4. Commercial Management Level 1

Question 1

What is a Cost Value Reconciliation?

Answer 1

• Cost value reconciliation is used to measure the projects ongoings costs and income against budgeted
  values at the start of the project.
• This allows the profitability of the project to be determined at a given point in time throughout the
  project lifecycle.

Question 2

How would you prepare a Cost Value Reconciliation?

Answer 2

1. I would determine the cumulative costs and value of the project to a set given point in time.
2. The cut-off date may coincide with an agreed accounting period or month end period which I would establish with the project management team.
3. I would carry out cost checks to ensure that:-
   o No high value fluctuations in costs or value are expected during the reporting period.
   o That all work in progress is accounted for and the reported values are inline with
   subcontractor’s measures and liabilities.
   o Risk and contingency items have been included for items not yet agreed.
   o When all costs and value items are finalised I would then determine the current profitability of
   the project and compare this against the original budgeted values.

Question 3

How do you ensure your Cost Value Reconciliation is accurate and up to date?

Answer 3

• The forecast revenue on variations is only reported when variation items are agreed.
• A reduced percentage profit is assumed if variations are paid on account or partly agreed.
• Contingency items are retained with the CVR for any unknown or pending cost items.
• I regularly arrange meetings to conclude the agreement of variations for each of the sub-contract
  packages so a backlog of items pending does not form.

Question 4

What is a Cash Flow Analysis?

Answer 4

• A cash flow analysis highlights the movement of income and expenditure into and out of a business
  over time.
• If the level expenditure going out of the company is higher than the income, the cash flow is classed as cash negative and may highlight the need to make additional funding arrangements.

Question 5

How would you compile a cash flow?

Answer 5

• To calculate the project incomes I would look to utilise the agreed payment schedule set out under the
  terms of the contract, the programme and the BoQ or Activity schedule.
• I would then accurately profile when the income is anticipated to be received and plot these dates on the cash flow forecast.
• If this information is not available it may be possible to use information cash flow analysis software to plot a typical S-curve.
• For the outgoings I would liaise with the supply chain to gain an insight of when invoices and payments are expected to become due taking extra care to account for any long lead items.

Question 6

Please explain your understanding of the term ‘Accruals’?

Answer 6

• Accruals are made within the financial accounting systems that are operated to take into account anticipated invoices that are not yet paid.
• The accrual can be calculated as the difference in the total liability that is due to a sub-contractor or supplier against the amount already paid to date.
• The accruals are retained as anticipated cash outflows not yet incurred and in theory the older the accruals are, the less likely they are to paid and may be released at a given point in time.

Question 7

What is Company Overhead?

Answer 7

• Company overheads are ongoing expenses incurred as a result of the day-to-day operations of the
  business.
• They are items that need to be incurred in order to provide critical support to the revenue generating
  arms of the company for example factory rental costs, heating and lighting.
• They are classified as fixed overheads which do not change for example monthly rental costs and
  variable overheads which do change depending on business activity for example heating costs.

Question 8

What is the purpose of maintaining cumulative accounts and payment procedures?

Answer 8

• Reporting, invoicing and processing of payments is done on a cumulative basis to ensure the full extent
  of the financial information is accounted for.
• If this is not adopted and invoices are made ‘in the period’ mistakes can be made and double counting
  may take place.
• It is much safer to work on a cumulative basis as the risk of double counting or missing invoices is
  reduced.

Question 9

Please explain your understanding of the term ‘Earned Value Analysis’?

Answer 9

• Earned Value Analysis is a technique used to forecast the final financial position of a project.
• The technique compares the current progress achieved to date with the planned progress at a given point in time.
• It also considers the current costs incurred with planned costs over the same time period.
• The EVA determines what value of work would have been achieved and what costs would have been incurred if the works had been on programme to forecast future performance and to highlight potential cost overspends and time overruns.