Project Financial Control and Reporting

Question 1

Why do you omit prov sums at the start?

Question 2

Can you tell me how you assessed change on the Innovation Centre project?
valuation rules

Answer 2

Under the JCT D&B, these are:
For measurable works – If works are of a similar nature then CSA/ BoQ rates should be used where possible. Where there are no works of similar nature then fair rates should be used.
Where the works are not measurable – Dayworks should be used (I.e. Prime cost, (materials, plant and labour) plus a percentage addition for incidental costs, materials and labour (within Contract Particulars) – should be valued in line with RICS definition of dayworks – 2 options – 20 page document setting out how to value.
Also paid OH&P/ Additional design fees etc.

Question 3

Can you talk me through some of the main headings you included in the cost report you produced on the Innovation Centre project?

Answer 3

• Exec Summary – changes/ risks/ rolling FA
• Key Risks
• Contract data – i.e. valuation amount
• Cash flow
• Rolling Final Account
• Provisional Sums
• Instructed variations
• Anticipated Variations

Question 4

How did you produce the cashflow on this project?

Answer 4

For this project I produced an initial projected cashflow using a standard S curve model based on the contract sum, programme and contractor cash flow. Then each month I modelled the actual spend based on my interim valuations against the anticipated spend to highlight to my client how works were progressing on site, spend to date etc.

Question 5

What information do you need to produce a cash flow/ what needs to be considered?

Answer 5

• Programme – start/ end dates – also defects rectification period/ release of retention
• Contract Sum
• need to account for holiday periods etc.
• Risk Register – risks should be included
• Fee schedules from consultants
• Any known variations
• Sectional completion details if relevant – i.e. retention release at different times
• Provisional Sums
• Any materials off-site – could increase expenditure
• Any direct costs, i.e. furniture
• Prelims – could use prelims book or £/week etc.

Question 6

How do preliminaries affect a cash flow?

Answer 6

You need to consider both fixed and time related preliminaries. For example site set up costs will only be required during the early stages, then preliminaries will mostly be time related, i.e. cost/week, until the site removal costs are incurred at the end of the project.

Question 7

What does EBITDA stand for?

Answer 7

Earnings Before - Interest, Taxes, Depreciation, and Amortization

Question 8

What is a Prime Cost Sum?

Answer 8

A unit rate for materials where quantities are unknown, excluding associated prelims, overhead, and profit

Used for long lead items; for example, a carpet spec may be unknown, so a rate of £25/m2 is used.

Question 9

What is loss and expense in project management?

Answer 9

Costs incurred that are not claimable elsewhere, such as variations

Question 10

What is not taken on loss and expense?

Answer 10

No retention is taken

Question 11

How would you calculate loss and expense?

Answer 11

Request evidence of direct loss and expense from the contractor as soon as practicable and update monthly when costs are realized. The CA/QS replies within 28 days with the ascertained amount showing the difference.

Question 12

What is value management?

Answer 12

The overall process on a project where value is consistently achieved and considered through choices and options.

Question 13

Can you give an example of value management in practice?

Answer 13

Advising the client to include recommended spares on a contract for equipment, saving costs on future variations.

Question 14

What is EBITDA?

Answer 14

Earnings Before - Interest, Taxes, Depreciation, and Amortization

Question 15

What is a Prime Cost Sum?

Answer 15

a. This is for supply of materials usually and is a unit rate for that material where the quants are not known yet. They exclude all associated prelims, OH&P
b. They are used for long lead items
c. i.e. if the spec of carpet is unknown so a rate of £25/m2 is used

Question 16

What is loss and expense

Answer 16

Costs incurred not claimable anywhere else such as variations. No retention is taken on loss and expense

Question 17

How would you calculate loss and expense?

Answer 17

Loss and expense is considered a relevant matter in JCT. In previous projects I requested the contractor provide evidence of the direct loss and expense as soon as practicable, and update this information monthly when cost is realised. The CA/QS shall within 28 days reply with ascertained amount showing the difference.

Question 18

Talk me through how you have delivered Value Management for a client?

Answer 18

a. Value management is the overall process on a project where value is consistently achieved and strived for by making and considering choices and options. I have contributed to this on the University of Birmingham NCDH project where there was an option that I explored from a commercial perspective to make up the levels on the site using material that would’ve been considered otherwise hazardous and would’ve been expensive to remove and dispose of.

Question 19

How would you create a cashflow forecast?

Answer 19

• I would need to have access to the construction programme and contract sum analysis in order to
  populate the cashflow.
• The values associated with each element of construction could be forecasted at times to reflect their
  installation within the programme.
• I would split the works into the different packages as shown on the contract programme and include
  individual s-curves for each package.
• Obtaining drawdown schedules from specialist subcontractors and professional consultants can also
  assist when populating the cashflow.
• An alternative approach would be to utilise a previous cashflow from a similar scheme or to use
  cashflow forecasting software although this may not be as accurate.

Question 20

If your construction budget was £2.5m and proposed construction
period was 25 weeks, would a forecast cashflow expenditure of £100,000 per week be realistic?

Answer 20

• In reality this would not be very realistic as the cashflow expenditure per week is unlikely to have a flat
  or regular profile.
• In reality the expenditure is much more likely to have an S-curve profile where at the start of the
  scheme, the expenditure per week will be fairly low as the site setup and enabling works are undertaken.
• As the scheme progresses, items that are of higher value such as the steel frame and M&E installations
  will be undertaken. The cost expenditure per week at this stage will be much higher than at the start of
  the scheme.
• As the scheme draws to a close, minor finishing items such as decoration and cleaning packages will be
  undertaken again resulting in a lower expenditure cost per week

Question 21

What is the benefit of a cashflow forecast?

Answer 21

• A cashflow forecast allows the employer to gain an understanding of the financial requirements over the project duration and setup any funding requirements for the scheme in advance
• It can also act as a check against valuations and provide an early indication of financial difficulties if the actual expenditure is lagging behind the forecast.

Question 22

What would you include within a Financial report?

Answer 22

I would typically look to include:
- Contract sum total
- Value of Instructed variations
- Value of potential future variations
- Ongoing claims
- Provisional sum adjustments
- The anticipated final account total
- The total of certified payments

Question 23

What is the purpose of a financial report?

Answer 23

• To report against budgeted values and act as a working cost check on the project budget
• To give the client an understanding of any saving or additional monies required
• To report contract progress compared to pre-contract predictions

Question 24

What are variations?

Answer 24

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

Question 25

Why might variations arise?

Answer 25

a) changes to specification
b) discrepancies between contract documents
c) discrepancies with statutory requirements
d) errors and omissions
e) deficiencies in employer’s requirements

Question 26

What form must architect’s instructions take?

Answer 26

• It is best practice under the majority of contracts for instructions to be made in writing
• The QS is not usually authorised to make additions to the contract sum for instructions that are not in written form

Question 27

What are the protocol for dealing with oral instructions?

Answer 27

• The validity of oral instructions depends on whether the form of contract being used contains
  mechanisms for them to be valid.
• For example within the JCT Standard Building Contract (SBC):-
  o Where the Contract Administrator issues an instruction otherwise than in writing, it shall be of
  no immediate effect
  o But the Contractor shall confirm in writing receipt of the verbal instruction within 7 days.
  o If the Contract Administrator does not dissent by notice to the Contractor within 7 days from
  receiving the contractors confirmation, it shall take effect as from the expiry of the latter 7 day
  period.
• In my opinion it is always best practice to follow up verbal instructions with written instructions as
  soon as possible.

Question 28

Can the contractor object to carrying out a variation?

Answer 28

• Some contracts allow the contractor to object to an instruction in special circumstances for example:-
• In the JCT Standard Building Contract the requirement to comply with a valid instruction is subject to
  certain exceptions, where:-
  o Where the instruction might affect the efficacy of the design of the Contractors Designed
  Portion.
  o Where the instruction might affect the contractor’s compliance with the CDM Regulations.
  o Where the instruction may infringe patent rights.
  o Where the instruction relates to a named specialist, and the contractor is unable to enter into a contract with that firm.

Question 29

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

Answer 29

• This depends on the form of contract being used however under JCT suites if the contractor does not follow an instruction, the architect will be required to issue a notice to comply to the contractor
• If the contractor still fails to comply, the architect can instruct another party to carry out the work and the contractor will be liable for any additional costs incurred
• In this circumstance it is important to record the costs and obtain a range of quotations

Question 30

What 3 methods are there of obtaining a cost for variations under JCT forms of contract?

Answer 30

This depends on the form of contract being used, under JCT SBC, quotations can be made by:-
o Agreement between the employer and contractor.
o A schedule 2 quotation.
o Valuation by the QS under the valuation rules

Question 31

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

Answer 31

o The architect should request via issue of an AI.
o The contractor has 7 days to notify that they will not provide one.
o If not, they have 21 days to provide the quotation.
o The architect then has 7 days to confirm in writing the acceptance or rejection.
o The acceptance is called the ‘confirmed acceptance’

Question 32

What costs does the schedule 2 quotation contain?

Answer 32

• Value of the work.
• Any adjustment of time.
• Money in lieu of direct loss and expense.
• The fair and reasonable cost of preparing the quotation

Question 33

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

Answer 33

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

Question 34

What are the valuation rules under JCT Forms of Contract?

Answer 34

There are three rules for measurable work:-

o If it is of a similar character, quantity and in the same conditions as existing work, then the bill
rates should be used.
o If it is of a similar character, but different quantity or conditions, the bill rates should be used as
a basis but a fair allowance should be made to take account of the difference.
o If it is not of a similar character, fair rates and prices should be used

Question 35

What about non-measurable work?

Answer 35

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

Question 36

What is a star rate?

Answer 36

• A rate that is based on the bill rates but includes a fair allowance.
• To deviate away from the bill rates there must be a reason as to why the star rate is being adopted.
• This may be because the conditions on site for installation are more complicated that first envisaged

Question 37

What are ‘fair rates and prices’?

Answer 37

• A market rate.
• A rate based on actual costs.
• A rate in line with current cost data.

Question 38

What are dayworks?

Answer 38

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

Question 39

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

Answer 39

This should be calculated in accordance with the ‘Definition of the Prime Cost of daywork carried out under Building Contracts’ published by the RICS

Question 40

What information is necessary to be able to assess dayworks?

Answer 40

• Vouchers showing the amount of time spent on each activity (dayworks sheets).
• Names of the workmen.
• Plant and materials used.
• This information should be given to the architect or authorised person at the end of the week for
  verification.

Question 41

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

Answer 41

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

Question 42

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

Answer 42

• I would verify with the architect that a relevant variation has occurred and is recorded on an Architects
  Instruction.
• I would check to ensure there is no other contractual method of valuing the variation.
• Providing the Architects Instruction is in place and no other mechanism for valuation is available I would seek verification of the hours and materials

Question 43

If you and the contractor’s QS could not agree on something how would you resolve it?

Answer 43

• I would discuss with the partner and client to try and seek a resolution with the contractor.
• The contractor could take the dispute to adjudication if necessary but all parties should try and resolve the matter by negotiation in the first instance.

Question 44

What is quantum meruit?

Answer 44

This translates to ‘what he deserves’ for example fair and reasonable costs that have been incurred.

Question 45

Give an example of where quantum meruit might be used

Answer 45

If the employer and contractor reach a separate agreement on acceleration, the costs of this may be based on a ‘fair and reasonable’ basis.

Question 46

What is loss and or expense under JCT Forms of Contract?

Answer 46

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

Question 47

What are the procedures for claiming loss and expense under JCT Forms of Contract?

Answer 47

• As soon as the regular progress of the work is affected, or is likely to be affected, or the contractor becomes aware of any other matter that would cause them to incur loss and expense, they should notify the architect in writing.
• The contractor should submit any further information as requested by the architect.
• The contractor should also submit any further information as requested by the Architect or QS to enable the amount of loss and expense to be ascertained.

Question 48

What are Relevant Matters under JCT Forms of Contract?

Answer 48

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

Question 49

What are the relevant matters?

Answer 49

There are 5 relevant matters:-
o Variations.
o Instructions.
o Execution of an approximate quantity that was not a reasonably accurate forecast of quantity.
o Suspension by the contractor for non-payment.
o Any impediment, prevention or default by the employer.

Question 50

What is the key thing to remember when assessing loss and expense claims?

Answer 50

It should be the actual loss incurred by the contractor

Question 51

What are the common heads of claim in loss and expense
applications?

Answer 51

• Prolongation.
• Thickening of preliminaries for example extra supervision required due to variations.
• Disruption causing plant or labour to be underemployed.
• Increases in labour or material costs during the period of delay.
• Head office overheads.
• Loss of profit.
• Finance charges.
• Acceleration costs.
• Claim preparation costs.