Project Finance / Design Economics and Cost Planning / Quantification and Costing

Question 1

What are the typical responsibilities of the cost manager on a construction project?

Answer 1

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.

Question 2

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?

Answer 2

New Rules of Measurement (NRM).

Question 3

Can you name the three documents in the NRM suite?

Answer 3

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.

Question 4

Can you provide a brief overview of NRM1?

Answer 4

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.

Question 5

Can you provide a brief overview of NRM2?

Answer 5

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.

Question 6

Can you provide a brief overview of NRM3?

Answer 6

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.

Question 7

What is the structure of NRM 1?

Answer 7

• 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.

Question 8

What is the structure of NRM 2?

Answer 8

• 1: General introduction.
• 2: Detailed measurement of building works.
• 3: Rules of measurement for building works.
• Appendices.

Question 9

What is the structure of NRM 3?

Answer 9

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.

Question 10

Why is it important to measure the works according to industry standards and best practices?

Answer 10

• 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.

Question 11

Is it mandatory for Chartered Surveyors to follow the procedures set out in NRM?

Answer 11

• 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.

Question 12

What are the key headings for contractor preliminaries identified in NRM 2?

Answer 12

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

Question 13

How is risk dealt with under NRM?

Answer 13

• 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.

Question 14

Can you tell me the 4 risk categories identified in NRM?

Answer 14

• Employer Change Risk.
• Employer Other Risk.
• Design Development Risk.
• Construction Risk.

Question 15

How does NRM define the ‘cost limit for the project?

Answer 15

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.

Question 16

How does NRM define the ‘base cost estimate’ for the project?

Answer 16

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.

Question 17

What is an ‘order of cost estimate’?

Answer 17

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.

Question 18

Which RIBA Stage is the order of cost estimate typically produced?

Answer 18

RIBA Stage 1 - Preparation and Briefing.

Question 19

What are the RIBA Stages of Work?

Answer 19

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.

Question 20

What is the difference between an order of cost estimate and a cost plan?

Answer 20

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.

Question 21

Can you explain the term ‘cost per functional unit’?

Answer 21

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.

Question 22

What typical information should accompany an order of cost estimate?

Answer 22

• 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.

Question 23

What is a cost plan?

Answer 23

• 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.

Question 24

Other than predicting the final project cost, what other benefits does the cost plan provide to the project and project team?

Answer 24

• 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.

Question 25

Do you need a programme to complete the cost plan?

Answer 25

• 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.

Question 26

How do you structure an elemental cost plan?

Answer 26

• Facilitating works
• Substructure
• Superstructure
  Internal finishes
• Fittings, furnishings and equipment
• Services
• Prefabricated buildings and building units
• Work to existing buildings
• External works

Question 27

What sources of cost information and data are available when preparing a new estimate or cost plan?

Answer 27

• 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.

Question 28

How do you take account of the project location, and why?

Answer 28

• 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.

Question 29

What is a cost plan risk allowance?

Answer 29

NRM 1 definition: A quantitative allowance set aside as a precaution against risks and future requirements to allow for uncertainty of outcome.

Question 30

When calculating the total fee estimate for a project, what component fees might be included?

Answer 30

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.

Question 31

What benefit does the client get out of accurate cost planning?

Answer 31

• 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.

Question 32

How would you deal with a cost plan that is over budget?

Answer 32

• 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.

Question 33

How can the cost manager help control the design to keep the project within budget?

Answer 33

• 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.

Question 34

In your view, what are some of the key reasons we have cost overrun on a project?

Answer 34

• 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.

Question 35

What is BWIC?

Answer 35

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).

Question 36

Why is VAT usually excluded from the cost plan?

Answer 36

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.

Question 37

Can you tell me what you understand by the term benchmarking?

Answer 37

• 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.

Question 38

How would you undertake a benchmarking exercise for your client?

Answer 38

• 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.

Question 39

What is wall-to-floor ratio?

Answer 39

• 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.

Question 40

How are subcontractor preliminary costs captured in the cost plan?

Answer 40

Costs associated with the subcontractor’s preliminaries should be included in the unit rates applied to sub-elements and individual components.

Question 41

Can you define contractor overhead and profit (OH&P) please?

Answer 41

• 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.

Question 42

What allowance would you make for contractor OH&P in the cost plan?

Answer 42

The percentage will vary due to various factors, such as:
- Project location.
- Level of perceived risk.
- Project type and value.
- Market conditions.

Question 43

What is a provisional sum?

Answer 43

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.

Question 44

How are provisional sums expended?

Answer 44

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).

Question 45

How are provisional sums dealt with in the final account?

Answer 45

• 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.

Question 46

How does the NEC contract incorporate provisional sums?

Answer 46

• 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.

Question 47

What types of provisional sums are there?

Answer 47

Defined and undefined.

Question 48

Please explain the deference between defined and undefined provisional sums?

Answer 48

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.

Question 49

Would the contractor be entitled to claim additional preliminaries and/or an extension of time when expending a defined provisional sum?

Answer 49

No, since the provisional sum is defined, the contractor should have allowed for programme and preliminaries within their price.

Question 50

What are prime cost sums (PC sums)?

Answer 50

• 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.

Question 51

What is the difference between prime cost sums and defined provisional sums?

Answer 51

• 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.

Question 52

Can you name some of the pricing documents we might use at tender stage?

Answer 52

• Bill of quantities (BoQ).
• Schedule of rates (SoR).
• Contract sum analysis (CSA).
• Schedule of work. (SoW).
• Priced activity schedule.

Question 53

Can you name some of the pricing options for construction contracts?

Answer 53

• Lump sum.
• Cost-plus (also known as cost reimbursable).
• Remeasurement.
• Target cost.
• Guaranteed maximum price (GMP).

Question 54

What is a lump sum contract?

Answer 54

• 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.

Question 55

What are the key advantages of lump sum contracts?

Answer 55

• 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.

Question 56

What are the key disadvantages of lump sum contracts?

Answer 56

• 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.

Question 57

What is a cost-plus contract?

Answer 57

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.

Question 58

What are the key advantages of cost-plus contracts?

Answer 58

• 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.

Question 59

What are the key disadvantages of cost-plus contracts?

Answer 59

• 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).

Question 60

When might a cost-plus strategy be appropriate to use?

Answer 60

• 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.

Question 61

What is a remeasurement contract?

Answer 61

• 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.

Question 62

What are the key advantages of remeasurement contracts?

Answer 62

• 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).

Question 63

What are the key disadvantages of remeasurement contracts?

Answer 63

• 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).

Question 64

What is a target price contract?

Answer 64

• 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.

Question 65

What are the key advantages of target price contracts?

Answer 65

• 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.

Question 66

What are the key disadvantages of target price contracts?

Answer 66

• 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.

Question 67

If the employer wanted a target cost contract using the NEC form, which main option(s) would you
use?

Answer 67

Option C: Target contract with activity schedule.
Option D: Target contract with bill of quantities.

Question 68

What is a guaranteed maximum price (GMP) contract?

Answer 68

• 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.

Question 69

What are the key advantages of a Guaranteed Maximum Price?

Answer 69

• 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.

Question 70

What are the key disadvantages of a Guaranteed Maximum Price?

Answer 70

The contractor will have to share any savings made while taking on the risk of cost overrun.

Question 71

What are contractor preliminaries?

Answer 71

• 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.

Question 72

When assessing the costs for contractor preliminaries (at tender stage), what are the key considerations to determine if they are fair and reasonable?

Answer 72

• 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.

Question 73

Can you give me examples of contractor preliminaries that might be considered abnormal (over and above a ‘standard’ project)?

Answer 73

• Tower cranes.
• Evening/weekend working.
• Road closures/traffic management.
• Closing train lines.

Question 74

What is the difference between fixed and time related preliminaries?

Answer 74

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.

Question 75

What is inflation?

Answer 75

• 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.

Question 76

What are the two types of inflation as defined in NRM 1?

Answer 76

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.

Question 77

What does TPI stand for?

Answer 77

Tender Price Indices.

Question 78

What do TPIs show?

Answer 78

• 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

Question 79

What is a bill of quantities (BoQ)?

Answer 79

• 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).

Question 80

Why would you use a BoQ instead of a schedule of work?

Answer 80

• 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.

Question 81

What are the key disadvantages of using a BoQ?

Answer 81

• Expensive and time consuming to produce.
• Potential for errors when measuring the project.

Question 82

What are the key advantages of using a BoQ?

Answer 82

• 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.

Question 83

What are the two key types of BoQ?

Answer 83

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

Question 84

When would a BoQ with approximate quantities be used?

Answer 84

• Since the quantities are approximate, this type of BoQ is suitable for a remeasurement form of contract.

Question 85

What is a cash flow projection?

Answer 85

• 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’.

Question 86

What are the key differences between employer cash flow and contractor (or construction) cash flow projections?

Answer 86

• 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.

Question 87

How will the employer benefit from accurate cash flow projections?

Answer 87

• 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.

Question 88

Construction cash flow projection - if payments to the contractor are behind the projection, what might this indicate?

Answer 88

This could be an indication that construction works is behind programme.

Question 89

Construction cash flow projection - if the contractor’s monthly valuation is ahead of the cash flow projection, what might this indicate?

Answer 89

The project is ahead of programme, or the contractor is overclaiming.

Question 90

What is the purpose of post-contract cost reporting?

Answer 90

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.

Question 91

What information would you include in a post-contract cost report?

Answer 91

• 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.

Question 92

What is the difference between cost and price?

Answer 92

• 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.

Question 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?

Answer 93

• 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.

Question 94

What is life cycle costing (LCC)?

Answer 94

• 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.

Question 95

What are the key advantages of Life Cycle Costing?

Answer 95

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.

Question 96

What are the key disadvantages of Life Cycle Costing?

Answer 96

• 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.

Question 97

What is the typical analysis period to calculate Life Cycle Costing?

Answer 97

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.

Question 98

What are the key cost categories to consider when calculating Whole Life Cost?

Answer 98

• Construction costs.
• Maintenance costs.
• Operation costs.
• Occupancy costs.
• End of life costs.
• Non-construction costs (land, fees, etc.).
• Income.
• Externalities.

Question 99

In your opinion, how accurate is Life Cycle Costing?

Answer 99

• 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.

Question 100

Where can you get information about maintenance costs?

Answer 100

• Building Cost Information Service (BCIS).
• Pricing books such as Spon’s -Contractors and subcontractors.
• In-house data.
• Previous projects.

Question 101

How can Life Cycle Costing be used in a value engineering exercise?

Answer 101

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.

Question 102

What are advanced payments?

Answer 102

• 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).

Question 103

What are the key disadvantages of advanced payments?

Answer 103

• 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).

Question 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?

Answer 104

An advanced payment bond may be required to protect the payment in advance of the works being completed.

Question 105

What is an interim valuation?

Answer 105

• 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.

Question 106

What are the main elements of an interim valuation?

Answer 106

• 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

Question 107

How would you assess the interim valuation?

Answer 107

• 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.

Question 108

What are the implications of overvaluing or undervaluing the works?

Answer 108

• 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.

Question 109

What would you do if the contractor claimed for paint in their first interim valuation?

Answer 109

• 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.

Question 110

What are the key things you should consider prior to valuing materials off-site?

Answer 110

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.

Question 111

What needs to be in place to make payment for materials on-site?

Answer 111

• 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.

Question 112

What is a vesting certificate?

Answer 112

A vesting certificate is a document evidencing that ownership of goods or materials will transfer from one party to another upon payment.

Question 113

What does the term ‘payment on account’ mean?

Answer 113

• 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.

Question 114

Can you explain what is meant by the term ‘daywork’?

Answer 114

• 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.

Question 115

What is a variation?

Answer 115

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.

Question 116

What information is typically shown on a payment certificate?

Answer 116

• 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.

Question 117

Can you explain the payment timeline for the JCT Design & Build 2016 contract?

Answer 117

• 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

Question 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?

Answer 118

• 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.

Question 119

What is a ‘pay less notice’?

Answer 119

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.

Question 120

What are the employer’s obligations if they wish to withhold the notified sum, but fail to issue a pay less
notice?

Answer 120

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.

Question 121

What is a final account?

Answer 121

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.

Question 122

What are the usual components of a final account?

Answer 122

• 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.

Question 123

What is value?

Answer 123

• Ratio between benefit and the cost / effort to achieve it.
• Could be the monetary worth of something