Project Financial Control and Reporting Flashcards
What is the purpose of a cost report?
To inform the client of the likely out turn of cost for a construction project.
This can empower the client to make changes/secure funding/mitigate forecasted costs.
What will a cost report include?
- All costs incurred at the date of the report that are known and can be accurately valued
- All costs incurred that are known and can be accurately estimated
- Forecast of costs that can be reasonably foreseen and estimated
- Risk allowances necessary as can be reasonably foreseen
How often should a cost report be submitted?
On a regular and frequent basis, e.g. once a month.
What sub sections would you expect in a CONSTRUCTION cost report for a lump sum contract?
- Contract Sum
- Adjustments to variables (PSUMS etc)
- Adjustment of variations
- Adjustment of fluctuations
- Claims for loss and expense
- Adjustment for risk allowance
Where can you find information on cost reporting?
RICS Guidance Note - Cost Reporting 1st Edition 2015
What sub sections would you expect in a PROJECT cost report?
- Construction costs
- Professional fees
- Statutory fees and charges
- Third-party costs
- Direct works costs
- Land costs
- Agency costs
- Finance costs
- Legal fees
What items in a contract sum can affect the outturn of the final account?
- Undefined PSUMs
- Defined PSUMs
- Provisional quantities
- Prime cost sums
- Daywork allowances
- Contract instructions
- Anticipated instructions/early warnings
- Loss and expense
- Fluctuations
- Risk allowances
Who should the cost report be distributed to?
- QS must take instruction from the client. It is confidential information.
- If Contractor had a copy, it could jeopardise the client’s bargaining position.
How should PSUM/Prime Costs/Daywork allowances/risk allowances be valued in a cost report at the project’s outset?
They should be reported at 100% of the amount defined in the Contract Sum.
What is loss and expense?
Where the contractor is entitled to be reimbursed by the client for loss and expense.
How should loss and expense be reported in JCT SBC?
Separate to the variations.
What is a final account?
The conclusion of the contract sum including all adjustments.
Signifies the agreed value the Employer will pay the Contractor.
Will a final account typically include VAT, interest on overdue payments, LADs, or loss and expense?
Loss and expense YES
LADs, VAT and interest NO
In JCT DB 2011 contract, which clause refers to the final account process?
Clause 4.12
What is a rolling final account?
- Where all instructions and cost effects are agreed up to the point of the latest financial report
- Final account statement if works were to complete with no further changes
When does preparation of a final account occur?
Throughout the contract period
Can provisional sums be expended without issuing a contract instruction?
No
What is change control?
The administrative process that implements the contract mechanism for instructing change.
MUST adhere to contract requirements for notification & approval of change
How would you structure a final account?
No firm defined format, but an example would be:
- Contract Sum (CSA of BoQ)
- Variable costs (PSUMS, PC Sums, Daywork allowances)
- Variations/Contract Instructions
- Loss and expense
- Fluctuations
- Risk allowance
At final account, must all variations be instructed?
All changes should have a contract instruction, but it is not uncommon at final account stage for some variations to not have received a formal instruction still.
It is good practice to ensure the architect/CA are aware of all variations.
What is the final certificate?
After the defects liability period is over, the final certificate is issued by the CA allowing the release of the remaining retention monies.
Final Account must be agreed before final certificate.
When does half retention get released?
Half of the retention should be released upon practical completion in most standard contract forms.
What happens to the retention release if the final account has not been agreed at PC?
The employer is entitled to release half retention only up to the amount agreed thus far.
Another payment certificate may be issued once FA is agreed.
What happens if the FA is not agreed after the DLP is over with regards to retention?
The employer is entitled to release full retention up to the amount that has been agreed thus far.
What happens if the contractor does not fix the defects during the DLP?
Most standard forms of contract allow the Employer to use retention money to employ a different Contractor to fix the defect.
The Contractor is allowed to rectify the issue themselves first, and usually this is defined by a timescale after notification by the CA.
What are patent defects?
Can be discovered by reasonable inspection
What are latent defects?
Cannot be discovered by reasonable inspection
What are contra charges?
Where the Employer recovers costs from the Contractor that the Contractor has caused the Employer to incur.
What would you do if there were 20 outstanding variations that were not instructed but agreed during the final account negotiation?
Issue an instruction wrapping up all of these outstanding works, with the instruction listing each variation as a sub-section/bullet point
In JCT contract suite, how long does the Contractor have to provide information for the final account?
6 months
What is value engineering?
Improve the value of products, by increasing functionality/quality and/or reducing cost.
What is value management?
Gives a project a clear path to create value through the understanding of client objectives as well as the needs and wants of the stakeholders.
Value engineering used to reach these objectives.
What is value for money?
Achieving value for money requires value management to understand objectives and client values, then using VE to decrease cost while maintaining functionality, or increase functionality greater than cost.
More value for less money.
Where can a QS learn more about cash flow?
RICS Practice Standards UK - Cash Flow Forecasting 2011 Guidance Note
What are the two types of cash flow forecast relevant in construction?
- Cash flow for a company
- Cash flow for a construction project
How long will company cash flow period forecast?
A year
What is the value of cash flow forecast for a company?
- Resource and business planning
- Analysing the companies health
What is the purpose of a construction project cash flow?
- To project when payments are due to ensure finances are in place (alert bank/funder of drawdowns)
- Construction cash flow will inform company’s cash flow
What may be included in a Contractor’s cash flow?
- Cash in from Employer
- Cash out to sub-contractors
- Cash out to suppliers
- Retention monies in
- Monies to their consultants
- Tax payment
Why would a construction cash flow be useful for a PQS?
To monitor progress on site
What is an S curve?
Standard Curve
A generic cash flow forecast in the shape of an “S” typical of most projects
Why would you ask for the contractor to produce their own cash flow based on the programme?
I will be more accurate than an S curve as it will account for anomilies relevant to the project, whereas the S curve is generic.
It is important to watch out for front-loading
What is front loading?
This is where the contractor forecasts costs at the start of the project to be greater than they actually will be, in order to coerce the PQS into thinking higher payments are due early.
What are the risks of over-payment?
This improves the contractor’s cash flow but leaves the client at risk, as they may be paying more than has actually been carried out.
If the Contractor stops working/goes into liquidation, the Employer may lose out as they have paid for more than they have received.
What is the most accurate form of measurement of works completed on site to date?
Not judging by the cash flow forecast, but by visiting the site and conducting an assessment
What are the benefits of requesting company cash flow forecasts before employing consultants/contractors?
- Predict how the company will be performing in the future
- Gauge whether they will be able to cope with the additional works
What should you look for in a company cash flow of a tendering contractor?
- Overdraft size
- How often they use their overdraft
- If their overdraft was removed, what effect would that have
- Is it bringing in as much money as it is spending?
What stakeholders may be interested in a companies cash flow?
- Funders e.g. banks, local authorities, guarantors
- Shareholders
- Employers
What are some liabilities that a consultancy may have?
- Staff wages
- Premises
- Training
- Equipment
What are the four types of payment mechanism in contruction contracts, and which are the most/least accurate?
- Stage payments (highest accuracy of cash flow forecast, but lowest accuracy of value of work done to date)
- Milestone payments
- Payment against activity schedule
- Valuation of work done to date on site (lowest accuracy of cash flow forecast, but highest accuracy of value of work done to date)
What legislation tries to improve construction cash flow?
- The Housing Grants, Regeneration and Construction Act 1996
- The Local Democracy, Economic Development and Construction Act 2009
How does the HGRCA 96 improve cash flow in construction?
- Right to interim, periodic or staged payments
- Contracts must include mechanism for communicating what is due, when & final date for payment
- Pay less notice must be communicated early
- Contractor may suspend performance for no payment
- Prohibiting pay that is linked to payment in a different contract
- Statutory right to refer disputes to adjudication
What is the DHSS Expenditure Forecasting?
The DHSS Expenditure Forecasting was created
by KW Hudson for the Department of Health and
Social Security for forecasting expenditure on
capital projects
What is a risk?
A potential event that, if it occurs, may cause the project to fail to meet one or more of its objectives
What is the difference between a risk and an issue?
An issue is something that’s happening now that is or will soon jeopardise the delivery of the projects objectives.
A risk may turn into an issue. When the probability of a risk reaches 100%, it is an issue.
An issue cannot turn into/be a risk, as it is already happening.
What are the different types of risk?
- Project risks
- Business risks
- Environmental risks
- External environment risks (force majeure, government shifts)
What does risk management seek to do?
- Identify risks
- Assess probability and impact of each risk
- Identify actions to avoid, reduce, or mitigate that risk.
- Implement and monitor actions that are cost effective solutions to ensure project objectives are achieved
- Provide feedback on the above for future.
Risk management can be divided into two phases. What are these?
Risk analysis - identification and assessment
Risk management - mitigation and control
