Project Finance

Question 1

What pricing methods are available for Quantity Surveyors?

Answer 1

1. Building Cost Information Service
2. Pricing books
3. In house benchmarking
4. Unit rates from suppliers /contractors

Question 2

What is BCIS?

Answer 2

There are a number of published cost indices that can be used to benchmark construction projects.

The most well-known is probably the RICS Building Cost Information Service, which is a large-scale cost database based on a number of construction costs in the UK.

Example: BCIS Tender Price Index (TPI)

Tracks changes in the prices that contractors charge for construction work in the UK.

Based on the analysis of tender prices for construction projects, considering factors such as labour, materials, and overhead costs.

It helps surveyors, contractors, clients understand how construction costs are evolving and can be used for various purposes, such as project cost forecasting, budgeting, and benchmarking.

Question 3

Advantages and disadvantages of BCIS?

Answer 3

Advantages:
* Widely used and respected
* Provides good coverage of construction costs

Disadvantages:
* Can be out of date
* May not be relevant to your specific project
* Limited control over data

Question 4

What are pricing books?

Answer 4

Pricing books provide a range of price data for different types of construction projects. The most well-known is probably the Spon’s Price Books (edited by AECOM), which is used by many quantity surveyors, however alternatives are available

Question 5

Advantages and disadvantages of pricing books?

Answer 5

Advantages:

Can be very specific to your project e.g. M&E services, external works and landscaping

Contains full cost breakdowns usually including materials & labour

Disadvantages:

Very quickly out of date after publishing due to it being a book

Compiled by one company so may not be representative of the wider market.

Question 6

What is in-house benchmarking?

Answer 6

Construction project benchmarking is a process of comparing the cost of a construction project to similar projects in order to determine the projects estimated cost. This process can be used to compare the cost of a construction project to other projects in the same region or to projects of a similar size and scope.

Question 7

Advantages and disadvantages of in-house benchmarking?

Answer 7

Advantages:
* Benchmarking can help improve the accuracy of your estimates. By understanding how your project compares to similar projects, you can make more informed decisions about your own project.
* Benchmarking can also help you gain a better understanding of the construction market. By understanding what similar projects cost, you can get a better sense of the meta conditions of the market
* Benchmarking can also help you make better decisions about your project. Popular cost sources prevalent in the industry and the moment rely on averages of large datasets that aren’t necessarily in touch with real-world rates, benchmarking allows your to control and own your own data meaning it is making it more reliable and definitive

Disadvantages:
* Benchmarking may not be available for all construction projects. For example large, complex or one-off buildings may not have comparable projects to benchmark against.
* Benchmarking may not be accurate for all construction projects.
* Benchmarking requires constant updating to keep in line with the latest rates.

Question 8

What are Unit rates from suppliers/contractors?

Answer 8

Quantity surveyors have the option of contacting suppliers and contractors before going out to tender to estimate the cost. This is one of the most accurate methods of estimation as costs are ultimately decided by the successful contractor. However, at an early stage this is both in-practical and time consuming.

Question 9

Advantages and disadvantages of Unit rates from suppliers/contractors?

Answer 9

Advantages:
* Can be very specific to your project
* Very accurate and temporal data

Disadvantages:
* Scope and specification is not defined early in the project so data will be unavailable.
* Access to cost data lies with the contractor/supplier so may not always be available
* To contact different contractors/suppliers for each building element would be extremely time consuming.

Question 10

When estimating costs what should you do as a QS?

Answer 10

• Use a mixture of benchmarking and cost indices to get the most accurate cost information
• It is not a fixed science know there will be variability in the results
• Know the limitations of each assessment method

Question 11

What is a cashflow?

Answer 11

General terms, ‘cash flow’ movement of income into and expenditure out of a business (or other entity) over time.

More money into the business than going out of it, ‘positive’. More money going out, negative.

In construction, typically refers to an ANALYSIS of:
- WHEN costs will be incurred
- and HOW MUCH they will amount to
- during the LIFE of a project.

Question 12

Why is it important to predict cashflows?

Answer 12

ensure that an appropriate level of funding is in place and that suitable draw-down facilities are available.

Question 13

How are cashflows predicted?

Answer 13

Until the main contractor has been appointed, client cash flow projections are likely to be based only on:

1. an agreed fee payment schedules for consultants AND
2. division of the construction cost over the likely construction period (or s-curve distribution).

It is only when the MAIN CONTRACTOR is appointed, a MASTER PROGRAMME prepared and some form of payment schedule agreed that cash flow projections become RELIABLE.

Question 14

Can you give some examples of possible cash flow problems?

Answer 14

1. Fee agreements tied to work stages rather than monthly invoicing- not a regular income attached to the project
2. Firm may not be charging for variations to the brief or scope of works
3. Firm holding too much ‘work in progress’ stock that has yet to be invoiced for
4. Clients might be slow-paying or disputing invoices to delay payment
5. Firm may have expanded too quickly, hiring more staff and renting larger offices, without the means to support them

Question 15

How can cash flow problems be minimised?

Answer 15

1. Long term financial plan (3-5 years) - direction / targets for business including a budget of income and expenditure
2. Monthly FORECASTING & MONITORING - allow for preparation for shortfalls / increases in cash
3. Monthly MANAGEMENT ACCOUNT - actual performance of previous month against forecast for income, cost and profit.
4. CASH COLLECTION REPORT - invoices, due date and agreed levels of debt before action is taken
5. Weekly monitoring or time sheets against projects - monitor costs / time
6. Daily monitoring and records for invoices raised and paid
7. Other reports - annual audited accounts, VAT returns and bank reports

Question 16

What is a contingency?

Answer 16

downside risk estimates that make allowance for the unknown risks associated with a project

Typically, contingencies refer to costs, and are amounts that are held in reserve to deal with unforeseen circumstances.

Question 17

What is a contingency plan?

Answer 17

a plan that can be enacted to mitigate project risks, such as adverse weather, an industrial dispute, supplier failure, and so on.

Question 18

What are typical contingencies?

Answer 18

Often expressed as percentage terms.

Greatest percentage applied in the early stages of project wen the greatest number of possible risks are present. Can reduced as better understanding of project.

Latimer benchmark:
5% contractor contingency;
3% client contingency.

Question 19

What is retention?

Answer 19

Retention is a percentage (often 5%) of the amount certified as due to the contractor on an interim certificate, that is deducted from the amount due and retained by the client.

Purpose: ensure that the contractor properly completes the activities required of them under the contract.

Retention can also be applied to nominated sub-contractors, and the main contractor may also apply retention to domestic sub-contractors

Question 20

Can you give some design risk contingencies for developers?

Answer 20

1. Scope changes – from unforeseen design challenges or evolving client requirements
2. Design complexity – increased design complexity from technical challenges or complications
3. Regulator changes – E.g., changes in Building Regulations such as requirements for second stair cores for buildings over 18m
4. Unknown site conditions – may not have been apparent during the initial site investigations e.g., soil issues
5. Technological or material changes – availability of materials
6. Market conditions - fluctuations in market conditions that could affect the costs of materials, labour, or other design-related expenses.
7. Environmental considerations – changes in environmental regs or considerations that require alterations to the design for compliance
8. Community issues
9. Vendor or supplier issues – delays in key design components or unexpected increases in costs
10. Design errors and omissions – require revisions or corrections in the design phase

Question 21

How does the planning portal fee calculator work?

Answer 21

Takes you through a series of questions to ask question about the application

Application type (full, outline, outline with all matters reserved etc.)

Type of development

Depending on application type (unit numbers, site area)

If any reductions apply e.g., if the application is being made on behalf of a parish or community council

If any exemptions apply

If the site is over two LPA boundaries

Question 22

What measures can be taken to effectively control costs during the construction phase of a project?

Answer 22

1. Proactive risk and contingency management
2. Management of provisional sums in budgets
3. Regular cost reporting which is also forward looking
   - Monthly forecasting and monitoring
   - Monthly management account
4. Rolling final account with closure process for financial impact of change

Question 23

What is a provisional sum?

Answer 23

An allowance (or best guess), usually estimated by a cost consultant, that is inserted into tender documents for a specific element of the works that is not yet defined in enough detail for tenderers to accurately price.

Question 24

What is the purpose of a financial report?

Answer 24

To report against budgeted values and act as a working cost check on the project budget.

To give the Client an understanding of any savings or additional monies required.

To report on contract progress against pre-contract predictions.

To avoid surprises for the client!

Question 25

What is a project cost report?

Answer 25

A document that meticulously documents and analyzes the financial aspects of a construction project.

It captures the financial ins and outs of a construction project in detail, from its first brick to the final coat of paint.

a full range of cost information, including budgets for all tasks over the entire project duration, tasks and resources that are overbudget, earned-value information for all tasks, and costs per task displayed for one-week periods.

Question 26

What information would you include within the cost report for a project?

Answer 26

Cost reports:

1. Executive summary, may include:

Current budget and forecast
Contingency position
Level of cost ‘certainty’, i.e. agreement of provisional sums
Total commitment and expenditure to date
Final account progress
Contract position
Cash flow position
Progress in the period and current financial position
Outstanding information
Major risks or causes for concern
Next steps and recommendations

2. Register of approved changes/ instructions and pending changes
3. Summary of provisional sums and progress against these
4. Value engineering or opportunities register
5. Risk register
6. Cash flow forecast

Question 27

Why is it important to ensure that forecast costs are accurate?

Answer 27

PRICE

1.Project feasibility assessments
2. Risk management
3. Investor confidence
4. Contract negotiations
5. Ensure budget and financial planning

Budget and financial planning - reliable estimated for allocation of resources and funding.

Risk management - accurate forecast costs manage and mitigate risks associated cost escalation (impact feasibility and profitability)

Project feasibility assessments - assess whether investment should take place

Investor confidence - investors, lenders, other stakeholders rely on forecasts for investment decisions. Accurate forecasts - confidence to invest (planning and reduced uncertainty)

Contract negotiations - ensure contracts reflect realistic cost estimates and prevent disputes over unexpected expenses.

Project monitoring and control - accurate cost forecasts act as benchmarks for monitoring and controlling expenses. Can track actual vs forecasts and make adjustments / ensure the contract is on track financially.

Question 28

What is benchmarking?

Answer 28

comparing the estimated costs for various components of a development project against industry standards, historical data, or similar projects.

Question 29

How do you benchmark professional service fees?

Answer 29

Comparative analysis – analysis costs for similar projects (size, type of development, complexity of a site, differences in planning laws) for each discipline (Architect, M&E, Transport consultant etc.). Identify any differences and make adjust planning budget accordingly.

Comparison of quotes: Obtain quotes and bids from consultants. Compare against one and other and the project budget

Question 30

What do you need to consider when benchmarking against other projects?

Answer 30

1. Project type - scope / complexity / objectives ( e.g. focus on sustainability v conventional development - different initial costs)
2. Scale and size - economies of scale
3. Quality standards
4. Location - difference in labour rates, material costs, regulations, market conditions
   5.Timing - timeline / development stages
5. Market conditions

Question 31

What is the purpose of a risk register?

Answer 31

A document or database used to:
identify
analyse and
manage risks
throughout the lifecycle of a project.

It is a key document to recording information about
potential risks,
their likelihood,
potential impact,
mitigation strategies,
and status.

Risk owners are often assigned to manage each of the identified risks so there is a clear responsibility of who is responsible for monitoring the risk, implementing mitigation strategies and keeping stakeholders up to date.

Question 32

Why is a project risk register managed?

Answer 32

By maintaining a project risk register, project teams can systematically identify, assess, and manage risks, enhancing their ability to anticipate challenges, capitalize on opportunities, and achieve project success. It also promotes transparency, accountability, and informed decision-making across all stages of the project.

Question 33

What risks could a risk register pick up on?

Answer 33

HUSSLTD

Health and Safety – meeting CDM requirements

Utilities – capacity checks

Sales risks – value fluctuations

Statutory undertakings – planning (delays to programme), S106, CIL

Legal risks – restrictive covenants, contract risks, unclear land ownership, rights of way, rights of light

Technical risks – acoustics, asbestos, ecology, flood risk,

Design risks – separation distances, tenure mix, building regulation up dates

Question 34

Why are risk registers maintained throughout the development lifecycle?

Answer 34

By maintaining a project risk register, project teams can systematically identify, assess, and manage risks, enhancing their ability to anticipate challenges, capitalize on opportunities, and achieve project success. It also promotes transparency, accountability, and informed decision-making across all stages of the project.

Question 35

What are the different stages of the development cycle?

Answer 35

The development lifecycle can be thought of as the whole process required from finding a site to
1. Pre-development
2. Design and Planning
3. Pre-construction
4. Construction
5. Finishing
6. Completions and handovers
7. Post-development

Question 36

What are build / construction contracts?

Answer 36

Legally binding agreement between a client / employer and a contractor / supplier to carry out the works in relation to a construction project.

It specifically governs the construction process.

Typically sets out the works, rights, obligations, timescales and expectations (WROTE) from both the client and contractor.

Question 37

What is the purpose of a build contract?

Answer 37

The contract aims to avoid risks of misunderstandings, by clearly setting out expectations before any work starts (so that client and contractor are on the same page). The contract will provide protection for both the contractor and client

In order for a construction contract to be enforceable and legally binding, it must cover these five key areas:

• Intention - what will happen, when and how
• Capacity - if all parties have capacity to agree
• Agreement - details of the offer and acceptance by both parties
• Certainty of terms - which terms are being set out
• Consideration - who will provide the services and payment schedules

Question 38

What are the different types of construction contracts?

Answer 38

Most common providers of build contracts are the

1. The Joint Contracts Tribunal
2. The New Engineering Contact

Main contracts I am aware of are
1. Design and build contract
2. Fixed price contract
3. Cost plus approach
4. Time and materials contract

Question 39

Difference between a development agreement and a build contract

Answer 39

DA encompasses various aspects of a development project.

A build contract specifically addresses the construction process and does not cover broader commerical terms and funding requirements

Question 40

Can you give some examples of different clauses in contracts?

Answer 40

1. Retention Clause (amount and release)
2. Variation and claims clause (how changes and claims are managed and handling disputes)
3. Completion and Acceptance Clause (completion definition and DLP)
4. Payment terms
5. Indemnity and insurance - requirements and identification obligations to parties

Retention clause
- amount (% of contract value, 5-10%)
- release (usually in stages e.g., part on substantial completion, remainder after final completion and inspection

Variations and Claims Clause
- specifies how variations (changes to the scope of work) and claims (disputes or additional costs) are managed.
- Change Orders: Process for documenting and approving changes.
- Dispute Resolution: Outlines procedures for resolving disputes.

Completion and Acceptance Clause
- Details what constitutes project completion and acceptance by the client.
- DLP: Specifies the period during which the contractor is responsible for correcting defects.

Payment Terms:
Outlines the schedule and conditions for payments to the contractor.
Milestones: Payments tied to project milestones (e.g., phases of completion).
Final Payment: Conditions for final payment upon completion and acceptance.

Indemnity and Insurance:
Description: Specifies insurance requirements and indemnification obligations of the parties.

Question 41

Can you give an example of when you have benchmarked costs on a live project?

Answer 41

Preston Road, Brighton – I prepared a residual appraisal for the bid. The build costs were based on a cost plan produced internally and benchmarked against live projects and recent tenders. I allowed for a project contingency to cover potential additional risks. I used benchmarking from other live projects to determine suitable assumptions for the planning, sales and marketing and legal fees.

Question 42

How would you prepared and managed a budget for the planning application?

Answer 42

Mitcham Gasworks - prepared and managed a budget for the planning application which included consultant’s fees, planning fees and council fees. I estimated the planning fee using the Planning Portal’s fee calculator. Based off benchmarking live projects I estimated costs for each discipline and then obtained three quotes per discipline. I ensured all consultants quotes met the required scope of services and were able to be delivered within the given timescales. I then selected a consultant for each discipline and used their fee quote in the planning budget. I made a 10% contingency allowance to allow for programme delays and unexpected changes. Once I had received sign-off for the budget, I maintained a tracker to monitor the invoices against the approved budget cashflow to monitor the spend over the planning programme.

Question 43

What is a Design and build contract and the advantages / disadvantages?

Answer 43

a single entity (the design-builder or contractor) is responsible for both the design and construction of a project. This contrasts with traditional contracts where the design and construction phases are handled by separate entities (architects/designers and contractors).

Advantages:
* Single point of responsibly
* Faster project delivery
* Cost certainty – contract can be fixed early in the process

Disadvantages
* increased costs when ideas change, and having to rely on other specialties.

Question 44

What is a Fixed price contract and the advantages / disadvantages?

Answer 44

Description: The contractor agrees to complete the project for a fixed price.

Clauses:
* Scope of Work: Clearly outlines the work to be completed.
* Price: Specifies the total fixed amount for the project.
* Payment Schedule: Milestones or schedule for payment.
* Completion Deadline: Date by which the project must be finished.
* Retention: Typically, a percentage of the contract price (e.g., 5-10%) is retained by the client until satisfactory completion.

Advantages: pre-agreed price – no change to account for fluctuations in material / labour costs
Disadvantages: may overpay for contract as buffer built in for risk
For contractors better for simple / straight forward jobs with less risk of profit loss

Question 45

Can you give an example of a risk within a risk register and mitigation?

Answer 45

Risk – Technical - Asbestos – potentially in light industrial units. Limited access during site visit – could not inspect below ground. Likelihood and severity rated 1-5 then multiplied to get the risk rating. (3 x 5 = 15)

Mitigation Remediation strategy to be prepared by clarion approved consultant and ACM removed from site. £50k mitigation cost. Risk then rated post mitigation strategy.

Question 46

Why are risk registers maintained throughout the development lifecycle?

Answer 46

By maintaining a project risk register, project teams can systematically identify, assess, and manage risks, enhancing their ability to anticipate challenges, capitalize on opportunities, and achieve project success. It also promotes transparency, accountability, and informed decision-making across all stages of the project

Question 47

What is a cost plus approach contract?

Answer 47

Description: The contractor is reimbursed for project costs plus an agreed-upon fee.

Clauses:
Cost Reimbursement: Specifies how costs are calculated and reimbursed.
Fee Structure: Details the contractor’s fee or percentage on top of costs.
Audit Rights: Allows the client to audit project expenses.
Retention: Retention practices can vary but are often tied to the overall project budget or costs.