Project finance, Design Economics & Cost Planning and Quantification & Costing Flashcards
What are the typical cost manager responsibilities on a construction project?
- Manage risk allowance expenditure
- Initiate action to avoid overspend
- 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 plans
- Produce cost estimates and cost plans
- Produce cost reports, estimates and forecasts
- Prepare and maintain the cashflow forecast
If you are producing estimates and cost plans, which measurement rules represent industry best practice?
New Rules of Measurement (NRM)
Can you name the 3 documents in the NRM suite?
- NRM 1 - Order of cost estimate 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
Can you provide a brief overview of each of the NRM documents please?
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.
NRM2
Is written mainly for the preparation of bills of quantities and quantified scheduled of works, although the rules will be invaluable for designing and developing standard or bespoke schedules of rates
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
What is the structure of the NRM 1?
- Part 1: General introduction
- Part 2: Measurement rules for order of cost estimate
- Part 3: Measurement rules for cost planning
- Part 4: Tabulated rules of measurement for elemental cost planning
- Appendices
What is the structure of the NRM 2?
- Part 1: General introduction
- Part 2: Rules for detailed measurement of building works
- Part 3: Tabulated rules of measurement for building works
- Appendices
What is the structure of NRM 3?
- Part 1: General introduction
- Part 2: New rules of measurement for building maintenance works
- Part 3: Measurement rules for order of cost estimating (renewal and maintain)
- Part 4: Measurement rules for cost planning of renewal (R) and maintain (M) works
- Part 5: Calculation of annualised costs for renewal (R) and maintain (M) works
- Part 6: Tabulated rules of measurement for elemental cost planning
- Appendices
Why is it important to measure the works according to industry standards and best practice?
- To provide consistency and greater accuracy of pricing
- To ensure that all parties price on the same basis and therefore reduce the risk of dispute
Is it mandatory for chartered surveyors to follow the procedures set out in NRM?
Following NRM is not a mandatory requirement. However, when an allegation of professional negligence is made against a surveyor, the court is likely to take account of the contents of any relevant guidance notes published by RICS in deciding whether the surveyor had acted with reasonable competence
What items are included within the standard NRM 2 preliminaries (main contract) list?
Employer requirements
- Site accommodation
- Site records
- Completion & post-completion requirements
Contractor cost items
- Management & staff
- Site establishment
- Temporary services
- Safety and environmental protection
- Control and protection
- Mechanical plant
- Temporary works
- Site records
- Completion & post-completion requirements
- Cleaning
- Fees & charges
- Site services
- Insurances, bonds, guarantees and warranties
How is risk dealt with under NRM?
NRM recommends that risk allowances are not a standard percentage, but a properly considered assessment of the risk, considering completeness of the design and other uncertainties such as the amount of site investigation undertaken
Can you tell me the 4 risk categories identified in NRM?
- Employer Change Risk
- Employer Other Risk
- Design Development Risk
- Construction Risk
What is an order of cost estimate?
- Order of cost estimate is a term using by RICS under the New Rules of Measurement, specifically NRM 1 for capital building projects
- The key purpose is to establish if the proposed building project is affordable and if so, to set a realistic cost limit for the development project
How are professional fees presented in order of cost estimate?
Fees can be presented as an item (if actual fees are known) or a percentage applied to the ‘works cost estimate’
Which RIBA Stage is the order of cost estimate typically produced?
RIBA Stage 1 - Preparation and Briefing
What are the RIBA stages of work?
- 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
What is the difference between an order of cost estimate and cost plan?
- 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 of functional units
- A cost plan is a more detailed elemental breakdown and shows how the costs are distributed across the project
What additional information should accompany an order of cost estimate?
- 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
What is a cost plan?
- The cost plan is typically prepared by the cost consultant and provides an estimate of what the actual project cost is likely to be
- The cost plan identifies the client’s agreed cost limit and how the money is allocated to the different parts of the project
Other than predicting the final project cost, what other benefits does the cost plan provide to the project and project team?
- 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
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 of site date
- Construction period
- Completion date
How do you structure a cost plan?
NRM 1 recommends a template to be following within appendix G of the NRM 1
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 of 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 direct to contractors, subcontractors and suppliers for cost information
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 that a similar project in Nottingham
What is a cost plan risk allowance?
A sum included to cover unknown costs or unmitigated risk during the project
What fees might be included in the fees estimate?
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)
How can design and construction processes impact project costs?
- Design complexity (bespoke detailing)
- Variations
- Proportion of risk allocation
- Contractor design portions (Risk / PI)
- Contract type - lump sum / target / reimbursement / remeasurement
- Legislation / planning obligations e.g. Building Regulations & Section 106 conditions.
- Value engineering
- Construction methods - prefabricated e.g. modular, bespoke components, concrete vs steel, level of skill required
- Use of BIM
What benefits does client get out of cost planning?
A cost plan tells client whether or not they can afford the scheme, helps develop design in order to tailor scheme to meet budget, is a value management tool which can be used to ensure client gets a building which suits their needs and represents best value
How can the cost manager help control the design to keep the project within budget?
Discuss cost plan with the design team and explain how changes have impacted the budget, discuss the limitations of the budget and offer areas where money can be saved through VE; identify less expensive materials / products, identify areas of design which may not be economical
What are some of the reasons we have cost overrun?
- Cost overruns often caused by employer through objectives that are unclear or unchanged during the project
- Unrealistic cost estimates
- Risk allocation is ambiguous
- Inadequate management control
- Design that does not meet planning or statutory requirements
- Uncoordinated design
- Design that is difficult to build and maintain
- Design that does not meet the tendering / procurement strategy
How would you deal with a cost plan that is over the client’s budget?
Communication of cost plans is extremely important. You need to do this in a clear and concise manner. Often cost plans come in at more than a client’s budget. In these circumstances you need to approach matters in a positive manner, identifying areas where potential savings can be made - possibly in terms of material specification or re-design. Reference needs to be made to value engineering alongside the design team
What risk allowances does the NRM recommend should be included within a cost plan?
- Design development risks = planning issues, environmental issues, incorporating sustainable technology
- Construction risks = discovery items during works, site / ground conditions, existing services.
- Employer change risks = changes to design by employer
- Employer other risks = acceleration, postponement, availability of funds
What are the various sources of cost data that we use?
- In-house cost data - cost information from previous projects
- BCIS (Building Cost Information Service) - database of cost info
- Client - benchmark data from previous projects
- Pricing books (SPONS)
- Cost models / data published in industry mags
- Manufacturer supplier literature or quotations for specialist items (soft tender)
What is BWIC?
- BWIC stands for Builders Work In Connection and is usually set as a percentage of the services cost
- Depending on the size of the job and complexity will determine the percentage of BWIC.
- BWIC accounts for any drilling, fixing, cutting that the builders do whilst undertaking the services
- BWIC can be measured in accordance with NRM2 when doing BoQs
Why is VAT excluded from the cost plan?
Different clients will incur different levels of VAT (some might be exempt)
Please can you tell me what you understand by the term benchmarking?
Benchmarking is the use of historical data from projects of a similar nature as a compensation or cost check of the cost of a project
How did you undertake benchmarking exercise for your client?
I produced a clear document which highlighted the comparative items to the benchmarked project and then clearly identified the elements which were abnormal
How are subcontractor OH&P calculated?
In NRM these are deemed to be included within the unit rates, so keep a look out for this to ensure they are not included twice
What are the problems to the QS regarding cost control with piling? whose risk is the piling?
The end depth of the piles are never a certainty and the procurement route used determines who takes the risk
What is a provisional sum?
A provisional sum is an allowance that is inserted into tender documents or contract for a specific element of the works that is not yet defined in enough detail for tenderers to price
How can a provisional sum be expected?
- The contract administrator (under JCT) should issue an instruction for its expenditure, there should be an add and omit on the instruction
- NEC - does not provide for provisional sums on the basis that if you cannot clearly define an aspect of the works, you should not include it in the contract
How are provisional sums dealt with in the final account?
The provisional sums included in the contract are deducted and the actual amount substituted
What are the risks associated with provisional sums?
- That the actual cost and time exceeds that allowed for in the provisional sum because the nature of the item changes; or an insufficient sum was originally allowed for
What types of provisional sum are there?
Defined and undefined
Please explained the deferral between defined and undefined provisional sums?
- Defined provisional sums are considered to have been accounted for within the contractor’s price and programme. In effect the contractor is taking the risk that their estimate will be sufficient
- Undefined provisional sums are not accounted for in the contractor’s price and programme. This means that the client is taking the risk for the works and the contractor may be entitled to an extension of time and additional payments
Is the contractor entitled to claim prelims costs and/or an extension of time in relation to a defined provisional sum?
No because a defined provisional sum should have already made allowances for prelims and time
What does BCIS stand for; what is it?
Building Cost Information Service
What is the BCIS used for?
- BCIS provides construction cost and price information through publications, online services and price books
What are the options for different types of pricing documents?
- Bill of Quantities
- Schedule of Rates (SoR)
- Contract sum analysis
- Schedule of works
How can we get prices for work?
- Lump sum
- Cost reimbursable
- Re-measurement
- Target cost
- GMP - guaranteed maximum price
What is a lump sum contract?
- Fixed sum in contract
- Lump sum contracts are normally used where the employer can define what is required. This will normally be in the form of drawings and specifications but can alternatively be a performance specification
What is a re-measurement contract?
- A price based on approx. quantities. Work is measured against agreed rates
- A bill of quantities comprises a list of work items and quantities prepared by the employer and priced by the contractor
- Where there is a significant amount of contractor’s design, a lump sum contract should be used rather than re-measurement, as it allows the contractor to price the work and include the various design stages within his activity schedule rather than the employer measuring the work which would not be practical
What is a reimbursable / prime cost contract?
- Contractor completes work and then is paid on the costs plus a pre-agreed mark-up
- Used where the extent of works cannot be defined but works need to progress quickly (emergency road works for example)
- A cost reimbursable contract should be used where the definition of the work to be done is inadequate for the contractor to price and yet an early start it required
- Suitable for maintenance or refurbishment works where extent is unknown until exposed or emergency work or resolution of a difficult project
Advantages
- Flexibility to alter design, programme and quantum of work
- Enables early start on site
- No premiums for abnormal risks in tender
Disadvantages
- No time or cost certainty
- No incentive for efficiency
- Difficult to monitor true costs
What is a target price contract?
- Target contracts are a development of cost reimbursable contracts and are used where the extent of work to be done may not be fully defined (although the target is to be based on assumed work), where anticipated risks are greater or where the employer sees a direct and significant benefit in encouraging collaboration through the target mechanism itself. Financial risks are shared, proportionally through the contractor’s share percentages, between the employer and the contactor
The contractor tenders a target price:
- The target price includes the contractor’s estimates of cost-plus other costs, overheads and profit.
- The contractor tenders his percentage to be applied to cost
- During the course of the contract, the contractor is paid cost plus the percentage for profit and overheads and at the end of the contract, the contractor is paid (or pays) his share of the difference between the final total of the target and the final cost plus profit and overheads according to a formula stated in the contract
Why would you use a target cost contract?
- Risk is shared (also known as pain/gain)
- Encourages positive behaviour between all parties
What is GMP?
Guaranteed Maximum Price
What does a GMP mean to you?
- A lump sum contract under which there is no adjustment of tender price unless the scope is required by the client changes
- The contractor includes the additional risks involved in the design development process in his tender price
- Savings made on packages are shared on agreed basis - pain/gain share - but extras are the contractor’s responsibility
What are the advantages of a GMP?
- Greater price certainty - contractor carries design development risk
- Greater control of overspending - contractor’s interests to alert the team to expensive items of design development
- Quicker settlement of final account
What are the disadvantages of a GMP?
- The client may pay too much (contractor’s risk allowance could be inflated)
- Scope changes are likely to be very expensive/exploited
- Can be adversarial - trying to decide whether changes are design development or scope changes
What risks are the contractors taking if you ask for a lump sum contractor over 3 years?
- Inflation
- Exchange rates
In the current market, what is the typical contractor OH&P percentage
This fluctuates due to various factors such as:
- Project location
- Project type
- Market conditions
If I am buying OH&P in a recession, what will happen?
This will reduce because the market is likely to be more competitive
How does a contractor price for design development in a design & build contract?
They will include a design development sum within their tender submission (usually a percentage of the build cost based on how far the design is developed and the perceived risk)
What are prime cost sums?
- A prime cost sum is an allowance usually calculated by the cost consultant for the supply of work or materials to be provided by a contractor or supplier that will be nominated by the client.
- The allowance is exclusive of any profit mark up or attendance (such as material handling, scaffolding and rubbish clearance) by the contractor
What are preliminaries?
- Preliminaries are items which cannot be allocated to a specific element, sub-element, or component
- For the most part, preliminaries are the cost of administering a project and providing plant, site staff, facilities site-based services and other items not included in the rates for measured works
Examples
- Hoarding
- Site cabins
- Management staff
- Site security
What should be considered when assessing preliminary levels?
- Length of contract
- Location - accessibility, space restrictions, accommodation
- Type of project - new build / refurb, tower / one story
- Size of project
- Need for temporary works
- Need for security
- Limitations on method and sequencing of works, working hours - supervision requirements
- Section completion
- Availability of services
- Level of contractor’s designed works
What sources are available to allow the QS determine a fair cost for prelims?
- Market testing
- Benchmarking studies
- Previous estimates, rates from BoQs and cost plans
- In-house database
- BCIS database
- Price books i.e. SPONS
- Published cost data i.e. Building Magazine articles
- Client’s own cost data
- Specialist quotes
What types of prelims might be considered abnormal?
- Tower crane
- Night / weekend working
- Road closures / traffic management
- Re-routing services
- Closing train lines
What is the difference between fixed and time related prelims? Give examples?
- Fixed prelims are on off costs whereas time related are dependent on duration
- Tower crane erection = fixed cost
- Tower crane weekly hire = time related
What is inflation?
NRM defines the estimate base date as the date on which the cost limit is established as a basis for calculating inflation, changes of other related variances
What are two types of inflation?
- Tender inflation - the period measure is from estimate base date to the date of tender return
- Construction inflation - the period measured is from the date of tender return to the mid-point of the construction period (or later if required for FF&E or other materials that may be bought after this point)
What does TPI stand for?
Tender Price Index
What do TPIs show?
They reflect changes in the level of pricing contained in the accepted tender work to take account of market conditions - compares against base rates
- Reflects changes in the level of pricing contained in the lowest accepted tenders for new work
- Data from prices tendered for construction projects
- Inclusive of labour, plant, materials, preliminaries and OH&P
- Used to forecast inflation up to construction phase
The TPI measures movement of market conditions
- Labour
- Market
- Economic climate
- Inflation
When are approximate quantities to be used?
For items that cannot be accurately quantified at time of tender
What is a functional unit?
- The ‘factors’ which express the intended use of the building better than any other’
- E.g. numbers of bedrooms in a hotel, number of beds in a hospital
What is a wall to floor ratio?
- This shows the relationship between wall area and floor area
- It is used to show the cost efficiency of the building
- The lower the ratio the cheaper the building as there is less external wall area per m2 of floor area
What is GIFA?
- Gross Internal Floor Area. This is not the area of a building measured to the internal face of the perimeter walls at each floor level
- GIFA normal exclusions are reveals of windows, balconies, voids, external staircases that are not structural, patios & decks at ground level not forming part of a structure, external car parking and other ground level area that are not fully enclosed
What are the rules for measuring GEA?
External face of the perimeter walls
What does NIA stand for?
Net Internal (floor) Area
What are the rules for measuring NIA?
- Usable area within a building measured to the internal face of the perimeter walls
- This is the area of usable space measured to the internal face of the perimeter wall at each floor level
- Excludes the above and internal structural walls and columns, spaces with headroom less than 1.5m, corridors and circulation space used in common, permanent lift lobbies, toilets, cleaners cupboards, plant rooms
What would you expect the percentage of NIA to GIFA to be?
- It depends on the type of project being undertaken (school, hospital, office)
- If it were an office build, I would expect the NIA to GIFA to be in the region of 70-85%, where 70% is not food and 85% is excellent
What is IPMS?
International Property Measurement Standards is a global mandatory standard and is for the measurement of floor area such as GIA NIA GEA. It supersedes the RICS Code for Measurement
What is a bill of quantities?
A detailed document consisting of all items which make up the components of a building as well as preliminaries. It includes measures and rates for each item. Usually based on full production of drawings and and project specification. This document then forms and excellent tool for pre and post contract cost control. By using the rates contained within the document, we can easily manage variations and monitor exact expenditure on site.
Consists of:
- Preliminaries
- Preambles (description of materials and workmanship to be employed)
- Measured works
- Provision sums
- PC sums
- Dayworks
- Appendices (bonds, warranties)
What are the advantages and disadvantages of preparing a BoQ based on standard method of measurement?
Advantages
- Easier post-contract cost control
- Easier tender analysis
- Good for large, complex projects
- It should have everything in it (detailed)
- Cost certainty
Disadvantages:
- Expensive to produce
- Time consuming
Why would you use a BoQ instead of a schedule of work?
- A BoQ is more detailed
- Much easier to compare tenders
How would dayworks be included within a BoQ?
Day or hourly rate for labour
What is a cash flow?
- (S-curve mechanism) Cash flow refers to the movement of cash into or out of a business or project
- It is usually measured during a specified, finite period
- Essentially, the cash flow statement is concerned with the flow of cash in and out of the business.
- The statement captures both the current operating results and the accompanying changes in the balance sheet
How would you create a cashflow forecast?
- Need to have the construction programme and cost plan
- The cash flow can be created on a computer programme such as excel
- The cash flow can be created without a computer, the expected costs are attributed to each month on a simple x-y axis graph. Construction projects usually form an ‘S Curve’
What are the key differences between employer’s cash flow and contractor’s cash flow items?
- Contactor cash flow will show the construction cost and prelims
- Client cash flow considers fee to government authorities, consultant fee, land acquisition charges, marketing, sales charges
What is the benefit of cashflow forecast for the employer?
- Allows employers to gain an understanding of financial requirements over the duration of the project duration
- Also acts as a check against valuations - early indication of financial difficulties
- Helps clients to plan expenditure
- Predicting cash flow is important in order to ensure that an appropriate level of funding is in place and that suitable draw-down facilities are available
What would payments being behind cash flow forecast imply?
This would imply that the project was behind programme or under budget
What would payment being ahead the curve imply?
The project was ahead of programme, or the contractor is claiming for more than has been completed on site
Why do we need to use a cash flow forecast?
Predicting cash flow is important to ensure an appropriate level of funding is in place and that suitable draw-down facilities are available
Is there anything else to consider that may affect your cashflow?
Cash flow projections may be affected by the need for the early purchase of long-lead time items or by items that the client may wish to purchase that are outside of the main contract (such as furniture or equipment)
What is the purpose of a financial report?
- 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 on contract progress against pre-contract predictions
Your final assessment record states that you established the cost reporting on project X. What approach did you take to this?
- Content and format or report
- Timing and frequency of issue
- Interfaces with other parties, such as the contractor and client’s finance team
- Any additional requirements of stakeholders, such as funders
- Method of presentation of report
What would you include in a financial report?
- Executive summary
- Contract sum
- Instructed variations
- Potential future variations as advanced warnings
- Claims
- Value engineering options
- Anticipated final account total (forecast)
- Risk allowances
- Final account progress
- Total of certified payments
- Major risk or causes for concern
- Next steps and recommendations
- Cash flow forecast
What is the difference between cost and price?
- Cost is the total of labour, plant, materials and management deployed for a specific activity
- Price is the amount a purchaser / client will pay for an item or product
How can the cost report help to monitor & control the project budget?
- It tracks all issues relating to cost on the project
- Budget, forecast, cost, expenditure to date
- Remaining expenditure for all areas of the project such as consultant fees, contractor valuations, surveys, FM costs, in addition to Variations / Changes (approved & unapproved) and Key Risks.
- Identifies Final Account - outturn costs vs client initial expectations
- Life cycle costing - total cost of a building from creation to grave
How is a risk register used in the post contract phase of a project?
The risk register is regularly updated throughout the post contract stage (usually during progress meetings). Any new risks identified will be added to the risk register and any risks that have not materialised and are no longer a risk will be closed out. The risk register can then be used to reallocate or give back to the client the risk allowances if they are no longer required or to obtain additional risk allowances if deemed necessary
The contractor on your project has made a large (and in your opinion) unrealistic claim for loss and expense, How do you deal with it within your cost report?
I would report the contractor’s figure that they have claimed but highlight to the client that I believe this is unrealistic and that I will carry out my due diligence checks on it to ensure value for money for the client. I would then report any change to this cost once it is agreed.
Give some examples of why a project might have a cost overrun?
- Employer’s objectives not clear or changed during the project
- Unrealistic cost estimates
- Risk allocation is ambiguous
- Inadequate management control
- Design not meeting planning or statutory requirements such as Building Regulations
- Uncoordinated design
- Design that is difficult to build or maintain
- Design that does not meet the tendering or procurement strategy
What is life cycle cost?
- It is the total discounted cost of owning, operating, maintaining and disposing of a building or a building system during a measurable period (By NIST - National institute of standards and technology)
- The discounted Cash Flow method is used to find out the life cycle cost of a project
Why carryout life cycle costing?
- As part of business case evaluation to work out if you can afford the building structure
- To work out if you can afford to run it
- As part of optional appraisal exercise to decide on the most economically advantage solution
- To control the design development within running cost and capital cost budget
- To provide a set of instructions and a budget for the facilities manager
What are the advantages of life cycle costing?
- Allows consideration to the long-term implications of a decision
- Enables informed decisions to be made on material selection
- This can result in lower operational, maintenance and replacement costs
- Can be used to plan future maintenance requirements - flexible spaces, easier access
- Can be used to judge sustainability in money terms
What are the disadvantages?
- Components are not always replaced due to end of life which is almost impossible to assess why at the design stage
- Costs or defects caused by bad workmanship . design faults cannot be predicted
- Uncertainty of available data - hard to predict life spans, future inflation and maintenance requirements over long periods.
- The client may be selling the building after it is constructed
- Choosing the wrong discount rate can render the exercise totally useless
What sort of clients might be particularly interested in life cycle costing?
- Government clients - concerned with overall value for money
- PFI projects
- Owner-occupiers
- Clients aiming to incorporate sustainable technologies
What elements should be considered when calculating life cycle costings?
- Construction costs (construction cost, client’s definable costs, other related costs)
- Maintenance costs (replacement costs, refurbishment & adaptation, Redecoration cost, ground maintenance cost)
- Operation costs (cleaning, windows & external services, External cleaning)
- Utilities cost (fuel, service charges)
- Administrative cost (staff cost, property management, waste management)
- Overhead costs, taxes
- Occupational costs (internal moves, reception, security, help desk, switchboard, postal)
- Miscellaneous (library, laundry, catering, FF&E, internal plants, stationary, porters, car parking charges)
- End of life costs (disposal inspections, demolition, reinstatement as per contract)
How accurate is life cycle costing?
- A lot of assumptions have to be made - on time periods, costs, trends, inflation
- Its accuracy relies on the accuracy of the assumptions
- As the time period considered grows, the accuracy is likely to fall
Where can you get information about maintenance costs?
- Building Maintenance Cost Information Service (BMCIS) - part of BCIS
- From subcontractors
- From in house data
- Previous projects
What is net present value?
Where future costs are discounted to present values
How does the net present value method work?
- It involves the comparison of the net present value of alternative options
- It is useful at the design stage
- Future life cycle costs - on maintenance / replacement - are discounted to present values
How can life cycle costing be used in a value engineering exercise?
You could review the maintenance costs and the cost of an element over its life cycle. It may be that something has a higher capital cost but its maintenance and replacement costs are significantly less that a cheaper capital cost alternative
What are advance payments?
- It allows the contractor to receive lump sum payment in advance
- Usually paid for the procurement of items on long lead in times (for example a lift)
What are the disadvantages of advance payments?
- May reduce the incentive of the contractor
- Bad for the employers cashflow
- Concerns over why the contractor can’t fund the expenditure - insolvency worries
- Commercial risk for the employer if the contractor goes into liquidation
What is a Valuation?
- A detailed breakdown of the works and provides and appraisal of the cost of the works carried out to date
- Precursor to issuing an interim certificate
What are the main elements of a valuation?
- Preliminaries
- Measured work
- Variations
- Materials on site
- Materials off site
- Loss and expense
- Provision sums (JCT contracts)
- Retention
What information is typically shown on a payment certificate?
- Date info
- Date of certificate
- Date of valuation
- Contract date
- Client details - Company, name, address
- Contractor details - Company, name, address
- Contract administrator details - Company, name, address
- Address of site
- Contract sum
- Payment due
- Gross value
- Less retention
- Less previously certified
- Amount due (exc. VAT)
- Director’s signature
How do you evaluate interim valuations?
- Go to site and conduct/review the valuation with the contractor
- Check work done, materials on site and materials off site
- Value preliminaries, agree variations and any claims
- Valuation amount is gross valuation, less retention, less previous payment
- Then send recommendation to contract administer to issue the payment certificate
How do you value materials off site?
- Request a vesting certificate: proof that ownership will transfer to employer on payment
- Ensure insurance was in place until the materials arrived at the site
- The materials are clearly marked for the site and set apart from other materials
What is a vesting certificate?
A vesting clause is a contractual term which deals with the transfer of ownership of goods and materials and a a vesting certificate is a document evidencing that transfer of ownership of those goods or materials
What are the options for conducting valuations?
- Stage payments (relating to programme milestones). The stages are usually related to the completion of significant items e.g. substructure and frame
- Periodic payments (monthly for example)
What would you do if the contractor claims for paint in their 1st application for payment?
- Assuming the project is a new build, the contractor is likely to be front loading.
- Assess if they had done any painting during the site visit and adjust the valuation accordingly
If a contractor’s work has been certified and paid in an interim valuation, can it be devalued in a later certificate?
- Payment in an interim certificate is a payment on account of the final sum
- It is always open and can be devalued in a later certificate
What does the term on account mean?
- It’s a payment made to recognise works had been completed but the actual value hasn’t yet been agreed
- For example, contractor is claiming £10k and the QS values at £8k, pay £9k ‘on account’ and then increase of decrease the value once the value has been agreed
A junior surveyor working in your team incorrectly over certifies on an interim valuation - what do you do?
The first thing to do it to check the facts and make sure an over certification has take place.
Assuming it has:
- You need to check whether the valuation has been processed or not
- If it has not, then withdraw it and re-certify
- If the valuation has been paid, then you need to remember it is an interim certification and assuming it is not the final certificate then financially matters can be rectified next month
- Talk to the client, explain the situation and ensure sufficient preventative measures are put in place to stop this happening again in the future (lesson learned session)
What is a gross valuation?
- Each month the work must be value and then an amount paid to the contractor
- To ascertain this amount, you do not value only the work completed in that particular month. This would prove almost impossible and is unrealistic
- The process is based on calculating the total amount of works completed to date and then deducting the previous month’s total
- This then gives the value of work completed in the current month
What needs to be in place for you to include payments for materials on site?
- Materials should be onsite and adequately protected
- Should be covered by works insurance
- In reasonable quantity
What needs to be in place for you to include payments for materials off site?
- Proof that ownership will transfer to the employer on payment (vesting certificate)
- Insurance until materials arrive at site
- Materials are clearly labelled as for the site and set apart from other materials
- Material off-site bond has been provided if required under the contract
In which instances would you use Dayworks to value the works?
- It is generally used when work cannot be priced in the normal way when work is instructed for which there are no comparative rates in a bill of quantities and a fair and reasonable rate cannot be agreed
- Can be used for uneconomical works
What is a variation?
An alteration to the scope of works in a construction contract in the form of an addition, substitution or omission from the original scope of works
What is the final account?
- Financial statement of all the adjustments to the contract sum and therefore the total amount that the employer is liable to pay
- End financial poison of contract
- Includes all additions and omissions
Who typically prepares the final account?
- The quantity surveyor (traditional procurement)
- The employer’s agent (D&B procurement)
What is its purpose of the final account?
To conclude the financial position of the project
What are the usual components of the final account?
- Summary
- Adjustments of prime costs
- Adjustments of provisional sums
- Adjustments of approximate quantities
- Variations
- Claims
- Fluctuations
- End financial poison of contract
What is the procedure for getting the final account agreed?
- The QS should visit site to evaluate if required
- Once prepared, the QS should send all the details and supporting evidence to the contractor
- Any points of disagreement should be discussed and negotiated
- Both parties should sign the summary to show their agreement
What is the employer does not pay a sum due to the contractor under JCT?
- In addition to the unpaid sum, the employer must pay interest on that amount from the payment date until the time payment is made
- The contractor may wish to exercise their right to suspend works
What are the payment timescales for the NEC3 contract?
- Applications to be received by the assessment date (usually stated in the contract)
- Due date is 7 days after the assessment date
- Interim certificate issue is no later than 5 days after the due date
- final date for payment is 14 days after the due date.
- Pay less latest date is 7 days before the final date for payment
What are payment timescales for the JCT Design & Build 2016 contract?
- Application to be received by the valuation date (usually stated in the contract)
- Due date is 7 days after valuation date
- Interim certificate issue is not later than 5 days after the due date
- Final date for payment is 14 days after the due date
- Pay les is not later than 5 days before the final date for payment
