Project Finance / Design Economics and Cost Planning / Quantification and Costing Flashcards
1
Q
What are the typical responsibilities of the cost manager on a construction project?
A
Subject to the scope of service, typical responsibilities may include:
- Manage risk allowance expenditure.
- Initiate action to avoid overspending.
- 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.
- Issue financial reports or statements.
- Provide initial cost advice on capital investment costs.
- Produce cost estimates and cost plans.
- Provide advice on whole life costs.
- Produce cost reports, estimates and forecasts.
- Prepare and maintain the cash flow forecast.
2
Q
If you are producing estimates and cost plans, which measurement rules represent industry best practice for capital building and building maintenance works in the UK?
A
New Rules of Measurement (NRM).
3
Q
Can you name the three documents in the NRM suite?
A
NRM 1 - Order of cost estimating and cost planning for capital building works.
NRM 2 - Detailed measurement for building works.
NRM 3 - Order of cost estimating and cost planning for building maintenance works.
4
Q
Can you provide a brief overview of NRM1?
A
NRM 1
- Provides guidance on the quantification of building works for the purpose of preparing cost estimates and cost plans.
- It is the ‘cornerstone’ of good cost management of construction projects, enabling more effective and accurate cost advice to be given to clients and other project team members, as well as facilitating better cost control.
5
Q
Can you provide a brief overview of NRM2?
A
NRM 2
- Is written mainly for the preparation of bills of quantities and quantified schedules of works, although the rules will be invaluable for designing and developing standard or bespoke schedules of rates.
6
Q
Can you provide a brief overview of NRM3?
A
NRM 3
- Gives guidance on the quantification and description of maintenance works for the purpose of preparing initial order of cost estimates.
- The rules also aid the procurement and cost control of maintenance works.
7
Q
What is the structure of NRM 1?
A
- 1: General introduction.
- 2: Measurement rules for order of cost estimating.
- 3: Measurement rules for cost planning.
- 4: Tabulated rules of measurement for elemental cost planning.
- Appendices.
8
Q
What is the structure of NRM 2?
A
- 1: General introduction.
- 2: Detailed measurement of building works.
- 3: Rules of measurement for building works.
- Appendices.
9
Q
What is the structure of NRM 3?
A
1: General introduction.
2: Measurement rules for building maintenance works.
3: Measurement rules for order of cost estimating.
4: Cost planning of R and M works.
5: Calculation of annualised costs for R and M works.
6: Elemental cost planning.
Appendices.
10
Q
Why is it important to measure the works according to industry standards and best practices?
A
- To provide consistency and greater accuracy in pricing.
- To ensure that all parties price on the same basis and therefore reduce the risk of dispute.
11
Q
Is it mandatory for Chartered Surveyors to follow the procedures set out in NRM?
A
- Following NRM is not a mandatory requirement. However, when an allegation of professional negligence is made against a surveyor, the adjudicator or court is likely to take account of the contents of any relevant guidance notes published by RICS in deciding whether the surveyor acted with reasonable competence.
12
Q
What are the key headings for contractor preliminaries identified in NRM 2?
A
1 Preliminaries
1.1 Employer’s requirements
1.1.1 Site accommodation
1.1.2 Site records
1.1.3 Completion and post-completion requirements
1.2 Main contractor’s cost items
1.2.1 Management and staff
1.2.2 Site establishment
1.2.3 Temporary services
1.2.5 Safety and environmental protection
1.2.6 Control and protection
1.2.7 Mechanical plant
1.2.8 Temporary works
1.2.9 Site records
1.2.10 Completion and post-completion requirements
1.2.11 Cleaning
1.2.12 Fees and charges
1.2.13 Site services
1.2.14 Insurance, bonds, guarantees and warranties
13
Q
How is risk dealt with under NRM?
A
- NRM recommends that risk allowances are not a standard percentage, but a properly considered assessment of the risk, considering the completeness of the design and other uncertainties such as the extent of site investigation undertaken.
14
Q
Can you tell me the 4 risk categories identified in NRM?
A
- Employer Change Risk.
- Employer Other Risk.
- Design Development Risk.
- Construction Risk.
15
Q
How does NRM define the ‘cost limit for the project?
A
NRM 1 definition: The maximum expenditure the client is prepared to make in relation to the completed building. Includes construction costs, the cost of professional services, certain other project costs, items required post completion and during its operation, and risk allowances.
16
Q
How does NRM define the ‘base cost estimate’ for the project?
A
NRM 1 definition:
- An evolving estimate of known factors without any allowances for risk and uncertainty, or an element of inflation.
- The base cost estimate is the sum of the works cost estimate, the project and design team fees estimate, and the other development and project costs estimate.
17
Q
What is an ‘order of cost estimate’?
A
NRM 1 definition:
- An estimate based on benchmark data for a similar type of project based on the client’s strategic definition or initial brief.
- Its purpose is to establish the affordability of a proposed development for a client.
- It takes place prior to the preparation of a full set of working drawings or bills of quantities and forms the initial build-up to the cost planning process.
- Order of cost estimates are a method of cost prediction.
18
Q
Which RIBA Stage is the order of cost estimate typically produced?
A
RIBA Stage 1 - Preparation and Briefing.
19
Q
What are the RIBA Stages of Work?
A
Stage 0 - Strategic Definition.
Stage 1 - Preparation and Briefing.
Stage 2 - Concept Design.
Stage 3 - Spatial Coordination.
Stage 4 - Technical Design.
Stage 5 - Manufacturing and Construction.
Stage 6 - Handover.
Stage 7 - Use.
20
Q
What is the difference between an order of cost estimate and a cost plan?
A
Cost Estimate:
- 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 or functional units.
Cost Plan:
- A cost plan is a more detailed elemental breakdown that shows how the costs are distributed across the project.
- A cost plan is an estimate based on a specific design.
21
Q
Can you explain the term ‘cost per functional unit’?
A
NRM 1 definition:
- The unit rate that, when multiplied by the number of functional units, gives the total building works estimate (i.e. works cost estimate minus the main contractor’s preliminaries and the main contractor’s overheads and profit).
- The total recommended cost limit (i.e. the cost limit, including inflation) can also be expressed as a cost per functional unit when reporting costs.
22
Q
What typical information should accompany an order of cost estimate?
A
- Covering letter.
- Executive summary.
- Cost limit.
- Specification notes.
- Assumptions.
- Exclusions.
- Drawings and other information upon which the estimate is based.
- A schedule of value enhancing options.
- Risk register.
- Cash flow information.
23
Q
What is a cost plan?
A
- NRM1 definition: In the context of Cost prediction, a cost plan is ‘an estimate based on a specific design’
- A statement showing an apportionment of an estimate of or an agreed budget between cost headings.
- Cost planning is a method of cost prediction.
24
Q
Other than predicting the final project cost, what other benefits does the cost plan provide to the project and project team?
A
- 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.
25
Do you need a programme to complete the cost plan?
- Preliminaries are typically presented as a weekly rate in developed cost plans; therefore, a programme or at least some high-level dates will be required.
The key information usually required is:
- Design and tendering periods.
- Start on site date.
- Construction period.
- Completion date.
26
How do you structure an elemental cost plan?
- Facilitating works
- Substructure
- Superstructure
Internal finishes
- Fittings, furnishings and equipment
- Services
- Prefabricated buildings and building units
- Work to existing buildings
- External works
27
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); data is available on a wide range of building types.
- Published pricing books such as Spon's and BCIS (the information may need adjusting for inflation).
- Pricing documents and other information from previous projects.
- Cost analysis and cost models produced in-house.
- Speaking directly to contractors, subcontractors, and suppliers for cost information.
- Existing client information - benchmark data from previous projects.
28
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.
29
What is a cost plan risk allowance?
NRM 1 definition: A quantitative allowance set aside as a precaution against risks and future requirements to allow for uncertainty of outcome.
30
When calculating the total fee estimate for a project, what component fees might be included?
Consultant fees:
- Project and design team.
- Other specialist consultants.
- Survey fees.
Contractor fees:
- Management and staff.
- Specialist support staff.
- Contractor's design management fees.
- Contractor design team fees (if applicable).
- Framework fees (if applicable).
Others:
- Planning permission application fees.
- Statutory undertaker fees.
31
What benefit does the client get out of accurate cost planning?
- The cost plan confirms to the client that 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 that not only meets their needs, but also represents best value.
32
How would you deal with a cost plan that is over budget?
- Communicate the matter to the client and 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.
33
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 and asking the design team to focus on mitigating key design risks.
- Explain how changes in the design will impact the cost plan.
- Contribute to value engineering and/or cost saving sessions.
34
In your view, what are some of the key reasons we have cost overrun on a project?
- Ambiguous client briefs or changes in the later stages of the project.
- Unrealistic cost estimates.
- Project risk is realised or not properly managed.
- Inadequate management control or processes.
- Uncoordinated design.
- Unknown external factors (for example, global pandemics).
- Unsuitable tendering and/or procurement strategy selection.
- Statutory authority influences, such as onerous planning permission conditions.
Inflation or changing market conditions.
35
What is BWIC?
BWIC refers to the builders work that is necessary to allow other works to proceed (typically mechanical and electrical services but also other specialist installations).
36
Why is VAT usually excluded from the cost plan?
Employers may incur different levels of VAT (some might be exempt). Therefore, VAT is usually excluded to ensure the incorrect tax rate is not applied.
37
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.
38
How would you undertake a benchmarking exercise for your client?
- Produce a clear document that shows the various cost plan elements side-by-side with the benchmark projects).
- This process will identify items which are considered abnormal, I would then endeavour to justify cost anomalies for flagged items.
39
What is wall-to-floor ratio?
- The wall-to-floor ratio of a building is calculated by dividing the external wall area by the gross internal floor area.
- This indicates the proportion of external wall required to enclose a given floor area.
- This may reveal how efficient the design is and may also help inform the construction cost.
40
How are subcontractor preliminary costs captured in the cost plan?
Costs associated with the subcontractor's preliminaries should be included in the unit rates applied to sub-elements and individual components.
41
Can you define contractor overhead and profit (OH&P) please?
- Profit can be defined as the money the contractor makes after accounting for all costs and expenses.
- The percentage of profit a contractor might apply will vary according to risk, workload, and the economic climate.
- General overheads are those not readily chargeable to one particular project, they constitute the contractors cost of doing business. These costs may include head office expenses, marketing. administration, IT equipment, etc.
42
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.
- Level of perceived risk.
- Project type and value.
- Market conditions.
43
What is a provisional sum?
Provisional sums are generally an allowance or estimate included within the contract price that are:
- Not sufficiently defined, designed, or detailed 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.
44
How are provisional sums expended?
The contract administrator (JCT contacts) should issue an instruction for its expenditure.
- Where a contract includes a provisional sum, the final amount payable will be adjusted (the provisional sum is omitted and replaced with the actual cost of the work).
45
How are provisional sums dealt with in the final account?
- By the time the project has reached the final account stage, the contract administrator will have issued instructions to expend all provisional sums.
- The instruction will show an add and omit (add actual costs and omit the provisional sum); the instructions are then accounted for in the usual way.
46
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 properly defined.
47
What types of provisional sums are there?
Defined and undefined.
48
Please explain the deference between defined and undefined provisional sums?
Defined
The contractor is deemed to have allowed for programming and preliminaries within the contract.
Undefined
The contractor does not allow for planning, programming or preliminaries. This means the contractor may be entitled to an extension of time and/or additional preliminaries when the actual works are undertaken.
49
Would the contractor be entitled to claim additional preliminaries 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 preliminaries within their price.
50
What are prime cost sums (PC sums)?
- A sum of money included in a unit rate to be expended on materials or goods from suppliers (e.g. supply-only ceramic wall tiles at £50/m2
- It is a supply-only rate for materials or goods where the precise quality of those materials or goods is unknown
- PC sums exclude all costs associated with fixing, installation, fees, OH&P, etc.
51
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 its installation).
- In contrast, defined provisional sums include allowances for supplying the item and all related work to be performed by the contractor.
52
Can you name some of the pricing documents we might use at tender stage?
- Bill of quantities (BoQ).
- Schedule of rates (SoR).
- Contract sum analysis (CSA).
- Schedule of work. (SoW).
- Priced activity schedule.
53
Can you name some of the pricing options for construction contracts?
- Lump sum.
- Cost-plus (also known as cost reimbursable).
- Remeasurement.
- Target cost.
- Guaranteed maximum price (GMP).
54
What is a lump sum contract?
- Fixed price or lump sum pricing, as the name indicates, provides for payment of a set amount.
- The amount of the fixed price or lump sum is determined by a contractor by estimating their cost to provide the work, and then adding overhead and a profit margin.
55
What are the key advantages of lump sum contracts?
- The contractor takes on the pricing risk but stands to benefit from increased profit if actual costs turn out to be below the estimated costs.
- Cost certainty for the employer.
56
What are the key disadvantages of lump sum contracts?
- A lump sum agreement presents a higher risk to a contractor. If the contractor underestimates their costs, the profit margin decreases and may disappear altogether.
- As a result of the additional risks faced by the contractor, they may increase their tender price.
57
What is a cost-plus contract?
Cost-plus contracts, otherwise known as cost reimbursable contracts, involves the employer paying the
contractor for the costs incurred during the project, plus a pre-agreed percentage for profit.
58
What are the key advantages of cost-plus contracts?
- Since cost-plus contracts are flexible by nature, inaccuracies in the initial bid aren't as detrimental as they are with lump sum contracts.
- Cost-plus contracts allow employers to make design changes along the way, contractors know they'll be paid for the extra time or materials that those changes incur.
59
What are the key disadvantages of cost-plus contracts?
- The final contract price is uncertain until the end of the project.
- Contractors may deliberately incur higher costs to increase profit (no incentive for efficiency).
60
When might a cost-plus strategy be appropriate to use?
- A cost-plus strategy might be used where the nature or scope of work to be carried out cannot be properly defined at the outset.
- This pricing strategy would suit emergency work such as infrastructure repairs or immediate reconstruction following a fire.
61
What is a remeasurement contract?
- Works are carried out based on pre-agreed unit rates.
- The actual quantities of work carried out are measured, and the tendered rates are applied to those quantities.
- The contractor is paid for the actual work they have done, so the final value of the project will be derived based on the unit prices and exact quantities.
62
What are the key advantages of remeasurement contracts?
- Since the work is tendered on approximate quantities, the contractors will submit competitive prices in their tender.
- The contractor's risk is comparatively low (compared to a lump sum contract).
63
What are the key disadvantages of remeasurement contracts?
- There is less cost certainty until the project is complete.
- General accuracy of cash flow forecasting.
- The risk for the employer is higher (compared to a lump sum contract).
64
What is a target price contract?
- The main difference between a target and a conventional contract is the mechanism for sharing risk and opportunity.
- The target cost is set early in the project, and upon completion, cost savings and overruns are shared between the contractor and the employer based on a pre-agreed formula or percentage.
- This is often term the ‘pain and gain’ mechanisms.
65
What are the key advantages of target price contracts?
- The contractor and employer are incentivised to reduce costs.
- Encourages active and equitable risk sharing, based on a clearly defined allocation of risk agreed upon at the outset of the project.
66
What are the key disadvantages of target price contracts?
- The employer and contractor must share pain and gain, this exposes the employer to greater risk.
- Complex target price, pain/gain share may not easily be understood by all parties.
67
If the employer wanted a target cost contract using the NEC form, which main option(s) would you
use?
Option C: Target contract with activity schedule.
Option D: Target contract with bill of quantities.
68
What is a guaranteed maximum price (GMP) contract?
- A guaranteed maximum price contract (GMP) sets a limit that the employer will pay their contractor, regardless of the actual costs incurred (i.e. the contract sum will not exceed a specified maximum).
- If the actual cost of the works is higher than the guaranteed maximum price, then the contractor must bear the additional cost.
- If the cost is lower than the guaranteed maximum price, the contract should set out which party will benefit from the savings.
- Usually, the savings will be split between the employer and contactor using a pre-agreed formula or percentage.
69
What are the key advantages of a Guaranteed Maximum Price?
- Establishes the employer's maximum financial commitment (subject to employer variations).
- If the contractor's costs exceed the target cost, only the target cost is paid.
- Both the contractor and employer have the potential to benefit from savings.
70
What are the key disadvantages of a Guaranteed Maximum Price?
The contractor will have to share any savings made while taking on the risk of cost overrun.
71
What are contractor preliminaries?
- Items that cannot be allocated to a specific element, sub-element, or component.
- Preliminaries are typically items that are necessary for the contractor to complete the works but will not actually become part of the works once the project is complete.
Contractor preliminaries may include items such as:
- Management and staff.
- Site establishment.
- Temporary services.
- Security.
- Safety and environmental protection.
- Insurances.
72
When assessing the costs for contractor preliminaries (at tender stage), what are the key considerations to determine if they are fair and reasonable?
- Length of contract.
- Type of project (new build, refurbishment, infrastructure, etc.).
- Size of the project and overall build cost.
- Need for temporary works.
- Security requirements.
- Method and sequencing of works (working hours, supervision, management, etc.).
- Extent of the contractor's design responsibilities.
73
Can you give me examples of contractor preliminaries that might be considered abnormal (over and above a 'standard' project)?
- Tower cranes.
- Evening/weekend working.
- Road closures/traffic management.
- Closing train lines.
74
What is the difference between fixed and time related preliminaries?
Fixed preliminaries are one-off costs, whereas time related preliminaries are dependent on duration.
Time related - tower crane weekly hire.
Fixed - purchasing site security equipment.
75
What is inflation?
- NRM 1 definition: Sustained increase in the general price level of resources (ISO 15686-5)
- It is included as an allowance in the order of cost estimate or cost plan for fluctuations in the basic prices of labour, plant, equipment and materials.
76
What are the two types of inflation as defined in NRM 1?
Tender inflation - An allowance included in the order of cost estimate or cost plan for fluctuations in the basic prices of labour, plant and equipment, and materials during the period from the estimate base date to the date of tender return.
Construction inflation - An allowance included in the order of cost estimate or cost plan for fluctuations in the basic prices of labour, plant and equipment, and materials during the period from the date of tender return to the mid-point of the construction period.
77
What does TPI stand for?
Tender Price Indices.
78
What do TPIs show?
- They measure the movement in prices agreed between clients and contractors at ‘commit to construct' normally when the tender is accepted.
- These indices are typically used for adjusting estimates and budgets to different dates.
Version
79
What is a bill of quantities (BoQ)?
- Bills of quantities are a means of breaking a project down into exact quantities that are measured in an industry-wide recognised format.
- Includes all components of a building (or project) as well as preliminaries.
- Usually based on mature drawings and specifications, at tender stage, the contractor inserts their cost or rate against each item.
- The document then forms a precise tool for pre and post contract cost control (such as managing variations, project expenditure and cash flow).
80
Why would you use a BoQ instead of a schedule of work?
- Schedules of work break the works sections down in less detail than a BoQ and do not contain any quantities for specific work items.
- The BoQ simplifies the tender process because tendering contractors will be pricing the same quantities (rather than taking-off quantities from the drawings and specifications themselves). This also simplifies the tender analysis.
81
What are the key disadvantages of using a BoQ?
- Expensive and time consuming to produce.
- Potential for errors when measuring the project.
82
What are the key advantages of using a BoQ?
- Ideal for post-contract cost control.
- Simplified tender analysis.
- Very detailed and comprehensive.
- All the tenderers are pricing the same items and quantities.
- Effective document for interim payments and preparing the final account.
83
What are the two key types of BoQ?
Firm BoQ:
NRM 2 definition: The reliability of the tender price will increase in relation to the accuracy of the quantities provided (i.e. the more precisely the work is measured and described). In theory, if there were no design changes, a firm BQ would provide a price at the tender stage, which would equal the final cost.
Approximate BoQ:
NRM 2 definition: Approximate BQs are used when there is not enough detail to prepare a firm BQ, or where it is decided by the client that the time or cost of producing a firm BQ is not warranted. Such contracts do not provide a lump sum price, but rather tender price totals (i.e. a quantified schedule of rates), since the quantities are subject to remeasurement on completion by the quantity surveyor/ cost manager
84
When would a BoQ with approximate quantities be used?
- Since the quantities are approximate, this type of BoQ is suitable for a remeasurement form of contract.
85
What is a cash flow projection?
- A cash flow projection (or forecast) is a financial planning tool that shows the predicted flow of cash in and out of a project. This is typically shown month-by-month, for the duration of the project.
- When the construction phase is underway, the cash flow projection for contractor payments will typically form an 'S curve'.
86
What are the key differences between employer cash flow and contractor (or construction) cash flow projections?
- Contractor cash flow projections will typically show construction costs (materials, labour, plant, preliminaries, etc.).
- Employer cash flow projections usually consider the project in a much broader context and might include costs such as, but not limited to:
- Statutory authority fees.
- Consultant and legal fees.
- Land acquisition charges.
- Marketing and sales charges.
- Financing.
- Employer capital salaries.
87
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 enable the employer to plan and anticipate periods of cash shortages 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.
88
Construction cash flow projection - if payments to the contractor are behind the projection, what might this indicate?
This could be an indication that construction works is behind programme.
89
Construction cash flow projection - if the contractor's monthly valuation is ahead of the cash flow projection, what might this indicate?
The project is ahead of programme, or the contractor is overclaiming.
90
What is the purpose of post-contract cost reporting?
The key purposes are:
- To provide an overview of the client's current financial commitment.
- To inform the client of the likely outturn cost of the project, including forecasting the outturn cost as a variance against the budget and/or tender sum.
- To give the client an understanding of potential savings or additional funds required.
91
What information would you include in a post-contract cost report?
- Executive summary.
- Contract sum.
- Instructed variations or compensation events.
- Potential future variations as advanced warnings.
- Status of any claims.
- Cost plan.
- Value engineering options.
- Anticipated final account (forecast).
- Risk allowances.
- Final account progress (if applicable).
- Total of certified payments.
- Cash flow forecast.
- Recommendations and next steps.
92
What is the difference between cost and price?
- Cost is the total of labour, plant, materials, and management deployed in relation to building work.
- The price is the amount the employer will ultimately pay for the work to be completed.
93
The contractor on your project has made a large, and in your opinion, unrealistic claim for loss and expense. How would you deal with it within your cost report?
- I would report the contractor's claim and highlight my concern with the figure submitted.
- Assuming the contract administrator has agreed the loss and expense claim is valid, I would carry out my due diligence checks and assess the claim.
- I would update my client on a regular basis until a conclusion was reached.
94
What is life cycle costing (LCC)?
- Life cycle costing (LCC) is an objective method for measuring and managing the lifetime costs of any project or asset.
- In construction, it enables design options to be compared from a lifetime perspective with a view to understanding and reducing overall costs associated with owning and/or operating the asset.
- For example, anyone buying a car would want to know not only the purchase price, but also its ongoing costs, such as fuel consumption, likely maintenance, and the residual value on disposal.
95
What are the key advantages of Life Cycle Costing?
Long-term value
LCC ensures that the project has the highest possible value, even if upfront costs are not significantly reduced. It provides a mechanism for identifying and addressing issues with the original design. The process will promote better durability, reduced maintenance, fewer risks, operational efficiency, and even an increased building lifespan.
Green building certification credits.
- LCC credits are included in many green building certification schemes, such as BREEAM.
Reliable planning and reduced risk.
- LCC is an excellent planning tool that covers long spans of time. With a properly conducted LCC, you can effectively avoid surprises and reduce financial risks.
LCC will also promote:
- Consideration of the long-term implications of a decision.
- Enables informed decisions to be made on material selection.
- Can be used to plan future maintenance requirements.
96
What are the key disadvantages of Life Cycle Costing?
- Components are not always replaced due to end of life. Changes in style and fashion, for example, are almost impossible to assess in the design phase.
- The cost associated with defects (caused by poor workmanship or design faults) cannot be predicted.
- Uncertainty from inaccurate data may influence the decision-making process.
- Choosing the wrong discount rate will heavily affect accuracy.
97
What is the typical analysis period to calculate Life Cycle Costing?
The LCC period of analysis should be determined by the client. It might be the length of a private finance initiative (PFI) concession, the length of a lease, the anticipated functional life of a whole building, the time to first refurbishment, etc.
98
What are the key cost categories to consider when calculating Whole Life Cost?
- Construction costs.
- Maintenance costs.
- Operation costs.
- Occupancy costs.
- End of life costs.
- Non-construction costs (land, fees, etc.).
- Income.
- Externalities.
99
In your opinion, how accurate is Life Cycle Costing?
- Various assumptions based on trends, inflation, historic data, etc. must be made; therefore, the precision relies on the accuracy of the assumptions.
- If LCC is calculated over a long analysis period, the accuracy is likely to fall.
100
Where can you get information about maintenance costs?
- Building Cost Information Service (BCIS).
- Pricing books such as Spon's -Contractors and subcontractors.
- In-house data.
- Previous projects.
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How can Life Cycle Costing be used in a value engineering exercise?
It may be the case that a component or element of the design has a high capital cost, but its maintenance and replacement costs are significantly less than a cheaper capital cost alternative.
102
What are advanced payments?
- Payments are issued to the contractor in advance of completing works or procuring materials.
- The usual rationale for these payments is to assist with the cash flow required to cover initial expenses.
- A typical example would be the procurement of items with a long lead-in period (e.g. passenger lifts or structural steelwork).
103
What are the key disadvantages of advanced payments?
- There may be a commercial risk for the employer, e.g. the contractor or supplier could go into liquidation after the payment is made.
- The payment will affect the employer's cash flow.
- Subject to the nature of the advanced payment, there could be a concern that the contractor is unable to fund the expenditure (potential cash flow issues).
104
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.
105
What is an interim valuation?
- An interim valuation is a document put forward by the contractor that contains the value of work completed against each of the work elements.
- The interim valuation involves a revaluation of the whole work, not the work done since the last interim certificate or payment notice was issued.
- The document acts as a precursor to issuing the next interim payment certificate.
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What are the main elements of an interim valuation?
- Preliminaries.
- Measured work.
- Variations / compensation events.
- Extension of time and acceleration costs (JCT contracts).
- Materials on-site.
- Materials off-site.
- Loss and expense (JCT contracts).
- Adjusted provisional sums (JCT contracts).
- Retention.
- Fees.
- Prime cost sums.
- OH&P
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How would you assess the interim valuation?
- It normally involves the quantity surveyor visiting the site and checking the works by visual inspection and/or measurement.
Key steps:
- Review the valuation prior to visiting site.
- Visit site and review the valuation with the contractor.
- Check work completed, materials on-site and materials off-site.
- Liaise with the clerk of works (JCT) or the supervisor (NEC).
- Value preliminaries, agree on variations/compensation events, and any claims.
- Finally, send the recommendation to the contract administrator or project manager who will issue the payment certificate.
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What are the implications of overvaluing or undervaluing the works?
- An interim valuation must be a realistic assessment.
- A low valuation creates unreasonable financial problems for the contractor
- A high valuation creates a risk to the employer of paying sums for which he or she obtains no benefit.
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What would you do if the contractor claimed for paint in their first interim valuation?
- Assuming the project is a new build, the contractor is likely to be front-loading. I would assess if they had done any painting during the site visit and adjust the valuation accordingly.
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What are the key things you should consider prior to valuing materials off-site?
Subject to contract requirements:
- Request a vesting certificate.
- Check that insurance is in place until the materials arrive on site.
- Ask for evidence that the materials (stored off-site) are clearly marked for the project and are set apart from other materials.
- Check that the material off-site bond has been provided.
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What needs to be in place to make payment for materials on-site?
- Materials should be adequately protected.
- Should be covered by the works insurance.
- Materials should be on site within a reasonable period when they are actually needed. i.e. doors being delivered on the 1st week of a new build project may not be appropriate.
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What is a vesting certificate?
A vesting certificate is a document evidencing that ownership of goods or materials will transfer from one party to another upon payment.
113
What does the term 'payment on account' mean?
- The term 'on account' means a payment for an item of work (or materials) for which no instruction has been issued but is anticipated.
- Payments 'on account' are used by the quantity surveyor for any item in a valuation that cannot be agreed under the contract rules, but both sides agree that some payment is due.
114
Can you explain what is meant by the term 'daywork’?
- The basic principle of daywork is that the work done is recorded on a daywork sheet together with the labour, material, and plant resources utilised to carry out the work.
- It is generally used when work cannot be priced in the normal way or is uneconomical work.
115
What is a variation?
A variation is an alteration to the scope of work originally specified in the contract, whether by way of an addition, omission, or substitution to the works, or through a change to the manner in which the works are to be carried out.
116
What information is typically shown on a payment certificate?
- Date of certificate.
- Contract date.
- Key payment timeline dates (due date, assessment date, final date for payment, etc).
- Employer, contractor and contract administrator details (company, name, address, etc).
- Site address and project number.
- Contract sum.
- Certificate reference number.
- Gross value.
- Retention.
- Cumulative value of previous payments.
- Amount due/notified sum (excluding VAT).
- Director and contract administrator signature.
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Can you explain the payment timeline for the JCT Design & Build 2016 contract?
- Contractor required to make an Interim Payment Application before each Interim Valuation Date
- 7 days = Due Date (date works are value to)
- Not later then 5 days = Payment Notice issued by Employer stating the sum it considers to be/have been due on the Due Date. Otherwise application becomes the payment notice
- Payless Notice may be issued no later than 5 days before Final Date for
Payment
- Usually 14 days from due date = Final Date for Payment
118
What happens if the employer fails to pay the amount due (identified on the payment certificate) on or before the final date for payment?
- The employer will be liable for interest on the amount due (subject to contract conditions).
- The contractor may wish to exercise their right to suspend works.
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What is a 'pay less notice'?
The purpose of a pay less notice is to give the paying party the right to pay less than/withhold all or part of the notified sum.
120
What are the employer's obligations if they wish to withhold the notified sum, but fail to issue a pay less
notice?
If the paying party does not serve a valid pay less notice, they are obliged to pay the notified sum without deduction, regardless of whether they have a valid challenge to the sum.
121
What is a final account?
The final account is the conclusion of the contract sum (including all necessary adjustments) and signifies the agreed amount that the employer will pay the contractor.
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What are the usual components of a final account?
- Summary.
- Measured work.
- Variations/compensation events.
- Adjusted prime cost and provisional sums.
- Claims.
- Fluctuations.
- Total of all previous payments made to the contractor (total of interim certificates).
- Delay damages.
- Retention.
- Fees.
- OH&P.
- The original contract sum.
- Final account sum.
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What is value?
- Ratio between benefit and the cost / effort to achieve it.
- Could be the monetary worth of something
