Project Finance [Control and Reporting] Flashcards
Related guidance to cost reporting?
Several RICS Black books:
- Cost Reporting
- Cashflow Forecasting
- Valuing Change
- Interim Valuations and Payment
- Final Account Procedures
What is the purpose of post-contract cost / financial reporting?
- Provide overview of client’s current financial commitment
- Inform client of the predicted final account costs of the project
- Can be benchmarked to initial budget and tender sum / pre contract predictions
- Give client understanding of potential savings / risks / VE additional monies required
What information would you include in a post-contract cost report?
- Summary
- Contract sum
- Instructed variations
- Anticipated variations
- Provisional sum adjustments
- VE options
- Anticipated final account (forecast)
- Risk allowances / contingencies
- Cashflow forecast and certified payments
- Commentary on project status
Difference between cost and price?
- Cost is the expense incurred in the production of a product / service
- Price refers to payment required for supply of a product / service
How would you deal with a large and (in your opinion) unrealistic claim for loss and expense in your cost report?
- Report claim and highlight concern with figure submitted
- Assuming CA deems the principal of the claim is valid, I would assess the claim
- Update client on a regular basis until conclusion reached
What is a cash flow projection (/ forecast)?
Financial planning tool showing predicted flow of cash in and out of project, typically shown month-by-month
- Typically form an ‘S curve’
What formula can be used to predict anticipated payments?
S curve algorithm
Difference between employer cash flow and contractor (/ construction) cash flow projections?
- Employer -> usually considers project in broader context, may include costs such as fees (statutory, consultant, legal), charges (land acquisition, marketing and sales)
- Contractor -> construction costs
How does [the employer] benefit from accurate cash flow projections?
- Assist with planning expenditure- ensures apt funding in place
- Gain understanding of potential financial commitment at specific point in the future
- Sense check monthly contractor valuations
If payments to the contractor are behind the projection, what might this indicate?
Construction works may be behind programme
If payments to the contractor are ahead of the projection, what might this indicate?
Construction works may be ahead of programme or the contractor is over-claiming
How would you create a cashflow forecast?
- I would need to have access to the construction programme and contract sum analysis in order to populate the cashflow.
- The values associated with each element of construction could be forecasted at times to reflect their installation within the programme.
- I would split the works into the different packages as shown on the contract programme and include individual s-curves for each package.
- Obtaining drawdown schedules from specialist subcontractors and professional consultants can also assist when populating the cashflow.
- An alternative approach would be to utilise a previous cashflow from a similar scheme or to use cashflow forecasting software although this may not be as accurate.
Different ways to produce a cash flow?
- S curve calculator to calculate expenditure over course of construction
- Use programme and pricing schedule to plot expenditure
- Request contractor to submit cashflow
If your construction budget was £2.5m and proposed construction period was 25 weeks, would a forecast cashflow expenditure of £100,000 per week be realistic?
- In reality this would not be very realistic as the cashflow expenditure per week is unlikely to have a flat or regular profile.
- In reality the expenditure is much more likely to have an S-curve profile where at the start of the scheme, the expenditure per week will be fairly low as the site setup and enabling works are undertaken.
- As the scheme progresses, items that are of higher value such as the steel frame and M&E installations will be undertaken. The cost expenditure per week at this stage will be much higher than at the start of the scheme.
- As the scheme draws to a close, minor finishing items such as decoration and cleaning packages will be undertaken again resulting in a lower expenditure cost per week.
Components of a cash flow?
Prelim costs, work packages, OH&P, retention, expenditure of loss and expense, provisional sums, instructions, variations
Contributors to increased costs on a construction project?
- Client driven changes
- Design development
- Site specific risks (contamination, ground obstructions, logistical issues, incoming services)
- External influences (market fluctuations, tax and insurances, Brexit, COVID - depends on contract)
Methods to bring the project back in budget?
Main options are to reduce scope or assess value engineering possibilities
Would there be a potential conflict on the scheme if the EA undertook commercial aspects of the contract?
- Post contract - not really as the EA and QS scope of services are to act impartially and in accordance with administering contract conditions, so technically there shouldn’t be too much variance between their assessment of say valuations etc.
- Pre-contract (EA not appointed yet) but could be PM - if they had a favourable contractor in mind this could skew their quality assessment if they knew the status of the cost rankings
Have you produced a change control tracker? If so, how?
- Description of changes, who this was raised by and when, categorise change according to status
- Any additional comments in other column as a running commentary
What are the typical responsibilities of the cost manager on a construction project?
Depends on scope of service, may include:
- managing risk allowance expenditure
- prepare pricing documents
- tender evaluation / analysis
- prepare interim valuatoins
- value variations
- assess contractor’s financial claims
- negotiate and agree final accounts
- produce cost estimates and cost plans
- advice on whole life costs
- cost reports, forecasts
- prepare and maintain cash flow forecast
Advantages of buildability?
- Better programming, sequencing, construction methods
- Potential for reduced capital and life cycle costs and improve building performance and maintenance characteristics
What are variations?
Alterations / modifications to design, quality or quantity of the contract works / site access / working conditions
Why might variations arise?
- a) change to specification.
- b) discrepancies between contract documents.
- c) discrepancies with statutory requirements.
- d) errors and omissions.
- e) deficiencies in employer’s requirements.
What form must architect’s instructions take?
- It is best practice under the majority of contracts for instructions to be made in writing.
- The QS is not usually authorised to make additions to the contract sum for instructions that are not in written form.
What form must oral instructions take?
- Validity depends on whether form of contract has valid mechanisms
- i.e. JCT SBC- Instructions other than writing of no immediate effect- contractor shall confirm in writing receipt within 7 days, if CA doesn’t dissent within 7 days, takes effect from expiry of 7 day period
- In my opinion, best practice to follow up verbal instructions with written ones ASAP
Can the contractor object to a variation?
- Depends on the contract, i.e. JCT SBC - contractor must comply with valid instruction subject to certain exceptions
Exceptions
- Instruction might affect efficacy of CDP / compliance with CDM regulations
- Instruction might infringe patent rights
- Contractor unable to enter into contract with named specialist in instruction
What can the architect do if the Contractor doesn’t comply with an instruction?
- Depends on the contract, though in JCT, the architect is required to issue ‘notice to comply’ to the Contractor
- If contractor still fails to comply, architect can instruct another party to carry out work, with contractor liable for additional costs incurred - must obtain range of quotations and have record
3 methods of obtaining a cost for variations under JCT forms of contract?
Depends on contract, JCT SBC:
- Agreement between employer and contractor
- Schedule 2 quotation
- Valuation by QS under valuation rules
What are time periods for Schedule 2 quotations under JCT SBC?
o The architect should request via issue of an AI.
o The contractor has 7 days to notify that they will not provide one.
o If not, they have 21 days to provide the quotation.
o The architect then has 7 days to confirm in writing the acceptance or rejection.
o The acceptance is called the ‘confirmed acceptance’.
What does the Schedule 2 quotation contain?
- Work value
- Time adjustment
- Money in lieu of direct loss and expense
- Fair and reasonable cost of preparing quotation
Is the contractor entitled to any costs if the quotation is rejected?
Fair and reasonable cost of preparing quote, as long as quote itself was fair and reasonable
Valuation Rules under JCT forms of contract?
3 rules for measurable work:
- If of similar character, qty and condition as existing work, bill rates should be used
- If of similar character, but different qty / conditions, bill rates used as basis, with fair allowance to account for difference
- If not of similar character, fair rates and prices should be used
What about non-measurable work?
Typically valued by dayworks procedure based on labour, plant, materials costs incurred
What is a star rate?
- Rate based on bill rates, but including fair allowance
- Deviation must have reason (i.e. conditions on site more complicated than first envisaged
What are ‘fair rates and prices’?
- Market rate
- Rate based on actual costs
- Rate in line with current cost data
What are dayworks?
Actual cost of materials, labour, plant used in carrying out work, along with % addition as set out in the contract
What document should the prime cost be calculated in accordance with?
Definition of the Prime Cost of daywork carried out under Building Contracts (by RICS)
What information is necessary to be able to assess dayworks?
- Dayworks / time sheets
- Names of workmen
- Plant and materials used
This info should be given to CA / authorised person for verification
Can the QS alter hours they consider excessive on a dayworks sheet that’s authorised by CA?
No the hours recorded and signed off should be maintained within the variation.
What would you do if the contractor submitted 10 dayworks sheets to you for payment?
- Verify with CA that relevant variation has occurred and it’s recorded on an instruction
- Ensure no other contractual method of valuing variation
- Providing CAI in place and no other mechanisms, I’d seek verification of hours and materials
How would you resolve if you didn’t not agree on something with the contractor’s QS?
- Discuss with client / senior colleague, try to seek resolution with contractor
- Could take to adjudication if necessary, all parties should try and resolve matter by negotiation in first instance
What is quantum meruit?
“what he deserves’ - fair and reasonable costs incurred
Give an example of where quantum meruit might be used?
If employer and contractor reach separate agreement on acceleration, costs may be based on ‘fair and reasonable basis’
What is loss and/or expense under JCT Forms of Contract?
Reimbursing contractor for any direct loss and/or expense incurred in carrying out additional work / from employer’s breach of contract
What are the procedures for claiming loss and expense under JCT forms of contract?
- As soon as the regular progress of the work is affected, or is likely to be affected, or the contractor becomes aware of any other matter that would cause them to incur loss and expense, they should notify the architect in writing.
- The contractorshould submit any further information as requested by the architect.
- The contractorshould also submit any further information as requested by the Architect or QS to enable the amount of loss and expense to be ascertained.
What are Relevant Matters under JCT forms of contract?
Events listed in Contract entitling contractor to loss and/or expense
What are the Relevant Matters?
o Variations.
o Instructions.
o Execution of an approximate quantity that was not a reasonably accurate forecast of quantity.
o Suspension by the contractor for non-payment.
o Any impediment, prevention or default by the employer.
What is key to remember when assessing loss and expense?
Actual loss incurred by the Contractor
What are common heads of claim in loss and expense applications?
- Prolongation
- Thickening of prelims (i.e. extra supervision required)
- Disruption causing plant/labour to be underemployed
- Increase in labour / material costs during delay period
- Head office overheads
- Loss of profit
- Finance changes
- Acceleration costs
- Claim preparation costs
Can you explain how you valued loss and expense claim on one of your projects?
- Liaised with EA/CA to confirm validity, if it was a relevant matter following EoT
- Reviewed contract prelims / extent on site to build up costs
- Communicate with contractor, ascertain their costs and sense check if matched with my assessment
- Client informed, agreed, monies paid against
What is a provisional sum?
- Allowance / estimate included within the contract price
- Not sufficiently defined/designed/detailed to allow accurate cost determination at time of carrying out and/or
- Work the employer may (not) wish to be carried out
How are provisional sums expended?
- Under JCT, CA should issue instruction for expenditure
- Final amount payable = omission of prov sum allowance and addition of actual cost
How are provisional sums dealt with in the Final Account?
- CA should have issued instructions for expenditure of all provisional sums with the add/omit
- Instructions then accounted for in usual way under Final Account (FA)
How does the NEC contract incorporate provisional sums?
- Unamended NEC contracts don’t provide for use of prov sums
- NEC approach - if scope of works unclear, item is excluded until it can be properly defined
What types of provisional sum are there?
Defined and undefined
Difference between defined and undefined sums?
Defined (as stated in NRM1)
Contractor has allowed adequate time for programme and prelims included in contract - nature of construction work, qty and time required is known but design not yet complete
Undefined
Extent unknown so contractor has not allowed for planning/programming/preliminaries implications- entitled to EoT and/or additional prelims when actual works undertaken
Would the contractor be entitled to claim additional preliminaries and/or EoT when expending a defined provisional sum?
No- they should have allowed for programme and prelims in price
What are prime cost sums (PC sums)?
- Supplier only rate for materials / goods where precise spec unknown
- Excludes costs associated with installation, fixing, fees, OH&P
Prime cost vs provisional sums?
- Prime cost affects material cost only, work elements firm but only material elements subject to change
- Provisional sums allow for supply and related costs
On one of your projects, how did you make sure the contractor made sufficient allocation in their programming, planning and prelims?
Ensuring provisional sums classed as defined, so contractor accounted for programming, prelims - less cost and time risk
When would you use a prime cost sum over a provisional sum?
When works element can be firmed up but specification isn’t confirmed
What are some of the risks associated with a provisional sum?
- Cost not certain - if full extent of works not realised / appreciated, costs can increase significantly
- Undefined provisional sums have time-related costs and programme implications
Under what situation would you advise a provisional sum to be included?
When design can’t be complete and inadequate information to attribute a firm cost
Does JCT D&B mention provisional sums in the contract?
Mentioned and to be expended by contract instructions (not mentioned if defined / undefined)
What is a final account?
- Conclusion of the Contract Sum (including necessary adjustments)
- Signifies agreed amount employer will pay contractor
What are the usual components of a final account?
- Summary
- Measured work
- Variations
- Adjusted prov sums / prime cost sums
- Claims
- Fluctuations
- Previous payments made
- Delay damages
- Retention
- Fees
- OH&P
- Original contract sum
- Final account sum
Can you detail the process for agreeing a final account?
- Contractor has 3 months from PC date to send all relevant information
- Review and agree within 2 months of contractor submitting necessary information
- Draft final account statement, send to contractor to confirm agreement
- Issue statement to employer’s agent, allows final completion certificate to be issued (after rectification period elapsed)
What needs to be in place to allow the final completion certificate to be issued?
- End of defects rectifications period
- Final statement in place (FA agreed)
- Notice of Completion of Making Good (any defects rectified)
What is the benefit of a cashflow forecast?
- A cashflow forecast allows the employer to gain an understanding of the financial requirements over the duration of the project duration and setup any funding requirements for the scheme in advance.
- It can also act as a check against valuations and provide an early indication of financial difficulties if the actual expenditure is lagging behind the forecast.
What would you include within a financial report?
I would typically look to include reference to:
o a) Contract sum total.
o b) The value of Instructed variations.
o c) The value of potential future variations.
o d) Ongoing claims.
o e) Provisional Sum Adjustments.
o e) The anticipated final account total.
o f) The total of certified payments.
