Project Finance Flashcards
What are the typical Cost Manager responsibilities on a construction project?
- Manage risk allowance expenditure
- Initiate action to avoid overspend
- Prepare pricing documents for tendering
- Evaluate and analyse tender bids
- Prepare interim valuations
- Value variations and compensation events
- Assess the contractor’s financial claims
- Negotiate and agree final accounts
- Produce cost reports, estimates and forecasts
- Prepare and maintain the cash flow forecast
If you are producing estimates and cost plans, which measurement rules represent industry best practice?
NRM - New Rules of Measurement
Can you name the 3 documents in the NRM suite?
- NRM1 - Order of cost estimating and cost planning for capital building works
- NRM2 - Detailed measurement for building works
- NRM3 - Order of cost estimating and cost planning for building maintenance works
Why is it important to measure the works according to industry standards and best practice?
- To provide consistency and greater accuracy of pricing
- To ensure that all parties price on the same basis and tehrefore reduce the risk of dispute
What are the key headings for contractor preliminaries identified in the NRM2?
Employer’s Requirements:
- Site accommodation
- Site records
- Completion and post completion requirements
Contractor Cost Items:
- Management and staff
- Site establishment
- Temporary services
- Safety and environmental protection
- Mechanical plant
-Temporary works
- Site records
- Cleaning
- Insurances, bonds, guarantees and warranties
How is risk dealt with under NRM?
NRM recommends that risk allowances are not a standard percentage, but a properly considered assessment of the risk.
Can you tell me the 4 risk categories identified in NRM?
- Employer Change Risk
- Employer Other Risk
- Design Development Risk
- Construction Risk
How are professional fees presented in the order of cost estimate?
Fees can be presented as an item (if actual fees are known) or a percentage applied to the ‘works cost estimate’
Which RIBA Stage is the order of cost estimate typically produced?
RIBA Stage 1 - Preparation and Brief
What are the RIBA Stages of work?
Stage 0 - Strategic Definition
Stage 1 - Preparation and Brief
Stage 2 - Concept Design
Stage 3 - Spatial Coordination
Stage 4 - Technical Design
Stage 5 - Construction and Manufacturing
Stage 6 - Handover
Stage 7 - In Use
What is the difference between an order of cost estimate and cost plan?
- An estimate provides a possible cost based on the employer’s requirements and is the initial phase of the cost planning process. The estimate is usually completed using m2 areas.
- A cost plan is a more detailed elemental breakdown and shows how the costs are distributed across the project.
What is a cost plan?
- The cost plan is typically prepared by the cost consultant and provides an estimate of what the actual project cost is likely to be.
- The cost plan identifies the client’s agreed cost limit and how the money is allocated to the different parts of the project.
Other than predicting the final project cost, what other benefits does the cost plan provide to the project and project team?
- Designers are aware of the cost implications of their proposals which enables them to arrive at practical and balanced designs
- Provides information upon which the employer can make informed commercial decisions
Do you need a programme to complete the cost plan?
Prelims are typically presented as a weekly rate in developed cost plans, therefore a programme or at least some high level dates will be required.
Key info required is:
- Design and tendering periods
- Start on site date
- Construction period
- Completion date
How do you structure a cost plan?
NRM recommends a template to be followed.
What sources of cost information and data are available when preparing a new estimate or cost plan?
- Information produced by the BCIS (building cost information service)
- Published pricing books such as Spons and BCIS
- Pricing documents and info from previous projects
- Cost analysis and cost models produced in house
- Speaking to contractors, sub contractors and suppliers for cost information
- Existing client data - benchmarking from previous projects
How do you take account of the project location and why?
A location factor is usually applied to recognise differences in construction prices. For example, a project in London is typically more expensive than a similar project in Nottingham.
What is a cost plan risk allowance?
A sum included to cover unknown costs or unmitigated risks during the project.
What benefit does the client get out of accurate cost planning?
- The cost plan confirms to the client the scheme is affordable or not
- Cost planning places the client in an informed position to make commercial decisions
- The cost plan can act as a value management tool to ensure the client gets a building which meets their needs but also represents best value.
How would you deal with a cost plan that is over budget?
- Communicate the matter to the client and the project team in a clear and concise manner.
- Identify areas where potential savings can be made, possibly in terms of material specification or re-design.
How can the cost manager help control the design to keep the project within budget?
- Explain to the design team where the cost plan sits against the budget and discuss the limitations
- Identify and communicate areas of design which may not be economical
- Regular project risk reviews
- Explain how changes in design will impact the cost
- Contribute to VE sessions
What are some of the key reasons we have cost overrun on a project?
- Ambiguous client brief or changes in the later stages of the project
- Unrealistic cost estimates
- Project risk not properly managed
- Inadequate management control or processes
- Uncoordinated design
- Unknown external factors, e.g. global pandemic
- Unsuitable tendering/procurement strategy
- Statutory influences
- Inflation or changing market conditions
What is BWIC?
- BWIC stands for builder’s work in connection Necessary to allow other works to proceed.
Why is VAT usually excluded from the cost plan?
Employers may incur different levels of VAT or be exempt, therefore, VAT is usually excluded to ensure the incorrect tax rate is not applied.
Can you tell me what you understand by the term benchmarking?
- Benchmarking is the use of historical data from projects of a similar nature.
- Can be used as a comparison or check for cost planning purposes.
- Benchmarking can highlight areas of design that are not value for money, or if the price offered by the contractor is in line with market conditions.
Can you define contractor overhead and profit?
- Profit can be defined as the money the project makes after accounting for all costs and expenses. The percentage of profit a contractor might apply to their tender price will vary according to risk, workload and economic climate.
- General overheads are those not readily chargeable to one particular project , they constitute the contractor’s cost of doing business. These costs may include head office expenses, marketing, admin, IT equipment etc.
What allowance would you make for contractor OH&P in the cost plan?
The percentage will vary due to various factors such as:
- Project location
- Project type and value
- Market conditions
What is a provisional sum?
Provisional sums are generally an allowance or estimate included within the contract sum that are:
- Not sufficiently defined, designed or detailed enough to allow an accurate determination of its cost at the time the contract is entered; and/or
- Work that the employer may or may not wish to be carried out
How are provisional sums expended?
- The contract administrator should issue an instruction for its expenditure
- Where a contract includes a provisional sum, the final amount payable will be adjusted (the prov sum is omitted and replaced with the actual cost of the work).
How are provisional sums dealt with in the final account?
By the time the project has reached its final account stage, the contract administrator will have issued instructions to expend all provisional sums. The instruction will show an add and omit and then the instructions are accounted for in the usual way.
How does the NEC contract incorporate provisional sums?
- Unamended NEC contracts do not provide for the use of provisional sums
- NEC approach - if the scope of works is so unclear that a price cannot be provided with a level of certainty, the item should be excluded until it can be defined properly.
What types of provisional sum are there?
Defined and undefined.
Please explain the difference between defined and undefined provisional sums.
Defined: The contractor has enough detail to allow for programme and prelims within the contract.
Undefined: The contractor does not allow for planning, programming and prelims implications and may be entitled to an extension of time and/or additional prelims when the works are undertaken.
Would the contractor be entitled to claim additional prelims and / or an extension of time when expending a defined provisional sum?
No, since the provisional sum is defined, the contractor should have allowed for programme and prelims within their price.
What are prime cost sums?
A sum of money included in a unit rate to be expended on materials or goods from suppliers (e.g. supply only ceramic wale tiles at £36 m2).
It is a supply only rate for materials or goods where the precise quality is unknown.
What is the difference between prime cost sums and defined provisional sums?
A prime cost is limited to the cost of supplying the relevant item and does not include the cost of any work that relates to it such as installation.
A defined provisional sum includes allowances for supplying the item and all related works to be performed by the contractor.
What is a cash flow projection?
- A cash flow projection or forecast is a financial planning tool that shows the predicted cash flow in and out of the project. This is typically shown month by month for the duration of the project.
- When the construction phase is underway it will typically form a S curve for contractor payments.
What are the main types of cash flow projection?
There are two main types:
- The cash flow projection of a company known as organisational cash flow
- The cash flow projection of a particular project known as project cash flow
What are the key differences between employer cash flow and contractor cash flow projections?
How will the employer benefit from accurate cash flow projections?
- Cash flow projections will assist with planning expenditure and ensure that an appropriate level of funding is in place for future payments
- The projection will allow the employer to plan and anticipate for periods of cash shortage and take corrective action where necessary
- Allows the employer to gain an understanding of the potential financial commitment at a specific point in the future.
- The projection can also act as a sense check for monthly contractor valuations.
Construction cash flow projection - if payments to the contractor are behind the projections, what might this indicate?
This could be that works are behind programme
Construction cash flow projection - if the contractor’s monthly valuation is ahead of the cash flow projection what might this indicate?
That the project is ahead of programme or they are over claiming.
What is the purpose of cost reporting?
The key purposes are:
- To provide an overview of the client’s current financial commitment
- To inform the client of the likely cost of the project, including forecasting the cost as a variance against the budget or tender sum.
- To give the client an understanding of potential savings or additional monies required.
What information would you provide in a cost report?
Executive summary
Contract sum
Instructed variations or compensation events
Potential future variations or advanced warnings
Status of any claims
Cost plan
VE options
Anticipated final account forecast
Risk allowances
Total of certified payments
Cash flow forecast
Recommendations and next steps
What is the difference between cost and price?
- Cost is the total of labour, plant and materials and management to be deployed in relation to building work
- Price is the amount the employer will pay for the work to be completed
The contractor on your project has made a large and unrealistic claim for loss and expense. How would you deal with it in your cost report?
What are advanced payments?
Payments issued to the contractor in advance of completing works or procuring materials.
Assists with cash flow required to cover initial expenses , e.g. lifts that have a long lead time.
What are the key disadvantages of advanced payments?
- There may be a commercial risk for the employer if the contractor go into liquidation after the payment is made.
- The payment will affect the employer’s cash flow.
- Subject to nature of the advanced payment, there could be concern as to why the contractor cannot fund it (indicate cash flow issues?).
Assuming the employer is happy to proceed with the advanced payment, what measures could be put in place to protect the employer’s commercial risk?
An advanced payment bond may be required to protect the payment in advance of the works being completed.
What is an interim valuation?
It is a document put forward by a contractor which contains their progress against each of the work elements.
The interim valuation involves a revaluation of the whole work, not the work done since the last interim cert or payment cert was issued. The document acts as a precursor to issuing the next interim payment certificate.
What are the main elements of an interim valuation?
- Prelims
- Measured work
- Variations
- Extension of time and acceleration costs
- Materials on site
- Materials off site
- Loss and expense
- Adjusted provisional sums
- Retention
- Fees
- Prime cost sums
- OH&P
