1
Q
Where could you find guidance on pre-construction cost reporting?
A
New Rules of Measurement
2
Q
What duties should a QS provide a client in regards to post-contract cost control?
A
- report all known construction costs
- report all anticipated construction costs
- report on required risk allowances for construction costs
- provide reports on a regular and frequent basis
3
Q
What is the purpose of cost reporting?
A
To inform the client of the likely outturn cost of a construction project
The forecast outturn costs may be expressed as a variance against a budget amount, or expressed in absolute terms.
4
Q
What is good project financial control?
A
A proactive approach to managing the financials of a project.
• Always accurately track costs and changes to costs
• Communicate the changes effectively and as and when required
• Keep a rolling final account
• Good cost reports documents to keep the client informed
• Good relationship with contractor
5
Q
How do you ensure effective control of costs on a project?
A
- Proactive risk and contingency management
- Implementing a robust change control process
- Management of provisional sums within budget
- Regular cost reporting which is forward looking
- Rolling final account
6
Q
What is the role of the QS in terms of controlling costs?
A
- Actively manage project costs
- Report to project team on costs, cost changes and potential cost changes (EWNs)
- Both pre and post-contract
7
Q
What financial control documents do you produce at pre-contract stages?
A
- Cost estimates/ feasibility estimates
- Cost plans
- Cost Reconciliation (detailing the reasons for cost changes between cost plans)
- Value engineering exercises
- Early warning trackers
- Benchmarking exercises
8
Q
What financial control documents do you produce at post-contract stages?
A
- Cost Reports
- Valuation assessments
- Early warning / risk trackers
- Change control trackers
9
Q
What is a cost report?
A
A document produced periodically that sets out the financial position of a project at that current point. A cost report will ultimately describe the starting position (the contract sum), the current position and the estimated final account value.
10
Q
What is the purpose of a cost report?
A
• Inform client of the likely out-turn cost of the
construction project
• Give Client an understanding of any savings or
additional monies required
• Report contract progress
• Basis of final account
11
Q
What does a cost report record?
A
- Contract sum
- Current position & changes to contract
- Anticipated final account
- Project progress
- Expenditure of risk allowances
12
Q
What types of cost report can you get?
A
- Construction cost report
- Project cost report
- Programme cost report
- Detailed cost report
13
Q
What is a construction cost report?
A
Captures historic and forecast costs incurred under a construction contract
14
Q
What is a project cost report?
A
Captures historic and forecast costs across a construction project. May include construction costs, professional fees, statutory fees, third party costs, Client direct costs, land costs, agency costs, finance costs, legal fees
15
Q
What is a programme cost report?
A
Captures historic and forecast costs across a programme of construction works. May include (Programme management office costs, project costs)
16
Q
What is a detailed cost report?
A
o Elemental Cost Report - reporting on an elemental level, can assist in VM/VE as budgets established elementally
o Building cost report - report for individual buildings across a project of multiple buildings
o Budget holder cost report - reports prepared for
the elements of the construction works under the control of individual budget holders (e.g. designers)
o Stakeholder cost report - cost reports prepared for
individual stakeholders in projects with multiple
stakeholders.
17
Q
What are the components of a cost report?
A
- Executive summary
- Variations (instructions and agreed)
- Variations (instructions but not agreed)
- Anticipated instructions
- Early Warnings
- Unapproved changes
- Cashflow
- Contingency details
- Expenditure against provisional sums
18
Q
How often should cost reports be issued?
A
Usually on a monthly basis but this should be agreed with the Client on their requirements
19
Q
If a client says they aren’t interested in cost reports, what would you do?
A
- Speak with client, reiterate benefits
- Propose an alternative such as a one pager cost report
- If still no, I would still produce a cost report on a monthly basis as part of my due diligence and to update the client as to the project financials / progress
20
Q
If there is no change during the reporting period, would you still need to produce a cost report?
A
- Yes, good practice to always produce an up to date cost report
- Might be some new early warnings which have a potential cost implication
- Will need to update cash flow with latest interim valuation
21
Q
How would you deal with a situation where the cost report indicates the budget will be exceeded?
A
- Inform the client and outline reasons why
- Set up meeting to discuss with team in greater detail to plan a way to deal with the overspend
- Before meeting think of initial ideas to deal with the overspend (areas for value engineering)
22
Q
How did you approach completing your cost report?
A
Discussed Client’s internal reporting procedures to ensure cost report met their requirements
Before issuing cost report, it was presented and discussed with the Client
23
Q
What should a Cost Report generally exclude?
A
- VAT (Construction Cost Report)
- Capital Allowances
- Direct Works
- Works undertaken by statutory undertakers (Construction Cost Report)
- Planning costs
24
Q
What can the Client do if the cost report is showing the project out-turn cost over budget?
A
- Omit works
- Reduce scale of works
- Reduce specification of works
- Increase budget
25
How might you tailor a cost report?
- Understand client's requirements
- Expand on certain sections or simplify others
- One pager
26
How would you report on costs for different procurement routes?
For a traditional or D&B job you would report on the costs with one main contractor whereas CM you would need to report on the various trade packages.
27
Why not use interim valuations to review the current financial position?
- Valuation only shows expenditure to date
- Cost report shows current position and anticipated final account
- Valuations wont take in to account all the costs for which the client is currently liable
- Valuations do not factor in anticipated changes / EWNs
28
What are the typical headings for lump sum contracts?
* contract sum
* adjustment of variable costs
* adjustment of variations
* adjustment of fluctuations
* claims for loss and/or expense; and
* adjustment of risk allowances.
29
What are the typical headings for remeasurable contracts?
* contract sum
* adjustment of remeasurable work
* adjustment of variable costs
* adjustment of variations
* adjustment of fluctuations
* claims for loss and/or expense; and
* adjustment of risk allowances.
30
What are the typical headings for reimbursable contracts?
* contract sum/target cost
* adjustment of reimbursable costs incurred
* forecast of reimbursable costs to be incurred; and
* adjustment of risk allowances.
31
What are the typical headings for management contracts?
* contract sum/target cost
* adjustment of management fee
* adjustment of reimbursable costs incurred
* forecast of reimbursable costs to be incurred; and
* adjustment of risk allowance.
32
What are the typical headings for construction management contracts?
```
• construction management fee
• adjustments to the construction management fee
• adjustments to the trade contracts
- contract sum
- adjustment of variable costs
- adjustment of variations
- adjustment of fluctuations
- claims for loss and / or expense
- adjustment for risk allowances
• adjustment to project risk allowances.
```
33
What can affect outturn construction costs?
- Fixed costs - costs agreed to be paid for known works
- Provisional sums
- Provisional quantities
- Prime costs
- Day works
- Instructions
- Anticipated instructions / early warnings
- Loss & expense
- Fluctuations
- Risk Allowances
34
How is loss and expense dealt with in JCT & NEC cost reporting?
* If JCT, L&E should be dealt with separately in the cost report
* If NEC, L&E is considered a variation
35
Describe the process of change control on one of your projects?
On Standard Chartered Bank:
• Weekly design team meeting where contractor would raise CRF’s
• CRF produced by CA
• I would put a budget price on CRF (liaised with design team when required) and this would be signed by the whole design team & Contractor
• Commercial meeting with Client to review CRF and get sign off
• CRF became CAI
• VO log and contingency updated
• Firm price for CAI provided by contractor
• Negotiation and agreement of CAI
36
Why is change control so important?
* So that cost and programme can be managed
* Help forecast final account
* Give Client time to review costs and instruct changes
37
What should a change request form include?
* Reason for change
* Who requested change
* Consequence of change (time, cost, quality, H&S)
* Who will bear the cost
* Risks associated
* Time by which change must be instructed
* Cost indication
* Supporting information (drawings, specification, emails, quotations)
38
How did you implement a robust change control strategy on one of your projects?
UBS example tbc
39
Why are interim valuations important for both Contractor’s & Clients?
- Client - so client doesnt over pay the contractor
| - Contractor - so the contractor can be paid for the works they have completed in accordance with the contract
40
How do you value change under different contract types?
Refer to notes for table
41
What are the “Valuation Rules”?
All instructions must be evaluated using the valuation rules set out in the contract conditions
Options of pricing based on how closely the varied works resemble the contract documents
1) Pricing document
2) Fair Rates and Prices
3) Dayworks
42
What cost report format is recommended by RICS? What should you adopt?
- There is no format recommended by RICS
- Primarily based on client requirements
- Most professional practices have a preferred or standard format which is used in the absence of specific client requirements.
43
How often should you issue cost reports?
- Cost reports must be regularly updated to inform the
client of likely outturn costs.
- UK construction industry practice is to value work on a monthly basis. It is therefore recommended that cost reports are also updated and published on a monthly basis.
- There may be specific project or client requirements to report costs on a different frequency, e.g. quarterly, but this should be at the specific request of the client.
44
Who do you issue your cost reports to and what are the rules on confidentiality?
- The quantity surveyor must take instruction from the
client as to who the cost report should be distributed
to.
- The information contained in a cost report is
confidential and should always be marked as such and
be prepared, distributed, handled and stored in a
manner to protect its confidentiality
- RICS Ethical Standard - Act with Integrity = respect confidential information of clients and potential clients
45
What are the two broad categories of the budget that could be reported in a cost report?
- Costs of the work; defined by the building contract sum
- Costs of other work - the financial allowance for the other items of work should be agreed with the client, under NRM this allowance is referred to as the post tender estimate.
(RICS recommend QS to obtain or issue written confirmation of the budget and its scope)
46
How do you deal with provisional sums in a cost report?
1) At the outset, include the full amount of each PS in the outturn cost forecast
2) adjust the outturn cost forecast as work is instructed and valued against each PS
3) any OH&P included with PS increases are to be included with the provisional sums
By reporting in this manner, the QS allows the client to react at the earliest opportunity to take action to mitigate cost increases against a PS, or to make use of any cost savings
47
How do you deal with prime cost sums in a cost report?
1) At the outset, include the cost of work which is subject to the inclusion of a prime cost sum as priced in the contract sum
2) As the specification of the prime cost sum becomes defined, the QS should adjust the cost accordingly and then adjust the outturn cost forecast
By reporting in this manner, the QS allows the client to react at the earliest opportunity to take action to mitigate cost increases against a PC, or to make use of any cost savings
48
What is the process of adjusting prime cost sums in a cost report?
1) Calculate the supply only cost of the specified material in the units of the work item that is the subject of the prime cost
2) Subtract the prime cost sum amount from the unit rate of the work item
3) Add the calculated cost of the specified material to the unit rate of the work item
4) Calculate the revised amount (qty x rate)
5) Adjust the outturn cost report to reflect the difference in the cost of the work item
49
How do you deal with dayworks in a cost report?
1) At the outset, include for full amount of daywork allowances as set out in the construction contract
2) QS should maintain a separate daywork account to collate, calculate and record the amount of work undertaken on a daywork basis
3) Dayworks are submitted by the contractor on a daywork sheet that sets out the quantities and the rates of plant, labour and material for each instructed item of work
4) QS review / check of contractors dayworks sheet
5) Update the forecast outturn cost
50
What should the QS check before including the cost of a daywork sheet in a cost report?
1) The daywork sheet has been approved and signed by the clients repreentative
2) Basic rates for plant / labour / materials are in accordance with the rates in the contract
3) OH&P rates correctly applied
4) Arithmetical check
5) The daywork sheet is correctly instructed and the correct valuation rules applied
51
How do you deal with risk allowances in a cost report?
- At the outset of the construction contract the QS should include the full amount of each risk
allowance which is not a fixed price risk allowance
borne by the contractor (these sums are included in the fixed prices).
- As work is instructed which is to be set against the risk allowances, then the quantity surveyor should reduce the risk allowance by the cost of each such variation valued in accordance with the contract.
52
How do you deal with contract instructions in a cost report?
- Valued in accordance with the contract
- Once agreed with the contractor, it should be included within the cost report
- Where a contract instruction has not been agreed between the PQS and the contractor, this should be identified separately
- If there is a variance between the QS / contractors valuations, it is good practice to record this difference of opinion within the cost report
(Despite any difference in opinion, the outturn cost report should be based on the valuation of variations as determined by the QS)
53
How do you deal with anticipated instructions / early warnings in a cost report?
- The QS should identify all anticipated instructions / EWNs and make a suitable cost allowance in the cost report
- The cost report should clearly identify that these are anticipated instructions which have not yet been instructed in accordance with the contract
- Any allowance for OH&P should be included within the valuation of each variation
54
What should the QS review when carrying out a valuation of anticipated instructions / early warnings?
* instruction requests issued by the contractor
* drawing revisions
* specification revisions; and
* programme delays which are at the risk of the client
55
How are professional fees dealt with in a cost report?
- QS should note that contract variations may incur additional professional fees
- Construction cost report should exclude professional fees incurred by those working directly for the client, these are included in a project cost report
- Construction cost report should include those professional fees incurred by those working directly for the contractor
So, if the QS is producing a project cost report, then all fees need to be accounted for but separately in the report (construction cost section vs professional fees section)
56
How do you deal with fluctuations in your cost report?
- Refer to the contract, does it permit adjustments to the contract price for fluctuations?
- If so, the QS will include the amount of the adjustment within the cost report
- The cost report should only include the amount of fluctuation against the value of the work carried out to date; the cost report should include a note that no allowance for future fluctuations have been made
57
How did you deal with loss and expense in your cost report?
As the project was under a JCT form of contract, loss and expense claims are to be made separately from the variations provisions of the contract (unlike NEC where L&E = CE)
- Therefore L&E shown separately in the cost report
- Upon receipt of contractors L&E claim, the QS should assess the information submitted in support of the claim and include an appropriate allowance in the cost report
58
What happens if the QS has not been instructed by the client to determine the amount of L&E due?
- consult the client to understand if another professional has been appointed or whether the matter is to be excluded from the cost report
- Where the client has employed others to ascertain the amount of loss & expense, then the QS should request a cost report on this matter, to include in the cost report.
59
What typical headings should a simple cost report show?
- Authorised expenditure (Contract Sum, Additional authorised expenditure and Total Authorised Expenditure)
- Forecast Expenditure (PS, PCS, PQs, CI, AI, F, L&E, RA, DW)
60
How is VAT dealt with in a cost report?
- Always exclude VAT
| - Include a clear statement that all costs are exclusive of VAT
61
How are capital allowances dealt with in your cost reports?
- Cost reports should not report the impact of capital
allowances.
- The cost report should contain a clear statement that all reported costs are exclusive of capital allowances.
- If the quantity surveyor has been
commissioned by the client to provide advice on
capital allowances, then this advice should be provided separately to the cost report.
62
How are direct works dealt with in your cost reports?
- Should be captured in a separate section of the cost report and include a separate reporting line on the cost report summary
- Should state what direct works have been included in the report
- This clearly identifies the direct works costs to the client which may assist the client if these works are subject to alternative funding
63
How are works undertaken by statutory undertakers dealt with in your cost reports?
- Work that is required to publicly owned assets or assets privately owned by third parties may be subject to different contract conditions than the construction contract works
- QS should ascertain scope and liability for these works
- QS should seek instruction from the client as to whether these costs should be included in the cost report
- Cost report should state what work undertaken by statutory undertakers have been included in the report
64
How are planning costs dealt with in your cost reports?
- The planning consent granted for the construction
project may include requirements for the client to make
payments that are outside of the construction contract
- E.g. Section 106 charges, Community Infrastructure Levy (CIL) etc
- QS should seek instruction from the client as to whether these should be included in the cost report
- Cost report should state what planning costs have been included
65
What should the QS do if the AFC is showing there will be an overspend?
- Omit elements of remaining construction work
that are not immediately critical for the required
functionality of the building.
- 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.
- Reduce the specification of elements of
remaining construction work.
- Advise on the whole life impact and consequential cost impacts of any cost savings
(all of the above should be considered within the constraints of the planning consent to ensure no breach is committed).
66
What should the QS consider regarding the whole life impact of potential cost savings?
* capital cost saving
* renewal cost and frequency impact
* operating cost impact
* maintenance cost impact; and
* end of life cost impact
67
What should the QS consider regarding the consequential cost impacts of the potential cost savings?
```
• programme impact
• other cost element impacts
• statutory compliance impact (planning and building
control)
• asset value impact; and
• funding conditions.
```
68
What should the QS consider when establishing a cost reporting service to the client?
- Reporting frequency
| - Reporting methodology
69
When might weekly cost reporting be appropriate?
- Minor works as the duration may only be a few weeks
- Fast paced projects / programmes
- Client's reporting procedures
70
Why is monthly cost reporting considered the norm?
- Due to the fact that the UK construction industry works on a monthly payment cycle
71
When in the month might you prepare and issue a cost report?
The timing of the production of the cost report should
accord with the availability of updated cost data and is
usually prepared in conjunction with the payment cycle.
It is recommended practice to produce monthly cost
reports even if stage payments are to be made less
frequently.
72
Why might the client change their reporting frequency set out in the consultant's appointment, and how might this be approved?
- The volume of variations might require cost reporting to be carried out at shorter intervals
- QS should advise the client and seek instruction
73
What do RICS recommend in terms of presenting the cost report to the client?
It is recommended that the quantity surveyor meets with the client, in person, to present each cost report and explain cost movements, assumptions, risk and opportunity
74
How did you present a cash flow in your cost report?
- Presented the forecast cash flow against the actual cash flow
- This should be carried out in accordance with the RICS guidance note on cash flow forecasting
75
What is the benefit of progressively agreeing each category of cost with the contractor?
- Final account emerges
| - Cost certainty increases
76
How would you increase control over costs in cost reporting?
- Produce a budget holder cost report
- Identifies all those who retain design control over specific construction elements
- Establishes ownership and responsibility
77
What is a budget holder cost report?
- A cost report expressed as a series of budget holder reports
- Budget holder = those designers who retain control over specific construction elements
E.g. Services = Building Services Engineer
Can be expressed as group elements or elements
78
In a budget holder cost report, what if there is an overlap in design responsibility e.g. sanitaryware
It is recommended that one of the designers is given budget responsibility and should co-ordinate design and cost control.
79
How is a budget holder cost report carried out?
If budget holder cost reporting is deemed appropriate,
the quantity surveyor should arrange for monthly cost
meetings with each budget holder to discuss cost
variances from the agreed budgets. This requirement
should be taken into account when agreeing fees for
the quantity surveying service.
80
Can you use a budget holder cost report instead of a construction or project cost report?
No, the budget holder cost reports are intended to be
supplemental to a construction cost report or project
cost report as they only report costs within a budget
holder’s responsibility.
81
What level of contractor consultation was implemented when producing your cost reports on UBS?
- By reviewing the cost report with the contractor, you are able to ascertain what is being claimed by the contractor and forecast these costs against each category of cost
- The cost report may include this information in addition to the quantity surveyors assessment of each category of costs
- Allows the client to see the degree of agreement and hence the residual risk in outturn cost
82
How did you present your cost reports to your client?
- Set up a meeting to go through either in person or on video call
- Carefully explain each section of the cost report
83
Define Anticipated instructions
Instructions known to be required but not yet issued in accordance with the contract for variations to the contract works.
84
Define Budget
The amount approved or agreed with the client that is available for expenditure on the construction project.
85
Define Contract instructions
Instructions issued in accordance with the contract for variations to the contract works.
86
Define Dayworks
Monetary allowances for the costs of labour, plant and materials which are used to price work where the quantity and specification are unknown and the instruction is likely to be on an adhoc basis
87
Define Direct works
Works undertaken directly by the client.
88
Define Fixed costs
The lump sum payments set out in the contract for specified construction work
89
Define Fluctuations
Monetary adjustments made to the original contract prices to compensate for changes in pricing levels at a macro-economic level by reference to input costs, price indices and price adjustment formulae.
90
Define Loss and expense
Additional costs arising from delays to programme or the disruption to the performance of the contract works.
91
Define Outturn cost
The forecast total construction cost.
92
Define Prime cost sums
The quantities of work whose extent is known but whose specification has yet to be determined.
93
Define Provisional quantities
Where work can be described and given in items in accordance with the applicable measurement rules but the quantity of the work required cannot be accurately determined, an estimate of the quantity is given and identified as an provisional quantity.
94
Define Defined provisional sums
A provisional sum for defined work is a sum provided for work that is not completely designed but for which the following information shall be provided:
– the nature and construction of the work
– a statement of how and where the work is fixed to the building and what other work is to be fixed thereto
– a quantity or quantities that indicate the scope and extent of the works; and
– any specific limitations and the like identified.
Where provisional sums are given for defined work the contractor will be deemed to have made due allowance in programming, planning and pricing preliminaries.
95
Define Undefined provisional sums
A provisional sum for undefined work is a sum provided for work where the information required for defined provisional sums cannot be given. Where provisional sums are given for undefined work the contractor will be deemed not to have made any allowance in programming planning and pricing preliminaries.
96
Define Risk allowances
The monetary allowances, for works or services, whose quantity and specification are unknown and are at the risk of the client.
97
Risk allowance capital
refer to RICS guidance note and confirm here...
98
How do you report loss and expense in your cost report?
- If JCT, loss and expense must be captured seperatley
- The cost report should include the amount being claimed for by the contractor and, if instructed, the amount assessed by the QS (must be a reasonable assessment)
99
In your experience, is it difficult valuing loss and expense claims and how can this be mitigated?
- To make a reasonable assessment, the QS needs all info from the contractor
- The burden of proof for actual loss and expense lies with the contractor, so therefore the QS may not receive a detailed submission until the end of the project
- The QS should make the client aware of the difficulty in reporting a reasonable assessment of loss and expense claims during the presentation of each cost report.
- The cost report should state whether an assessment for loss and/or expense has been included and on what basis is the allowance made.
100
Do you report on liquidated damages / ascertained damages in your cost reports?
- Yes, damages should be reported in the cost report unless you have specific instruction from the client not to
101
Treatment and reporting of tender adjustments
RICS GN, check if this needs to be revised
102
What is the minimum level of service expected from a QS in regards to cash flow forecasting?
- Review clients requirements for cash flow forecasting at the outset of the project
- Produce an initial cash flow forecast at the feasibility stage to allow the client to see their likely obligations
- Update cash flow through design / tender / contract stages
- Monitor actual payments against the cash flow forecast and explain any discrepancies
103
What are the two main types of cash flow forecast?
- Organisational cash flow - the cash flow forecast of a company
- Project cash flow - the cash flow forecast of a particular project or contract
104
What is an organisational cash flow used for?
- to review and analyse the predicted incoming and outgoing cash for a set period of time (usually a year)
- Used for business and resource planning
- Used to analyse financial health of companies
105
What is a project cash flow used for?
- Deals specifically with the payments due under a construction contract
106
What are the potential directions for cash flows?
- From employer to main contractor, consultants, and third parties
- From contractor to sub contractors, designers and suppliers
- From subcontractors to suppliers
107
How do cash flows link to obtaining loans and bank monitoring?
- The employer understands what needs to be paid to the contractor and when
- Therefore the employers bank or funder need to be made aware of these draw-downs to manage the movement funds to meet contractual timescales of payment
- Especially important for developers and clients if they are obtaining debt finance (loans) to fund their projects
108
What is a cash flow?
A tool that shows planned expenditure over a period of time
109
How is a cash flow calculated?
You distribute the total cost of the works over the programme into monthly sums of expenditure. It will include preliminaries and one-off costs
110
What is the importance of a cashflow post contract?
- Allows client to assess contractor’s progress against programme
- Allows the client to understand financial requirements
- Acts as a check against valuations (to assess front loading or delays)
111
How can you calculate a cashflow?
1) Project / Programme duration is plotted against anticipated contract works to be carried out each month
2) Use a cashflow computer programme (e.g. causeway)
3) Obtain cashflow from contractor
112
Why is a cashflow typically an ‘S’ Curve?
- S shows typical rate of expenditure
- Early / late stages = less trades on site
- Middle section = construction activity is highest, most trades on site carrying out higher value packages
113
What are some important things to consider when producing a cashflow?
- Method of payment (monthly valuations, stage payment)
- Sectional completion?
- Advanced payment?
- Holiday periods?
- Materials off site?
- Methods of construction e.g. prefab vs in situ
114
How would you deal with retention in a cash flow?
- check with client on how they want this reported
- Can be included in each month as client is committed to that payment
- Deduct from each monthly payment on cash flow and show it as paid at PC / end of the DLP
115
How would you deal with a provisional sum in a cash flow?
- You should have a good idea of what work it relates to and when in the programme it should be carried out
- Include there
- A cash flow should be recast every 3 months so once the PS is fixed it should be picked up in the recast CF
The risk of each of the provisional sums being over (or under) should be added to the risk register and factored into the risk spend profile.
116
Why would the client request a cash flow?
- Client's finance requirements
- So the client can plan ahead
- Project progress
- Risk management & Early Warning indicator
117
Will a cashflow shape differ depending on the project sector/ type?
- Relatively small jobs could have a 'flatter' cash flow
- Projects with advanced payments or payments upfront to procure materials
- Specialist / complex projects - e.g. nuclear projects, in these instances an understanding of the techniques involved would be needed from the specialist before undertaking the cash flow forecast
118
If the cash flow per month is lower than the forecast, what could it mean?
- Project is behind programme
- Contractor having trouble in procurement of materials / labour
- Works have been omitted
- Contractor may have re-sequenced or updated the programme, moving higher packages later
- Relevant events
- Major subcontractor gone insolvent
- Poor contractor cash flow = insolvency?
- Cash flow forecast inaccuracy
119
What if the cash flow is significantly above the forecast?
- Project is ahead of programme
- Front loading = financial issues
- Resequencing of works, bringing higher value packages forward
- Client request to accelerate the works
- Variations / changes instructed
- Client change - increase size / scope
- Cash flow forecast inaccuracy
120
Should a cash flow be updated or reforecast?
- Good practice to regularly update cash flow (e.g. every 3 months) especially on longer programmes
- Update when any big changes to programme or scope of works occur
121
What is front loading?
* When the price for works to be completed and paid for early in the programme bear a disproportionate cost to the rest of the works or are disproportionately high for the works themselves.
* It might be that the contractor is looking to maximise their payments early to help their cash flow.
122
What might front loading suggest?
• Front loading could suggest that the contractor is in financial difficulty and looking to maximise their early payments to help their cash flow. A client should be advised of this and an open conversation should be had.
123
Once getting in to contract, what happens to the cash flow forecast?
Once getting in to contract and having an agreed programme, the employer will request an updated cash flow based on this
124
How can you assess progress of works on site?
1) Interim valuations
| 2) Review contractors cash flow against forecast cash flow
125
What are the key purposes of a cash flow?
- Obtaining loans - ensuring funders are aware of draw-downs to meet contractual timescales of payment
- To monitor contractor progress
- Managing cash within a business
- Forecasting business performance - useful when appointing a company, can they cope with the works?
- Stakeholder management - e.g. funders, shareholders
- Managing consultants resources - to ensure all resources (staff, training, equipment) can be paid
126
If a company is profitable or successful, does this mean they should have a healthy cash flow?
- Not necessarily, as a company may still be profitable without being able to manage their cash flow effectively
- Contractors may enter administration due to the inability of meeting current liabilities, potentially due to late payments from clients, tying up too much capital in assets, or withdrawal of overdraft facilities from funders
127
What are the various valuation methods and how do these each impact the cash flow?
- Stage payments - pre-agreed values to be paid at pre-determined times, the least accurate method of valuing works
- Milestone payments - a type of stage payment triggered upon completion of a pre-agreed milestone; less accurate predictability of the cash flow
- Activity schedules - NEC option A and C, a form of milestone payment, assessed at regular intervals and payment is made against completed activities, accurate
- Third party certification - a typical valuation of the works carried out to date, the most accurate
128
How could contractual procedures impact cash flow?
- Amount of retention & how this is presented
- Payment mechanism and timescales
- Contract amendments
129
What is the Construction Act 1996 and what did it enforce?
- The right for interim, periodic or stage payments
- Requiring that contracts provide a mechanism to determine payment dates
- Requires the payer to give the payee prior notice of the amount proposed
- The payer may not withhold payment
- Prohibits pay when paid clauses
- Right to adjudication
130
How did you identify the clients requirements in regards to the cash flow?
• Is it for the employer or contractor?
• Should it be produced for the whole
development or just the construction contract?
• Should it show values at valuation date,
certificate date, invoice date or payment date?
• Should gross or net values be used?
• Should it show cumulative payments, monthly
payments or both?
131
Did you make adjustments in your cash flow for cyclical events or other client requirements?
- Holiday periods (easter, christmas)
- School exams for example
- Adverse weather is hard to predict however this should be factored in so seasonal variations are taken in to account
132
What impact did christmas have on your cash flow?
- Public holiday was taken in to account
- 2 week shut down
- Valuations made earlier in December, so payment date is a week or so earlier in January
133
How would you deal with sectional completion or partial possession when producing cash flows?
- Sections included within the contract have their own completion dates and retention amounts / periods, so a separate cash flow should be produced for each section, and each of these are merged together to have an overall cash flow
- The time lag between sections will have an impact on the overall cash flow
134
Should you note the currency of a cash flow?
Yes, a cash flow must clearly state the currency of the contract
135
Did you factor in risk allowances in to your cash flow?
Typically, yes, the cash flow produced should represent the likely spend on variations based on a priced risk register (note to client that programme impacts aren't factored in)
To feed the risk spend in to the overall project cash flow, you apply the 'close out dates' of each risk on the register and these can be used as the assumed expenditure points for each risk
However, you can just say the client requested this was excluded from the cash flow although I advised of the benefits of including risk allowances in the cash flow
136
What costs will a full development cash flow require to be presented?
- Consultants fees
- Direct contracts - FF&E, enabling works, demo
- VAT and other taxes
- Internal costs and transfers
137
How did you include for materials on site in your cash flow?
- Included in cash flow on the assumption that materials were brought on to site as and when required
- Contractor should not be paid in advance for bringing materials on site way in advance unless this was a requirement due to issues of procurement etc
138
How did you include for materials off site in your cash flow?
- Materials off site should be included in the cash flow forecast e.g. bathroom pods payment may be due a lot earlier than bathrooms constructed in situ
139
What effect could delays have on a cash flow?
- Delays to the contract will affect the timing and amount of payments
- A significant delay may impact the project in that re-sequencing of the works is required
140
How can a cash flow be represented?
- cumulative (line, S curve)
| - periodic (includes bar charts)
141
How do you deal with loss and expense claims in your cash flow forecast?
- As soon as it becomes apparent that a claim may be
made by the contractor, the employer should be
made aware that the accuracy of the cash flow
forecast may be compromised
- Assess the likely settlement of the claim (best-case and worst-case) so the client understands their potential liability
- Update cash flow forecast
142
How do you represent liquidated damages in a cash flow forecast?
- Clients should be advised not to include LDs in a cash flow forecast until they have been formally agreed
- As liquidated damages are meant to be a genuine pre-estimate of likely loss then there should be no real ‘saving’ to the employer, simply a transfer of liability from one source to another.
- This will affect the construction cash flow but not necessarily the overall cash flow position.
143
Why might the works be re-sequenced?
```
• acceleration
• late procurement of sub-contractors or
suppliers – programme having to be updated
once appointment made
• change of subcontractor or supplier
• to accommodate employer’s variations
• site conditions encountered
• adverse weather
• insolvency of subcontractor or supplier
```
144
How could VAT be represented in your cash flow forecasts?
- Ask client if this is a requirement
- VAT usually paid for at the time of payment to the contractor
- Difficulty can arise when paying zero VAT rate, and in these instances VAT is included to the invoice and paid by the employer but claimed back at a later date from HMRC
- This impacts the employers cash flow as they are without funds for a period of time until VAT is claimed back, this can cause a dip in the cash flow towards the end of the project once claimed back
- Changes in VAT legislation need to be considered
145
How would a traditional procurement route impact the cash flow forecast you produce?
The design fees are kept separate from the construction costs
146
How would a design and build procurement route impact the cash flow forecast you produce?
The construction costs would include an element of design fees
147
How would a management procurement route impact the cash flow forecast you produce?
As the contractual relationships are between the client / management contractor and subcontractors, the cash flow forecast will be an accumulation of mini cash flow forecasts
Client must consider:
- Differing payment terms for each sub-contract
- Payment dates will fall throughout the month
- Inclusion of management contractor fee / construction management fee
- VAT applications may be different
148
Why is it important to understand the basis of an S-curve formula?
- so you can communicate the basis of the S curve to the client
Revision Notes
flashcards
Decks in class (10)
# Cards
-
Conflict Avoidance And Dispute Resolution Procedures24
-
Management of Risk63
-
Cost Reporting148
-
Contract Practice86
-
Value Management & Value Engineering24
-
Life Cycle and Whole life Costing0
-
Accounting Principles and Procedures56
-
Business Planning0
-
Design Economics and Cost Planning115
-
Quantification and Costing7
