Project Finance & Cost Reporting

Question 1

How would you create a cash flow forecast?

Answer 1

I would need access to the construction programme and contract sum analysis in order to populate the cash flow.

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 shown on the contract programme and include individual S-curves for each package.

You could also use forecasting software or utilise a previous cashflow on a similar project - however these are not as accurate.

Question 2

Why are cash flow forecasts shown by S-curves rather than linear spending?

Answer 2

Expenditure is fairly low at the start as site set-up and enabling works are undertaken.

As it progresses, items of higher value such as steel frames and M&E installs will be undertaken.

As the scheme starts to finish, minor items such as decoration and cleaning packages are undertaken.

Question 3

What is the benefit of a cash flow forecast?

Answer 3

Allows the employer to gain an understanding of the financial requirements over the duration of the project and setup any funding requirements for the scheme in advance.

It can also act as a check for valuations and provide an early indication of financial difficulties if the actual expenditure is lagging behind the forecast.

Question 4

What would be included in a financial report?

Answer 4

Contract Sum total

The value of instructed variations.

The value of anticipated variations.

Ongoing claims.

Provisional Sum Adjustments.

The anticipated final account total.

The total of certified payments.

Question 5

What is the purpose of a financial report?

Answer 5

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 contract progress compared against pre-contract predictions.

Question 6

What are variations?

Answer 6

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

Question 7

Why might variations arise?

Answer 7

1. Change of specification
2. Discrepancies between contract documents
3. Discrepancies with statutory requirements
4. Errors and omissions
5. Deficiencies in employer’s requirements

Question 8

What form must architect’s instructions take?

Answer 8

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.

Question 9

What about oral instructions?

Answer 9

The validity of oral instructions depends on whether the form of contract being used contains mechanisms for them to be valid.

Under a JCT SBC:
- where the CA issues an instruction otherwise than in writing, it shall be of no immediate effect.
- but the CA shall confirm in writing receipt of the verbal instruction within 7 days
- if the CA does not confirm within 7 days it shall take effect as from the expiry of the latter 7 day period.

Usually best practice to follow up on verbal instructions with a written instruction as soon as possible.

Question 10

Can the contractor object to a variation?

Answer 10

Some contracts will allow the contractor to object to an instruction in special circumstances.

In the JCT SBC the requirement to comply with a valid instruction is subject to certain exceptions where:
- it may affect the efficacy of the design of the CDP
- it may affect the contractor’s compliance with the CDM regulations
- it may infringe patent rights
- it relates to a named specialist, and the contractor is unable to enter into a contract with that firm.

Question 11

What can the architect do if the contractor does not comply with an instruction?

Answer 11

Depends on the form of contract being used however under JCT Suites if the contractor does not follow an instruction, the architect will be required to issue a ‘notice to comply’ to the contractor.

If the Contractor still fails to comply, the architect can instruct another party to carry out the work and the contractor will be liable for any additional costs incurred.

In this circumstance it is important to record the costs and obtain a range of quotations.

Question 12

What 3 methods are there of obtaining a variation under a JCT contract?

Answer 12

Depends on the form of contract being used but can be:
1. Agreement between employer and contractor
2. A schedule 2 quotation
3. Valuation by the QS under the valuation rules

Question 13

What are the time periods for Schedule 2 quotations under JCT SBC?

Answer 13

The architect should request via issue of an AI

The contractor has 7 days to notify that they will not provide one.

If not, they have 21 days to provide the quotation.

The architect then has 7 days to confirm in writing the acceptance or rejection.

The acceptance is called the ‘confirmed acceptance’.

Question 14

What costs does the Schedule 2 quotation contain?

Answer 14

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 15

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

Answer 15

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

Question 16

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

Answer 16

Three rules;

If it is of similar character, quantity and in the same conditions as existing work, then the bill of rates should be used

If it is of similar character but the quantity or conditions is different, the bill of 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 similar character, fair rates and prices should be used

Question 17

What about non-measurable work?

Answer 17

This would typically be valued by the dayworks procedure based on the cost of labour, plant and materials that have been incurred

Question 18

What is a star rate?

Answer 18

A rate that is based on the bill rates but includes a fair allowance

To deviate away from the bill rates there must be a reason as to why the star rate is being adopted

This may be because the conditions on site for installation are more complicated than first thought

Question 19

What are ‘fair rates and prices’?

Answer 19

A market rate

A rate based on actual costs

A rate in line with current cost data

Question 20

What are dayworks?

Answer 20

The prime (actual) cost of all the materials, labour and plant used in carrying out the works, along with percentage additions to each category as set out in the contract

Question 21

What document should the prime cost be calculated in accordance with?

Answer 21

‘Definition of Prime Cost of daywork carried out under the Building Contracts’ published by RICS

Question 22

What information is necessary to be able to assess dayworks?

Answer 22

Dayworks sheets - showing the amount of time spent on each activity

Names of the workmen

Plant and materials used

This information should be given to the authorised person ay the end of the week for verification

Question 23

Can the QS alter the hours which they consider to be excessive on a dayworks sheet that is authorised by the architect?

Answer 23

No - the hours recorded and signed off should be maintained within the variation

Question 24

What should you do if the contractor submitted 10 dayworks sheets to you for payment?

Answer 24

Verify with the architect that a relevant variation has occurred and is recorded on a CAI/EAI

Check to ensure there is no other contractual method of valuing the variation

Providing the instruction is in place, and no other mechanism for valuing is available, I would seek verification on the hours and materials

Question 25

If the PQS and Contractors QS do not agree - how would you resolve it?

Answer 25

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 it by negotiation in the first instance

Question 26

What is ‘quantum meruit’?

Answer 26

Translates to ‘what he deserves’ - e.g. fair and reasonable costs that have been incurred

e.g. if an agreement on acceleration has been reached, the costs for this may be based on a ‘fair and reasonable’ basis

Question 27

What is Loss & Expense under JCT FoC?

Answer 27

L&E reimburses the contractor for a direct loss and/or expense incurred in carrying out additional work or from an employer’s breach of contract

Question 28

What are the procedures for claiming L&E?

Answer 28

As soon as the regular process of work is affected, or is likely to be affected, or the contractor becomes aware of any other matter that would cause them to incur L&E, they should notify the EA/CA in writing

The contractor should submit any further information as requested

The contractor should also submit any further information as requested by the Architect or QS to enable the amount of L&E to be ascertained

Question 29

What are Relevant Matters under JCT FoC?

Answer 29

Events listed in the Contract which entitle the contractor to loss and/or expense

Question 30

What are the 5 Relevant Matters?

Answer 30

Variations

Instructions

Execution of an approximate quantity that was not a reasonably accurate forecast of quantity

Suspension by the contractor for non-payment

Any impediment, prevention or default by the employer

Question 31

What is the key thing to remember when assessing L&E?

Answer 31

It should be the actual loss incurred by the contractor

Question 32

What are the common heads of claim in L&E applications?

Answer 32

Prolongation
Thickening of prelims e.g extra supervision needed for variations
Disruption causing labour or plant to be underemployed
Increases in labour or material costs during the period of delay
Head office overheads
Loss of profit
Finance charges
Acceleration costs
Claim preparation costs