T5. PROJECT FINANCIAL CONTROL & COST REPORTING Flashcards
How would you create a cashflow forecast?
- I would require the construction programme and contract sum analysis.
- 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.
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?
- This would not be very realistic as the cashflow expenditure per week is unlikely to have a flat or regular profile.
- A standard S-Curve would be more realistic.
What is the benefit of a cashflow forecast?
- Allows the employer to gain an understanding of the financial requirements over the duration of the project duration and setup any funding requirements.
- Can also be used to check against valuations and provide an early indication of project delays or financial difficulties if the actual expenditure is lagging behind the forecast.
What would you include within a construction cost report?
I would typically include:
* contract sum
* adjustment of variable costs
* adjustment of variations
* adjustment of fluctuations
* claims for loss and/or expense; and
* adjustment of risk allowances.
What would you include within a project cost report?
I would typically include:
construction costs
* professional fees
* statutory fees and charges
* third-party costs
* direct works costs
* land costs
* agency costs
* finance cost; and
* legal fees.
What is the purpose of a cost 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 contract progress compared against pre-contract predictions.
What are variations?
- Alterations or modifications to the design, quality or quantity of the contract works or to the site access or working conditions.
Why might variations arise?
- a) change to specification.
- b) discrepancies between contract documents.
- c) discrepancies with statutory requirements.
- d) errors and omissions.
- e) deficiencies in employer’s requirements.
What form must architect’s instructions take?
- Should be in writing from the CA or an authorised person
- Must be clear and unambiguous
Can the contractor object to a variation?
Some contracts allow the contractor to object to an instruction
JCT SBC -
* Where the instruction affect the efficacy of the CDP
* Where the instruction affects compliance with CDM Regs.
* Where the instruction may infringe patent rights.
* Where the instruction relates to a named specialist, and the contractor is unable to enter into a contract with that firm.
What about oral instructions?
- Oral instructions are not usually valid for construction work unless the contract allows for them.
- JCT SBC - Contractor must issue CVI within 7 days.
- If CA does not dissent, it takes effect from expiry of 7 day period.
What can the architect do if the contractor does not comply with an instruction?
- Depends on the form of contract however under JCT Suites if the contractor does not follow an instruction, the CA will be required to issue a ‘notice to comply’ to the contractor.
- If failure persists, the CA can instruct another party to carry out the work and the contractor will be liable for any additional costs incurred.
What 3 methods are there of obtaining a cost for variations under JCT forms of Contract?
This depends on the form of contract being used, under JCT SBC, quotations can be made by:
* Agreement between the employer and contractor.
* A schedule 2 quotation.
* Valuation by the QS under the valuation rules.
What are the time periods for Schedule 2 quotations under JCT SBC?
o The CA should request via issue of an CAI.
o The contractor has 21 days to provide the quotation (or 7 to decline).
o The CA then has 7 days to confirm in writing the acceptance or rejection.
o The acceptance is called the ‘confirmed acceptance’.
What costs does the schedule 2 quotation contain?
- 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.
What costs is the contractor entitled to if the schedule 2 quotation is rejected?
- The fair and reasonable cost of preparing the quote, as long as the quote itself was fair and reasonable.
What are the valuation rules under JCT Forms of Contract?
There are three rules for measurable work:-
* If it is of a similar character, quantity and in the same conditions as existing work, then the bill rates should be used.
* 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.
* If it is not of a similar character, fair rates and prices should be used.
What are the valuation rules under JCT Forms for non-measurable work?
- This would typically be valued by the dayworks procedure based on the cost of labour, plant and materials that have been incurred.
What is a star rate?
- A rate that is based on the bill rates but includes a fair allowance.
What are ‘fair rates and prices’?
- A market rate.
- A rate based on actual costs.
What are dayworks?
- 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.
What document should the prime cost be calculated in accordance with?
- This should be calculated in accordance with the ‘Definition of the Prime Cost of daywork carried out under Building Contracts’ published by the RICS.
What information is necessary to be able to assess dayworks?
- Daywork sheets
- Plant and materials used
Can the QS alter hours which he considers to be excessive on a dayworks sheet that is authorised by the architect?
- No the hours recorded and signed off should be maintained within the variation.
What would you do if the contractor submitted 10 dayworks sheets to you for payment?
- I would verify with the CA that a relevant variation has occurred and is recorded on an CAI.
- I would check to ensure there is no other contractual method of valuing the variation.
- Providing the CAI is in place and no other mechanism for valuation is available I would seek verification of the hours and materials.
If you and the contractor’s QS could not agree on something how would you resolve it?
- I would discuss with the contractor 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.
What is quantum meruit?
- This translates to ‘what he deserves’ for example fair and reasonable costs that have been incurred.
Give an example of where quantum meruit might be used?
- If the employer and contractor reach a separate agreement on acceleration, the costs of this may be based on a ‘fair and reasonable’ basis.
What is loss and or expense under JCT Forms of Contract?
- L&E reimburses the contractor for costs incurred in carrying out additional work or from an employer’s breach of contract.
What are the procedures for claiming loss and expense under JCT Forms of Contract?
- Contractor must notify in writing 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.
- The contractor should submit any further information as requested by the CA.
- The contractor should also submit any further information as requested by the CA or QS to enable the amount of loss and expense to be ascertained.
What are Relevant Matters under JCT Forms of Contract?
- Events listed in the Contract that entitle the contractor to loss and/or expense.
What are the relevant matters?
There are 5 relevant matters:-
* Variations.
* Instructions.
* Execution of an approximate quantity that was not a reasonably accurate forecast of quantity.
* Suspension by the contractor for non-payment.
* Any impediment, prevention or default by the employer.
What is the key thing to remember when assessing loss and expense claims?
- It should be the actual loss incurred by the contractor.
What are the common heads of claim in loss and expense applications?
- 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.
What is a Provisional Sum?
- An allowance within a contract for works that are not defined in enough detail for tenderers to accurately price.
What is a Prime Cost Sum?
A sum of money included in a unit rate to be expended on materials or goods from suppliers, where precise quality is unknown.
What is the difference between Defined and Undefined Provisional Sums?
- Defined sums are those which have been described in sufficient detail that the contractor is expected to have made allowance for them in their programming, planning and pricing preliminaries.
- Undefined provisional sums are less well described and so the contractor cannot be expected to make allowance for them in their programming, planning and pricing preliminaries.
Give me an example of how a cost report can guide commercial decision making?
Cost reports can be used to provide possible courses of action to address any cost deviation away from the brief:
(i) Omit elements of remaining construction work that are not immediately critical for the required functionality of the building.
(ii) Reduce the scale of elements of remaining construction work without diminishing the required functionality of the building. This may include reducing room sizes, circulation and communication, space and storey heights.
(iii) Reduce the specification of elements of remaining construction work.
What is the importance change control procedures?
Change control processes can ensure changes to the timescale, cost and scope are effectively implemented.
How do you report on risk allowances within your cost reports?
(i) At the outset of the construction contract, I include the full value of each of the Clients risk allowances.
(ii) As work progresses, I monitor instructed works against these allowances, reducing them accordingly as variations are valued in line with the contract.
(iii) I track and report on actual costs incurred, progressively reducing the risk allowance as these costs materialise. This ensures transparency and allows for informed cost management throughout the project.
(iv) I avoid using a general contingency and instead allocate specific risk allowances for anticipated cost occurrences.
How do your clients reporting requirements vary?
Some clients require project cost reports whereas some require simplified construction costs report. On one scheme that comprises multiple phases, I provide a high level overview of the programme of works.
How do you manage project costs through the construction phase?
I undertake periodic site inspections to measure and assess work completed on-site. I review contractors submitted costs for variations. I also review contract instructions and take a view of the cost of any changes/potential changes.
How do you carry out a valuation on a JCT or lump sum project?
Under a JCT contract with a lump sum price, valuations are carried out based on interim payments for completed work:
(i) Measure and assess work completed on-site – Review the contractor’s application and inspect the works.
(ii) Adjust the contract sum breakdown/application accordingly – Assess progress against pre-agreed cost allocations.
(iii) Adjust for variations – Include any approved variations and omit incomplete works.
(iv) Consider materials on-site – Allow for materials stored on-site if permitted in the contract.
(v) Deduct retention – Apply the agreed retention percentage (e.g., 5%, reducing to 2.5% at practical completion).
(vi) Adjust for previous payments – Deduct amounts certified in prior valuations.
(vii) Issue a Payment Certificate/Recommendation
How do you carry out a valuation on a NEC Option A project?
Under NEC Option A, the contractor is paid based on completed activities rather than measured work:
(i) Review the Activity Schedule – Payments are made when activities are fully completed (not partially).
(ii) Assess completed activities – Confirm through site inspections and progress reporting.
(iii) Check for compensation events – Any instructed changes should be reflected in updated activity schedules.
(iv) No valuation of materials on-site – Unlike JCT, NEC Option A does not allow payments for stored materials unless they are included as an activity.
(v) Issue a Payment Certificate/Recommendation based on completed activities
How do you carry out a valuation on a NEC Option C project?
NEC Option C is a cost-reimbursable contract with a pain/gain share arrangement:
(i) Assess defined cost – Review contractor’s records for amounts paid to subcontractors, cost of components in SCC and less any disallowed cost (e.g. defective work) .
(ii) Apply fee percentage – Add the contractor’s agreed fee percentage to the defined cost.
(iii) Adjust for previous payments – Deduct amounts certified in prior assessments.
(iv) Issue a Payment Certificate/Recommendation based on verified actual costs plus the contractor’s fee.
How do you make adjustments for Provisional Sums?
Provisional sums can only be expended and adjusted on the written orders of the contract administrator. The valuation of work instructed under this method may be dealt with by reference to the other sections.
What are disallowed costs under NEC?
Amounts not justified by the Contactor’s accounts and records
Should not have been paid to a Subcontractor or supplier in accordance with their contract
Can you give me an example of a disallowed cost?
Amounts not justified by the Contactor’s accounts and records
Costs incurred because the Contractor did not follow an acceptance or procurement procedure stated in the Works Information
Contractor failed to give an early warning which this contract required him to give
Plant and Materials not used to Provide the Works (reasonable wastage)
Resources not used to Provide the Works
Preparation for adjudication / tribunal
Correcting Defects after Completion
On Project Day Case, which methods for quantifying risk did you advise?
The simple method - Basic method: Assign cost (£) and probability (%), multiply for expected value, then total for overall allowance.
The probabilistic method - Detailed version of the Simple Method, also known as “3-point estimating,” which considers different scenarios: best, likely, and worst case.
The Monte Carlo method - Computer simulation modelling outcomes.
On Project Day Case, which method did you recommend to the client?
I recommended the probabilistic method. This method provides a broader range of outcomes based on different scenarios.
Can you provide an advantage and a disadvantage for the three risk quantification methods?
Simple Method
Advantage: Easy to use and quick to implement.
Disadvantage: Limited accuracy, doesn’t account for full uncertainty.
Probabilistic Method
Advantage: More detailed, considers best, likely, and worst-case scenarios.
Disadvantage: Subjective estimates, time-consuming.
Monte Carlo Method
Advantage: Highly accurate, produces a range of possible outcomes.
Disadvantage: Complex, requires specialized software and expertise.
On Project PET CT, how did you advise on the risk allocation of compensation events?
I monitored instructed works against itemised allowances on the risk register.
I reduced risk allowances as Compensation Events were notified.
I tracked and reported actual costs, progressively reducing allowances as costs materialised.
On Project Elective Hub, what strategies did you advise the client to mitigate cashflow issues?
I advised the client that there are typically two ways to alleviate cash flow issues: advanced payment or acceleration of works.
Advanced Payment
I explained that an advanced payment bond could be considered, provided the bond was in place to protect the client in the event of contractor default.
Additionally, I suggested the client might consider paying for materials off-site, provided they were properly vested. The requirements for vesting included:
(i) Uniquely identifiable materials labelled in the client’s name
(ii) Signed vesting certificates
(iii) Evidence that the materials were insured
Acceleration
Alternatively, the client could instruct the contractor to accelerate the works. However, I cautioned that this would increase project costs, making it a less attractive option.
What were the cost implications of making payment for offsite materials?
There would be a cost associated with the provision of an advanced payment bond. There were also some storage costs associated with storage of materials off site.
What were the risks of payment for offsite materials?
Supply chain insolvency resulting in complications in reclaiming materials if stored off site.
Damaged/stolen materials resulting in additional cost if uninsured as well as delays If need remanufacturing.
Did you propose any solutions to mitigate these risk of payment for offsite materials?
I recommended that the materials were properly vested and that the contractor provided evidence of insurance as well as ownership.
