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RICS Revision > Project Finance & Quantification and Costing (L3) > Flashcards

Project Finance & Quantification and Costing (L3) Flashcards

1
Q

What are the responsibilities of a cost manager?

A

Manage risk allowances expenditure
Prepare pricing documents for tendering
Evaluate and analyse tender bids
Prepare interim valuations
Value variations
Assess the contractors claims
Negotiate and agree final accounts
Issue financial reports or statements
Prepare and maintain cost and cash flow forecasts

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2
Q

Which measurement rules represent industry best practice for capital building and building maintenance works in the UK?

A

New Rules of Measurement (NRM)

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3
Q

Can you provide an overview of the NRM documents?

A

NRM1 - Order of cost estimating and cost planning for capital building works
NRM2 - Detailed measurement for building works
NRM3 - Order of cost estimating and cost planning for building maintenance works

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4
Q

Why is it important to measure works according to industry standards?

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

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5
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, the adjudicator or court is likely to take account of any relevant guidance (such as NRM) to ascertain whether or not the surveyor acted with reasonable competence

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6
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

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7
Q

Can you tell me the four risk categories defined under NRM?

A

Employer Change Risks (programme impact)
Employer Other Risks (availability of funds / delay to PC)
Design Development Risks (planning requirements)
Construction Risks (ground conditions)

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8
Q

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

A

The maximum expenditure the client is prepared to make in relation to the completed building.

It includes construction costs, professional services, other costs, and risk allowances

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9
Q

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

A

An evolving estimate of known factors without any allowances for risk and uncertainty, or inflation

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10
Q

What is an ‘order of cost estimate’?

A

An estimate based on benchmark data for a similar type of project based on the clients strategic definition or initial brief. Its purpose is to establish the affordability of a proposed development for a client

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11
Q

Which RIBA stage does an order of cost estimate take place?

A

RIBA Stage 1 - Preparation and Briefing

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12
Q

Difference between an order of cost estimate and cost plan?

A

An estimate provides a possible cost based on the ER’s and is the initial stage of the process - usually based on m2 areas or functional units. A cost plan is a more detailed elemental breakdown that shows how costs are distributed across the project - it is an estimate based on a specific design

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13
Q

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

A

The unit rate that, when multiplied by the number of functional units (e.g. nr of beds) gives the total building works estimate.

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14
Q

What typical info should accompany an order of cost estimate?

A

Cover letter
Executive summary
Cost limit
Specification notes
Assumptions
Exclusions
Drawings
Risk register
Cash flow info

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15
Q

What is a cost plan?

A

An estimate based on a specific design

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16
Q

Other than predicting the final cost, what other benefits does a cost plan provide?

A

Helps inform designers of the cost implications of their proposals, allowing for practical and balanced design

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17
Q

Do you need a programme to complete the cost plan?

A

Yes, a programme or some high level dates will be required to price preliminaries

Key information includes:
- Design and tendering periods
- Start on site date
- Construction period
- Completion date

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18
Q

What sources of info are available when preparing a new estimate or cost plan?

A

Information produced by the BCIS is available
Published pricing books such as Spon’s (may need adjusting for inflation)
Pricing documents from previous similar projects
Speaking directly to the supply chain for current information

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19
Q

How do you take account of location within estimates?

A

A location factor is usually applied to recognise differences in prices. For example, a project in London is usually more expensive than a project in Nottingham.

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20
Q

What is a cost plan risk allowance?

A

A quantitative allowance set aside as a precaution against risks and future requirements

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21
Q

What component fees may be included within an estimate?

A

Consultant fees, Contractor fees and Other fees

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22
Q

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

A

Allows informed commercial decisions to be made
Including whether or not the project is affordable
Or whether or not certain changes are affordable

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23
Q

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

A

Communicate the matter to the client and project team in a clear and concise way
Review the specification to identify potential areas where savings could be made (if any)

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24
Q

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

A

Explain where the cost plan sits against the budget and discuss limitations
Identify areas of design which may not be economical
Regular project risk reviews, ensuring the design team are focused on relevant risks
Explain how changes in the design will impact the cost plan
Contribute to VE or cost saving sessions

25
Q

What are some of the reasons we have cost overrun on a project?

A

Unrealistic cost estimate
Inadequate change management procedures
Project risks being realised and inadequately managed
Uncoordinated design
Unknown external factors (wars / pandemics)
Unsuitable procurement strategies
Inflation or changing market conditions

26
Q

Why is VAT excluded from the cost plan?

A

To ensure incorrect tax rates are not applied, as employers may incur different levels of VAT

27
Q

What do you understand by the term benchmarking?

A

The use of historical data from projects of a similar nature

28
Q

How would you undertake a benchmarking exercise for your client?

A

Produce a clear document showing how the various cost plan elements compare side by side to the benchmark. This process identifies anomalies or flagged items, which can be reviewed, challenged or justified

29
Q

How are subcontractor preliminary costs captured within the cost plan?

A

They should be included within the unit rates applied to sub-elements and individual components

30
Q

Can you define contractor overhead and profit?

A

Profit can be defined as the money a contractor makes after accounting for all costs and expenses
Overhead can be defined as those not readily chargeable to one particular project

31
Q

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

A

The percentage will vary due to various factors, such as:

  • Project location
  • Level of perceived risk
  • Project type and value
  • Market conditions
32
Q

What is a provisional sum?

A

An allowance or estimate included within the contract sum which is not sufficiently designed to accurately determine its cost. Prov sums require an instruction to be expended

33
Q

What is the difference between defined and undefined provisional sums?

A

Defined provisional sums have been allowed for within the programme and preliminaries

Undefined provisional sums have not been allowed for within the programme and preliminaries, meaning the contractor will be entitled to an EOT and additional prelims

34
Q

What are prime cost sums?

A

A sum of money for materials or goods where the quantity is known, but specification is tbc.
PC sums exclude all costs associated with fixing, installation, fees, OH&P etc.

35
Q

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

A

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

36
Q

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

A

Lump sum
Cost-plus (cost reimbursable)
Re-measurement
Target cost
Guaranteed maximum price (GMP)

37
Q

Lump sum contract advantages and disadvantages?

A

A lump sum agreement provides for payment of a set amount (JCT D&B 2016)

Advantages: Contractor takes on pricing risk, providing cost certainty
Disadvantages: Premium associated with increased risk, risk of contractor underestimating their costs

38
Q

Cost-plus contract advantages and disadvantages?

A

Cost plus contracts, otherwise known as cost reimbursable contracts, involve the employer paying the contractor for the costs incurred, plus a pre-agreed percentage for the profit (NEC4 Option E)

Advantages: Inaccuracies in the initial bid aren’t as detrimental, allow for design changes and amendments
Disadvantages: Final contract price is uncertain until the end of the project. No incentive for efficiency

39
Q

Re-measurement contract advantages and disadvantages?

A

Works are carried out on pre-agreed rates, based on the actual quantity of work (JCT MTC 2016)

Advantages: Agreement of pre agreed rates ensures competitive pricing, contractor’s risk is low
Disadvantages: Less cost certainty until the project is complete, general accuracy of cash flow forecasting

40
Q

Target price contract advantages and disadvantages?

A

A set target cost is set early in the project, and upon completion, cost savings or overspends are shared between the contractor and employer based upon pre-agreed percentages. Known as a pain gain mechanism (NEC 4 Option C or D)

Advantages: Contractor and employer incentivised to reduce cost. Encourages equitable risk sharing
Disadvantages: The share of pain and gain exposes the employer to risk. Fairly complex, may not be understood

41
Q

Guaranteed Maximum Price (GMP) contract advantages and disadvantages?

A

A guaranteed maximum price sets a limit that the employer will pay their contractor, regardless of the actual costs incurred. If the cost is higher, the contractor bears this. If the cost is lower, it is usually split (Bespoke JCT)

Advantages: Establishes the employer’s maximum financial commitment (subject to variations)
Disadvantages: Contractor takes on risk of overrun but has to share savings

42
Q

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

A

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

43
Q

What are contractor preliminaries?

A

Cost for items necessary for the contractor to complete the works but which do not actually become part of the works once the project is complete. Includes items such as:

  • Management and staff
  • Temporary site establishment / accommodation
  • Plant (tower cranes)
  • Temporary services
  • Security
  • Insurances
44
Q

Difference between fixed and time-related preliminaries

A

Fixed preliminaries are for one off costs (such as equipment) whereas time related preliminaries are dependant on the project duration (staff time).

45
Q

What is inflation?

A

The sustained increase in the general price level of resources

46
Q

What are the two types of inflation defined within NRM 1?

A

Tender inflation - An allowance included within the order of cost estimate, to ensure the rates included at the base date are adjusted to the date of tender return.

Construction inflation - An allowance included within the order of cost estimate for fluctuations during the period from the date of tender return to the mid-point of the construction period.

47
Q

What does TPI stand for?

A

Tender Price Indices - they measure the movement in prices agreed between clients and contractors when the tender is accepted.

48
Q

What is a bill of quantities? Can you name an advantage and disadvantage?

A

A pricing document which breaks the project down into exact quantities which are measured in an industry-wide recognised format. The document forms a precise tool for pre and post contract cost control

Advantage: Ideal for post-contract cost control
Disadvantage: Expensive and time consuming to produce

49
Q

What are the two key types of BoQ?

A

Firm BOQ: If there were no design changes, the BOQ price equals the final cost (Lump Sum)
Approximate BOQ: The quantities are subject to re-measurement on completion (Re-measurement)

50
Q

What is a cash flow projection?

A

A financial planning tool that shows the predicted flow of cash in and out of a project

51
Q

What is the purpose of post-contract cost reporting?

A

To provide an overview of the client’s current financial commitment
To inform the client of the likely outturn cost
To give an understanding of key decisions required

52
Q

What is life cycle costing?

A

An objective method for measuring and managing the lifetime costs of any project or asset.
It includes the construction cost, maintenance costs, operation costs, occupancy costs, end of life costs, non-construction costs (land/fees).

53
Q

What are advanced payments?

A

Payments issued to the contractor in advance of completing works or procuring materials

Usual rationale is to assist with cash flow to cover initial expenses (procure items on long lead in)

Disadvantages: Commercial risk / cash flow impact / could highlight financial issues

54
Q

What measures could be put in place to protect the employer’s commercial risk when providing advance payment?

A

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

55
Q

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

A

Whether the contract allows for these payments via Listed Items?
Request a vesting certificate
Check that insurance is in place
Ask for evidence that the materials are clearly segregated and labelled appropriately
Check that a materials off site bond has been provided

56
Q

What does the term ‘payment on account’ mean?

A

Payment for an item of work for which no instruction has been issued but is anticipated
Used by quantity surveyors for any item in a valuation that cannot be agreed under the contract rules, but both agree that payment is due.

57
Q

Can you explain what is meant by the term daywork?

A

The work done is recorded on a daywork sheet together with the labour, material and plant resources utilised.
It is generally when the work cannot be priced in the normal way or is uneconomical work

58
Q

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

A

Interim Valuation Date - Stated in the contract (date AFP is needed)
Due Date - 7 days after
Payment Notice - 5 days after the due date
Pay Less notice - 5 days before the final date for payment
Final Date for Payment - 14 days after the due date

59
Q
A

RICS Revision (18 decks)

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