Week 5: Cost Control: Tender/Construction

Question 1

What is important when performing cost control in tender and construction phase?

Answer 1

• Greater precision as there is greater certainty as the design nears completion

Question 2

What is important to remember about cancelling projects and give an example?

Answer 2

• Cancel them early!
• Cardiff railway station lost £10 M on cancelling and there was public outrage
• However this made up < 1% of the total cost £200 M!

Question 3

What are tenders and what can they facilitate in cost control and planning?

Answer 3

• Built on drawings and specifications
• Facilitate elemental costing using CESMM4 such as a BOQ

Question 4

What are the benefits of a BOQ?

Answer 4

1. Assist with the agreement of the contract sum with the successful tenderer
2. Provide a schedule of rates assisting with the valuation of variations
3. Provide a basis for the valuation of interim payments
   (Value work done, monthly payments, milestone payments, monthly valuations)
4. Provide a basis for the preparation of the final account

Question 5

What is a ‘reconciliation audit’?

Answer 5

• The difference between tender price and cost model (BoQ)

Question 6

You cannot change the final tender price, but you can alter unit prices. What are the two primary ways of doing this?

Answer 6

1. Front End Loading - Load profits at start by pricing units higher at beginning of project
2. Back End Loading - Load profits at end by pricing units higher at the end of project

Question 7

What are the four different types of payment terms (contracts)?

Answer 7

1. Fixed Price
2. Measured fixed price (BoQ)
3. Cost Plus
4. Cost Plus + Target Cost

Question 8

What is ‘Fixed Price’ payment terms and what does it mean for the contractor?

Answer 8

• Agrees to do work for fixed amount
• Contractor takes on all risk

Question 9

What is ‘Measured Fixed Price (BoQ) payment terms and what does it mean for the contractor?

Answer 9

• Gives wriggle room for variation

Question 10

What is ‘Cost Plus’ payment terms and why is it dangerous?

Answer 10

• Cost plus sets a predetermined profit margin for the contractor
• Dangerous as in theory Cost Plus guarantees the recovery of all contractor costs above or below the contract value
• This means you must trust the contractor to do the right thing

Question 11

What is ‘Cost Plus + Target Cost’?

Answer 11

• Target cost means a penalty phase if the contractor overshoots.

Question 12

What variations facilitate cost implications?

Answer 12

• Changes to design
• Changes to specification
• Undiscovered items
• Changes to scope (this could void the contract!)

Question 13

How can you make payments in construction?

Answer 13

• Milestones
• Monthly valuations (Use Retention: pay 90% at milestone, 10% when work done to quality)
• Invoices
• Reconciliation to cost model (make sure project running to cost model)

Question 14

State the 7 steps to the working capital cycle?

• Remember projects operating on negative cash flow

Answer 14

1. Working Capital - cash
2. Raw material creditor (buy on credit)
3. Process - work in progress (Foundations built etc.)
4. Stock
5. Order - trade debtor (Client’s required payment invoiced)
6. Payment - cash (Up to 60 days!)
7. Working Capital

Debtor owes us (e.g. client) and should pay contractor in say 30 days
We owe creditor (e.g. materials creditor) and need to pay out in 90 days

Must get the cash on time!!

Question 15

What type of curve represents “A display of cumulative costs, labour hours or other quantities plotted against time” and why?

Answer 15

• An S-curve
• Since spending is generally slower at start and end of project and higher in middle hence the S curves steeper gradient in middle

Question 16

How do you calculate the final account?

Answer 16

Out-turn cost = Total construction cost calculated at end of project
- Includes variations
- Time related charges
- Who pays for extras?