration to the original scope of works:
- Addition
- Substitution
- Omission
What is the final account?
- Financial statement of all of the adjustments to the contract sum
- Total amount the employer is liable to pay
- End financial position of the contract
- Includes all additions and omissions
What if the employer doesn’t pay a sum due to the contractor under JCT?
- In addition to the unpaid sum, the employer must pay interest on that amount until the payment is made
- Contractor can exercise right to suspend works
What happens to contingency as the project progresses?
Design development - reduced as design develops
Construction risk - assessed based on construction risk, adjusted when more info is available, kept through construction phase. Any leftover = saving for client
Employer change risk - reduces as design develops and likelihood of client changing decreases. Kept during construction for any employer changes, leftover = saving
Employer other risk - kept through construction, allowance for any issues caused by client that have commercial implications
How did you go about creating the cost estimate for the NT?
- Determined which roles were required and whether they could be identified within or external to the client organisation
- Identified specialist roles, such as Conservation Accredited designers
- Identified survey and other professional fees required
- Used estimated or known day rates
- Created a schedule
- Mapped out the likely consultant involvement against the master programme
How did change control work on the F1MP project?
- I completed a change request form and issued to the contractor
- The form included the details of the change, design drawings and specification (if applicable), priority, and time for response
- The contractor would then issue a quotation
- Quotation reviewed alongside the QS, I did a check for overall reasonableness, plus checked against the contract specification documents
- I would then review the change with the client to get approval for the spend, then issue an instruction to the contractor
On F1MP, what did your change tracker include?
- The change reference, shared with the contractor
- The description of the change
- The contractors quotation
- The PM’s assessment if different
- Status: New, Accepted, Rejected.
How did you manage expenditure of a provisional sum on F1MP?
- Once provisional package was identified I established a brief for the works, and got a design prepared
- Defined PS: contractor made allowance in price and programme
- I requested a quote from the contractor
- Reviewed the time aspects of the quote and liaised with QS to review the costs
- If the costs were higher than the PS I would make the client aware, and the reasons for this
- Once verified I instructed the contractor to omit the PS and replace with the quoted work
How did you develop cash flow forecasts?
1) Developed a schedule showing
- consultant costs
- client direct costs
- construction costs
2) Gathered cost information
- consultant costs: based on invoicing schedule provided by consultants
- client direct costs: based on quotations provided to client
- construction costs: based on pre-tender estimate from QS
3) Ongoing monitoring and updating of the cash-flow throughout the project
What is the difference between a Prime Cost and Provisional Sum?
Prime cost - an allowance for the supply of labour, plant and materials to be provided by the contractor that will be nominated by the client. The allowance is exclusive of OH&P.
A prime cost contract (cost plus or cost reimbursement) - contracts in which the contractor is paid the prime cost (actual cost) and a fee for OH&P.
Provisional sum - an allowance, usually estimated by a cost consultant, that is inserted in tender documents for a specific element of the works not defined in enough detail for tenderers to accurately price. This is a called a defined provisional sum and includes OH&P.
What is an S-Curve?
- Chart showing construction cash-flow over a project lifecycle
- % of value of work completed vs % time completed
- At beginning of a project the % time is greater than % value, therefore contractor cash flow will remain flat before increasing towards the middle of the project
