Project Finance

Question 1

How would you create a cashflow forecast?

Answer 1

• 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 2

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 2

• 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 3

What is the benefit of a cashflow forecast?

Answer 3

• 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 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 4

What would you include within a financial report?

Answer 4

• I would typically look to include reference to:
  o a) Contract sum total.
  o b) The value of Instructed variations.
  o c) The value of potential future variations.
  o d) Ongoing claims.
  o e) Provisional Sum Adjustments.
  o e) The anticipated final account total.
  o f) The total of certified payments.

Question 5

What is the purpose of a financial report?

Answer 5

• 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.

Question 6

What are variations?

Answer 6

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

Question 7

Why might a variation arise?

Answer 7

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

Question 8

What form must architect’s instructions take?

Answer 8

• 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 9

What about oral instructions?

Answer 9

• 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 10

Can the contractor object to a variation?

Answer 10

• 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 11

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

Answer 11

• 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 Contractorstill 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 12

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

Answer 12

• 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 13

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

Answer 13

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 14

What costs does the schedule 2 quotation contain?

Answer 14

• 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 15

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

Answer 15

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

Question 16

What are the valuation rules under JCT Forms of Contract?

Answer 16

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 17

What about non-measurable work?

Answer 17

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

Question 18

What is a star rate?

Answer 18

• 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 19

What are ‘fair rates and prices’?

Answer 19

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

Question 20

What are dayworks?

Answer 20

• 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 21

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

Answer 21

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 22

What information is necessary to be able to assess dayworks?

Answer 22

• 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 23

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

Answer 23

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

Question 24

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

Answer 24

• 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 25

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

Answer 25

• 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 26

What is quantum meruit?

Answer 26

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

Question 27

Give an example of where quantum merit might be used

Answer 27

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 28

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

Answer 28

• 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 29

What are the relevant matters?

Answer 29

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 30

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

Answer 30

• It should be the actual loss incurred by the contractor.