Project finance (control and reporting) (L1)

Question 1

What cost control systems are used in the contracting environment?

Answer 1

-Cost Value Reconciliation (CVR)
- Earned Value Analysis (EVA)

Question 2

What is Cost Value Reconciliation (CVR)?

Answer 2

-CVR is a cost control process that is used during a construction project. It is typically carried out monthly (at the interim valuation date) by the QS and involves comparing cost against value to determine the profitability of the project.
-Cost equals the expenses incurred in performing the works both to date and a forecast
-Value equals the revenue incurred for the work complete both to date and a forecast
-If the value is higher than the cost then the project is in profit.
-If the cost is higher than the value then the project is at a loss.

Question 3

What is the process of CVR?

Answer 3

-Initial budgeting: establishing the budget of the project scope
-Cost tracking: monitoring actual cost against the budgeted amounts
-Value assessment: valuing work complete at different intervals. Note there are two types of valuations, external and internal. It is likely that the external valuation will contain value that maybe disputed by the client. This value is not included in the interval valuation, that is included in the CVR such that the prudence concept is applied.
-Reconciliation: identifying variance between budget and actual cost and the value, and analysing reasons for differences
-Reporting: generating CVR reports to provide stakeholders with a clear financial status of the project
-Review and action: use insights to make informed decisions and corrective action if necessary

Question 4

What is the prudence concept?

Answer 4

-Cost should not be understated
-Value should not be overstated
-As it is better to have unexpected financial gain than it is to have an unexpected financial loss.
-The prudence concept ensures the likelihood of the latter is decreased

Question 5

What is Earned Value Analysis (EVA)?

Answer 5

-EVA is a project management tool used to assess project progress and performance at any point in time.
- It does this comparing the amount and cost of work that was planned to have been complete at a point in time (known as Planned Value) with the actual amount that has been done and what it has actually cost (known as Actual Cost).
-The Earned Value then shows how much of the budget and time should have been spent to get to this point in the project
- So by comparing Earned Value to Planned Value you can see if the project is ahead or behind schedule (known as Schedule Variance) and if it is under or over budget (known as Cost Variance)

Question 6

What is the difference between CVR and EVA?

Answer 6

-CVR compares value of work done to a point in time with cost incurred to the same point in time
-EVA has an additional dimension of time and
- Shows how much of the budget and time should have been spent to get to this same point in the project

Question 7

How does regular and frequent cost reporting on a project help in controlling the outturn cost on a project?

Answer 7

-Outturn cost is controlled by recognition of cost changes incurred and planned implementation of future changes
-So regular and frequent cost reporting affords the client and project team with the visibility to recognise this

Question 8

What is a cost report?

Answer 8

-It is a report that records the cost incurred to date and a forecast of cost to be incurred which may include risk allowances

Question 9

What is the purpose of cost reporting?

Answer 9

-To inform the client of the likely outturn cost of the project

Question 10

What should be included in a construction cost report?

Answer 10

-This will somewhat vary dependant on the contract type/ main Option

Question 11

What should be included in a construction cost report for a lump sum contract?

Answer 11

It should include:
-Tendered total of the Prices
-Implemented CEs
-Unimplemented CEs
-Forecast total of the Prices
-Certified PWDD
-Profile of remaining incomplete activities
-Delay Damages if applicable
-Reasons for movement in outturn and in month
-United Utilities do not include Contractor notified CEs in their cost reports

Question 12

What should be included in a construction cost report for a Target Cost contract?

Answer 12

 Total of the Prices/ Target Cost
 Implemented CEs
 Unimplemented CEs
 Forecast total of the Prices/ Target Cost
 Certified PWDD
 Forecast PWDD including risk allowances
 Forecast Pain/ Gain share
 Delay Damages if applicable
 Reasons for movement in outturn and variance in month
 United Utilities do no include Contractor notified CEs in their cost reports

Question 13

How are variations/ CEs treated and reported in cost reports?

Answer 13

-If the value of a variation has been agreed with the Contractor it should be identified as so
-If the value of a variation has not been agreed with the Contractor it should be identified separately
-Differences in the valuation of a variation should be recorded, but the final cost report should reflect the PQS assessment

Question 14

How are loss and/ or expense claims/ contractor notified CEs treated and reported in cost reports?

Answer 14

• The cost report should include both the contractor’s claimed amount and the PQS assessed amount, if instructed to do so.
  -However, due to reliance on Contractor to submit details of the loss and expense claim it can be difficult to report a reasonable assessment in the first place.
  -If an allowance for loss and/ or expenses has been included it should be stated in the cost report
  -Additionally, the QS should make the client aware of the difficulty in reporting a reasonable assessment and of the basis on which the allowance has been made

Question 15

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

Answer 15

-Regular cost reporting which is also forward looking
-Rolling final account
-Effective communication and collaboration
-Proactive risk management
-Proactive management of CEs

Question 16

What is your understanding of the term ‘Accruals’?

Answer 16

o Accruals are made within financial accounting systems to take account of anticipated invoices that are not yet paid

Question 17

What is the trade-off between the different valuation methods and accuracy of a cash flow forecast?

Answer 17

o Stage payments – Pre-agreed amounts at pre-set times regardless of progress on site – provides high accuracy of cash flow but low accuracy of value of works done
o Milestone payments – Pre-agreed amounts paid upon completion of pre-agreed elements – high accuracy of payments but low accuracy of when they become due
o Activity schedule – pre-agreed payment when activities are complete – reasonable accuracy of cashflow and accuracy of value of work done
o Valuation of works done to date – Pre-agreed periods the value of work on site is assessed – lowest accuracy of cash flow but high accuracy of value of work done to date

Question 18

How is risk managed on a project during the construction phase?

Answer 18

o Through an early warning register and risk reduction meetings for example,
o Risks are:
 Identified and notified
 Assessed and prioritised – in terms of likelihood of occurrence and impact on the project,
 Mitigated – through actions such as avoidance or reduction and
 Monitored and reported – through further risk reduction meetings and updating the risk register and cost reports

Question 19

Who owns the change control process on a project?

Answer 19

o This depends on the form of contract being used
o Under the NEC the Project Manager is the primary owner of the change control process
o Under the JCT SBC the Architect/ Contract Administrator is the primary owner of the change control process

Question 20

Who managed the change control process on a project?

Answer 20

o This depends on the form of contract being used
o Under the NEC the Project Manager will manage the change control process
o Under the JCT SBC the Architect/ Contract Administrator will manage the change control process

Question 21

How is contingency formulated and who controls it?

Answer 21

o It is usually a percentage of the projects overall cost to cover unknown risk
o The client usually controls the overall contingency and decides when and how it should be released – this should be agreed upfront with the client

Question 22

What sort of risks might you see on one of your projects?

Answer 22

o External risks – economic uncertainty and legislation changes
o Financial risks – increase in exchange rates and cost of borrowing
o Site risks – restricted access, planning difficulties and environmental issues
o Client risks – lack of experience and post contract changes
o Design risk – incomplete design and lack of design co-ordination
o Construction and delivery risk – adverse weather, H&S and availability of resources

Question 23

What do you understand about contingencies?

Answer 23

o It is an allowance for unknown risk
o Cost reports should avoid the use of general contingency allowance and instead adopt the use of risk allowances for anticipated costs
o If a general contingency is required to be included in the budget by the client, then its reporting treatment should be agreed with the client at the outset of the project
o There are 2 accepted methods for reporting general contingency
 maintenance method and
* costs incurred and forecasted costs of work were no budget provision was made is charged against the general risk allowance
* The balance of remaining risk allowance should then be maintained throughout the project
 progressive release method
* costs incurred and forecasted costs of work were no budget provision was made is charged against the general risk allowance
* The balance of remaining risk allowance is then progressively released
o Pro-rata to completion of programme or
o Percentage completion of cost
* Advantage – allows use of available capital by the client

Question 24

What is a cash flow and what is it used for?

Answer 24

o It is an analysis of when costs will be incurred through the course of a project
o It use will depend on the party who using the cashflow
o For example, a client may use a cashflow to ensure that an appropriate level of funding is in place and that suitable draw-down facilities are available can also be used to monitor the projects progress
o A contractor may use a cashflow to ensure they are in a positive cash position and have sufficient working capital to cover day-today project expenses and payments to subcontractors or suppliers

Question 25

Can you explain the difference between a defined and undefined provisional sum?

Answer 25

o Defined provisional sum is used when the nature and extent of the work is known
o Undefined provisional sum is used when the nature and extent of the work is unknown and the information required for a defined provisional sum cannot be provided
o A defined provisional sum is also accounted for in the contractors price (for preliminaries) and programme
o An undefined provisional sum is not accounted for in the contractor’s price (for preliminaries) and programme and so the client is taking the risk for the whole of that work, and the contractor maybe entitled to additional time and loss and/or expense