Project Finance

Question 1

What are the contents of a Cost Report?

Answer 1

Executive Summary
Cost Summary
Cash-flow
Variations to Date
Anticipated Variations
Risk Allowances
Forecast Final Account
Report Basis

Question 2

What is the purpose of producing a cost report?

Answer 2

To monitor and manage cost throughout the project, giving the client an understanding of potential savings or additional monies required.
To inform the client on actual project cost against the budget.

Question 3

Why is it important for the client to know the anticipated out-turn cost?

Answer 3

It gives them the best possible basis on which to base future project decisions.
As well as for funding purposes.

Question 4

What is a cash flow forecast?

Answer 4

A financial planning tool that shows the predicted flow of cash in and out of a project. Typically shown month by month.
Contractor payments will typically form an S curve.

Question 5

How would you produce a cashflow forecast?

Answer 5

It depends on the stage of the project.
Pre-contract I would use an s-curve formula.
Post contract I would use the contractor’s pricing document and their programme.

Question 6

Should cost reports include VAT?

Answer 6

No.

Question 7

What do you do after issuing a cost report?

Answer 7

Meet the client in person to review it.

Question 8

What are variations?

Answer 8

Alterations or modifications to the design, quality or quantity of the contract works or to the site access or working conditions.

Question 9

Why might variations arise?

Answer 9

Change to specification.
Discrepancies between contract documents.
Lack of depth to the employer’s requirements.

Question 10

What form must an instruction take?

Answer 10

It is best practice under the majority of contracts for instructions to be made in writing.

Question 11

What about oral instructions?

Answer 11

The validity of oral instructions depends on whether the form of contract being used contains mechanisms for them to be valid.
In my opinion it is always best practice to follow up verbal instructions with written instructions as soon as possible.

Question 12

What are the valuation rules for variations under JCT Forms of Contract?

Answer 12

There are three rules for measurable work:-
If it is of a similar character, quantity and in the same conditions as existing work, then the bill rates should be used.
If it is of a similar character, but different quantity or conditions, the bill rates should be used as a basis but a fair allowance should be made to take account of the difference.
If it is not of a similar character, fair rates and prices should be used (star rate).
Non measurable work to be valued by dayworks.

Question 13

What is a star rate?

Answer 13

A rate that is based on the bill rates but includes a fair allowance.
This may be used because the conditions on site for installation are more complicated that first envisaged.

Question 14

What are ‘fair rates and prices’?

Answer 14

A market rate.
A rate based on actual costs.
A rate in line with current cost data.

Question 15

What are dayworks?

Answer 15

The actual cost of all the materials, labour and plant used in carrying out the work, along with a percentage additions to each category as set out in the contract.

Question 16

What information is necessary to be able to assess dayworks?

Answer 16

Vouchers showing the amount of time spent on each activity (dayworks sheets).
Names of the workmen.
Plant and materials used.
Information should be given to the CA for verification.

Question 17

If you and the contractor’s QS could not agree on something how
would you resolve it?

Answer 17

I would discuss with the partner and client to try and seek a resolution with the contractor.
The contractor could take the dispute to adjudication if necessary but all parties should try and resolve the matter by negotiation in the first instance.

Question 18

What is quantum meruit?

Answer 18

This translates to ‘what he deserves’ for example fair and reasonable costs that have been incurred.

Question 19

Give an example of where quantum meruit might be used?

Answer 19

If the employer and contractor reach a separate agreement on acceleration, the costs of this may be based on a ‘fair and reasonable’ basis.

Question 20

What can an organisational cashflow be used for?

Answer 20

It can be used to assess whether a company will be able to adequately cope with the works being considered.

Question 21

What are important points when reviewing an organisational cashflow?

Answer 21

Overdraft level.
Frequency of overdraft use.
Potential effect of bank removing overdraft.
Potential effect of company losing 1 or more key clients.

Question 22

What different payment mechanisms are there?

Answer 22

Stage payments - milestone
Periodic/Interim valuation

Question 23

How do the different payment mechanisms effect cashflow forecasting?

Answer 23

Stage payments - high predictability of cashflow, low accuracy of value of work done
Payment against activity schedule - reasonable predictability of cashflow, reasonable accuracy of value of works done
Valuation of works done on site to date - Lowest predictability of cashflow, high accuracy of value of works done

Question 24

Why is it important to consider the form of contract when producing a cashflow forecast?

Answer 24

Because different forms of contract have different payment timescales between application and payment.

Question 25

What other considerations should be made when producing a cashflow forecast?

Answer 25

Statutory holidays.
Time of year.
Weekend working requirements.
December valuation date is often pushed forwards due to Christmas, therefore January payment date will be earlier.

Question 26

Should you include the rectification period in a cashflow forecast?

Answer 26

Yes.

Question 27

How do you value a Provisional Sum?

Answer 27

The same way as a variation.
The CA will issue an instruction for its expenditure.

Question 28

How are Provisional Sums dealt with in the Final Account?

Answer 28

The provisional sum is included in the contract and then deducted.
The actual value added back as a variation.

Question 29

Why would project cash-flow be behind target?

Answer 29

Site conditions.
Adverse weather.
Re-sequencing of works.
Materials being stored off-site.
Materials not being delivered on time.
Inaccurate cash-flow forecast.

Question 30

How does NRM classify risks?

Answer 30

Employer change risk.
Employer other risk.
Design development risk.
Construction risk.

Question 31

How do JCT contracts define change?

Answer 31

Alteration or modification to the design, quality or quantity of the works.

Question 32

What methods are there of obtaining a cost for variations under JCT forms of Contract?

Answer 32

Using bill rates
Using star rates (fair and reasonable allowance
Using Dayworks
A schedule 2 quotation

Question 33

What costs does the schedule 2 quotation contain?

Answer 33

Value of the work.
Any adjustment of time.
Money in lieu of direct loss and expense.
The fair and reasonable cost of preparing the quotation.

Question 34

Can a contractor refuse to provide a schedule 2 quotation?

Answer 34

Yes. They must notify the CA within a defined time period, disagreeing with the approach of producing a quotation.
They are then not obliged to produce a quotation unless instructed further by the CA.
The usual reason that a contractor would refuse is due to a lack of info.

Question 35

What costs are the contractor entitled to if the schedule 2 quotation is
rejected?

Answer 35

The fair and reasonable cost of preparing the quote, as long as the quote itself was fair and reasonable.

Question 36

Can a contractor claim for the cost of preparing a schedule 2 quotation?

Answer 36

Yes a fair and reasonable amount can be claimed and paid, even if the quotation is not accepted.

Question 37

What is a Defined Provisional Sum?

Answer 37

Contractor is deemed to have made allowance for the works in their programme and prelims.

Question 38

What is an Undefined Provisional Sum?

Answer 38

The contractor is not deemed to have made allowance in their programme and prelims.
Contractor may be entitled to an extension of time or additional prelims once the works are undertaken.

Question 39

What is a provisional sum?

Answer 39

Generally an allowance or estimate included within the contract that are:-
Not sufficiently defined, designed or detailed to allow for an accurate pricing.
Work that the employer may or may not wish to have carried out.

Question 40

How does the NEC contract incorporate provisional sums?

Answer 40

Do not provide the use for provisional sums.
If the work cannot be properly priced, it should be excluded until properly defined.

Question 41

What is change control?

Answer 41

Process of dealing with any changes on a project.

Question 42

What are prime cost sums?

Answer 42

A sum that the client provides for works yet to be fully defined, and exclude a contractor mark-up.

Question 43

What is the difference between a prime cost sum and provisional sum.

Answer 43

A prime cost is limited to the cost of supplying the relevant item and does not include any work that relates to it i.e. installation.
A provisional sum includes an allowance for supplying and all the related work.

Question 44

L1 - What are the techniques for controlling and reporting cost?

Answer 44

Producing cost reports which show the forecasted final account of the project. A forecasted cash flow would also give the client an understanding of their outgoings within the period. Beneficial for budgeting purposes.

Question 45

L1 - What is the difference between cost control and cost reporting?

Answer 45

The objective of cost control is to manage the delivery of the project within the approved budget. Regular cost reporting will facilitate, at all times, the best possible estimate.

Question 46

L1 - As a QS what should you be doing for your client?

Answer 46

Ensure that the project remains in budget and provide updates in terms of cost reporting.

Question 47

L1 - How would the number of changes affect the frequency of reporting?

Answer 47

The more changes, the more complex the project. Therefore, the frequency of reporting would increase to provide the client with regular updates on the status of the project.

Question 48

L1 - Would it not be better to prevent/mange the changes rather than just report on them?

Answer 48

Yes, it would be beneficial to prevent and manage any changes, although the client would still need to be kept up to date with any potential changes through a reporting process.

Question 49

L1 - How do you compile a risk register?

Answer 49

You would sit down with the project team to identify hazards. You would apply a probability % to these hazards to give a score within the risk register. You would also confirm how they will be dealt with and by whom.

Question 50

L1 - How do you quantify risks?

Answer 50

You would apply a probability % to each of the hazards. This would be multiplied by a rate to give you an overall cost of the hazard.

Question 51

L1 - What are the key components of a cost/value reconciliation?

Answer 51

Used to measure expenditure against budgets, and what the overall profit margin is.

Question 52

L1 - What is the importance of having a project cash flow forecast?

Answer 52

It gives the client an understanding of their expenditure throughout a period.
It is used as a tool to predict funding at a given period in time.

Question 53

L1 - What information would you provide in your cost report?

Answer 53

Executive Summary
Cost Summary
Cash Flow
Variations
Anticipated Variations
Provisional Sums
Contingency
Claims

Question 54

L1 - What do you understand to be the difference between prime cost and provisional sums?

Answer 54

A prime cost is limited to the cost of supplying the relevant item and does not include any work that relates to it i.e. installation.
A provisional sum includes an allowance for supplying and all the related work.

Question 55

L1 - What current challenges is Covid and/or Brexit bringing to Project Finance?

Answer 55

Delays and variations to construction work which have to be regularly updated and reported on within cost reports.

Question 56

L2 - Project Zeta – what sort of provisional sums were these?

Answer 56

These were defined provisional sums.

Question 57

L2 - What is the difference between a defined sum and undefined and how are they dealt with?

Answer 57

An undefined provisional sum is where the contractor is not deemed to have made allowance in their programme and prelims.
They are dealt the same was as variations.
They would be instructed by the CA and priced by the contractor for review.
I would proceed to review the costs and agree the cost with the contractor.
If agreed the cost would be included within the next interim valuation.
An undefined provisional sum may warrant an extension of time and a variation for costs.

Question 58

L2 - When cost reporting how have you dealt with forecasting when the costs may be lagging behind progress?

Answer 58

Ill first look into the reasons why costs are lagging behind as this could indicate contractor difficulties/potential insolvency or works are slowing down etc.
I’ll also request from the contractor an updated cash flow and programme to include in the cost report which gives the Client a better understanding of the monthly expenditure

Question 59

L2 - Where have you used a cashflow to manage overall finances?

Answer 59

I have used a cash flow on Wythenshawe GMMH to forecast expenditure and provide the client with an understanding of their future spend for budgeting purposes.

Question 60

L3 - Toby Carvery – how often were you reporting to the client and in what format?

Answer 60

The programme on the Toby Carvery projects are only short, typically ranging from 4-6 weeks. I would report to the client typically every 2 to 3 weeks at the half way point.
This would be in the form of a financial statement.

Question 61

L3 - Project Zeta – when you updated the risk register how did you evaluate the current position of known risks?

Answer 61

They were discussed with the project team during the contractors progress meeting. The discussion in the progress meeting was reflected within risk register.

Question 62

L3 - Project Zeta - What solution did the design team provide?

Answer 62

They altered the design of the welfare facility. It was originally a double storey unit, with a large steel staircase. This was reduced to a single storey design, reducing masonry costs, as well as the cost of an external staircase.

Question 63

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

Answer 63

Proactive risk and contingency management.
Implementing a robust change control process.
Regular cost reporting which is also forward looking.
Rolling final account with closure process for financial impact of change.