Project Finance Flashcards
Guidance on cost reporting
RICS Guidance Note on Cost Reporting 1st Edition 2015
How do you communicate the financial status of a project to the Client?
Through monthly cost reports and valuations
What are the contents of a cost report?
a. Cover sheet
b. Issue sheet/QA
c. Contents page
d. Executive summary
e. Basis and assumptions
f. Exclusions
g. Contract summary
h. Provisional sums
i. Variations instructed
j. Anticipated variations
k. Valuation summary
l. Cashflow
m. Back cover
n. Summary sheet/appendices
Why do we use a cost report?
An explanation of each section of the cost report and how this will impact the cost to the client will give
them a better understanding of the costs of the project to date and movements in the period. This in
turn leads to better decision making in regards to scope, specification and programme. This
increases the likelihood of controlling costs within budget.
How should a cost report be communicated?
a. Should be presented by the Quantity Surveyor in person
b. Presenting solely by email or post should be avoided
How is the cost report used in informing decision making?
a. Shows the forecast final cost of the project
b. Identifies contractor progress
c. Can highlight any issues with the contractor
d. Can be used to adjust client held contingency
Why do we use a forecast final cost?
a. This allows the client to see what the potential outturn cost of the project is so that the client can make
the funds available if necessary
How do you ensure the forecast final cost is accurate?
a. By agreeing variations when possible and the use of a rolling final account for the project
What is a rolling final account?
a. The process of agreeing variations as the project progresses
What financial and narrative information did you provide the client?
a. Financial – provisional sum expenditure, variation value, valuation amount, payment due
b. Narrative – actual cashflow progress against forecast
How would you produce a cashflow?
b. At an early stage:
i. S-curve
ii. Lower levels of expenditure at the start and end (site set up and reduced number of trades
etc. )
iii. Used from a formula, driven by previous, similar schemes
iv. Time and cost curve
v. From this, monthly/period expenditure can be forecast
c. At a later stage (more detailed):
i. Project programme – start and end date
ii. Adjustment for cyclical events and shutdowns
iii. Public holidays
iv. Retention percentage
v. Rectification period
vi. Certification period
vii. Sectional completion and partial possession
viii. Currency
ix. Variations
x. Fees
xi. PS expenditure
xii. Advanced payments
xiii. Materials on/off site
d. Clearly state basis, assumptions, exclusions and dates on all cashflows
e. Split the contract sum down in line with the current programme, usually by package
Why might works on site be below a cashflow?
a. Site conditions and adverse weather
b. Re-sequencing of works since the contract cashflow was produced
c. Materials off site not being claimed for
d. Slower than anticipated progress
e. Supply chain issues
f. Cashflow not being accurate initially
Why might works on site be above a cashflow?
a. Front loading
b. Working ahead of programme
c. Resequencing
d. Materials being stockpiled/claimed for early
e. Acceleration
f. Over claiming due to financial issues with a contractor/sub contractor
g. Cashflow not being accurate initially
How would you cost a change?
a. Initial design sketch and specification was issued by the CA
b. Contacted suppliers of the bespoke items for an idea of cost
c. Once the drawings were produced:
i. Understood the abortive works that were required
ii. Measured the new works
iii. Priced both add/omit costs
d. This gave an E/O cost for the change
e. £175k – mainly driven from feature joinery unit and headboard
What are the different types of provisional sums?
a. Defined:
i. Works that are not completely designed
ii. Has been allowed for in programme (prelims)
b. Undefined:
i. Works that have not been defined to a level enough to allow for pricing into programme to be
made
What is change control?
a. Administrative process that implements the contract mechanisms for instructing change
b. Must adhere to the contract terms for notification and approval be the identified parties
c. Should be a streamlined process
Why is change control important?
a. Critical part of a well audited project
b. All changes should go through this process so that the employer feels that they are able to make an
informed decision
c. Prevents the contractor going ahead and acting on changes that they believe they have been
instructed to do but later find out the employer didn’t want them
How do JCT contracts define change?
a. The alteration or modification of the design, quality or quantity of the works
How should a variation be valued?
a. All variations should be sanctioned in writing
b. Should be the amount agreed by the employer and contractor
c. Where not agreed, the valuation rules apply – Clauses 5.6-5.10
d. Variation quotation:
i. Must be produced by the contractor unless, within 7 days of receipt of the instruction they
disagree with the application of procedure
ii. Contractor has the right be present at measurement
e. Valuation rules:
i. Measurable work:
You mentioned that you presented the cost report to the client and their accountants – isn’t there a risk with
this?
a. No, the Client’s accountants formed part of the Client team and as such, advising them was advising
the Client
What is a change under the JCT SBC?
a. The alteration or modification of the design, quantity or quality of the works
b. The imposition by the employer of any additional obligations or restrictions, specifically access to site
c. How is it valued?
i. The employer and contractor agree the value of a variation
ii. Parties exchange information and calculation
iii. Where the value hasn’t been agreed, the variation is to be valued in line with the valuation
rules
d. Valuation rules:
i. Reflect a sliding scale of how closely the varied work resembles what is in the contract
ii. Rules:
1. Where work is of a similar character, works can be valued in line with contract rates,
including a fair allowance for changes in prelims etc.
2. Fair rates and prices – where it is not of a similar character. No definitive method
3. Daywork:
a. Records need to be prepared by the contractor recording labour, plant and
materials used
b. These are then submitted to the CA for review
c. Add on OHP etc.
d. Examples includes opening up for inspections, repair etc, not major works
4. Contractor quotations:
a. Set out in schedule 2
b. Contractor has right to refuse, if instructed to do so, the QS will value in line
with the valuation rules
c. Conditions:
i. Sufficient information must be provided to enable the preparation of a
quotation
ii. Prescriptive time periods for preparation, review and acceptance
iii. The quotation must include the value of the varied work and effects
on any other work
iv. Supporting calculations should be submitted with appropriate
reference to the valuation rules
v. Any requirements for an EOT
vi. Any amounts to be paid in lieu of ascertaining loss and expense
vii. Method statement and resource requirements
Heads of claim under loss and expense?
a. Prolongation costs (time related)
b. General disruption
c. Finance charges
d. Loss of profit
e. Wasted management time
What is the purpose of a change control procedure?
a. Alert all parties to the existence and nature of any potential change
b. Provides a structured means of reporting the potential implications of the change on costs,
programme and other criteria
c. Provide a basis for the decision to approve or reject the proposed change and inform the adjustment
of the budget, programme and other criteria
d. Trigger the issue of an EAI
What is the difference between change control and design development?
a. Change control is a deviation from the employers requirements and contractors proposals
b. Design development provides the detail required to facilitate construction based upon the design
information included in the contract documents
Talk me through the change control procedure on one of your projects:
a. Greenwich – set out within the Project Execution Plan
b. Change request by employer:
i. CRF form:
1. Description of the change
2. Reason for change
3. Provides sufficient information to allow for costing of the change
4. Issued to the contractor, CM and CMT
ii. Within 14 days of receipt by contractor, they are to provide:
1. Impact on time
2. Impact on cost
3. Impact on design
iii. Employer has 14 days to review and decide if they wish to proceed
iv. If rejected, they re-draft or stop
c. Change request by the contractor:
i. Same timescales but instigated by the contractor
d. All put on change control register
What is on a change control register?
a. CFF nr
b. Date raised
c. Date to be done by
d. Description
e. Cost
f. Programme
g. Comments
How are costs kept up to date?
a. Contractor submits a weekly dashboard to the client
b. Covers:
i. Health and safety
ii. Project risks
iii. Programme review
iv. Change control
v. Cash flow
Talk me through the process of agreeing design submissions and CDP on your project:
a. Status A:
i. Proceed with no comments
b. Status B:
i. Proceed with minor comments
c. Status C:
i. Not approved
d. 14 day design review period
How do you ensure effective control of costs on a project?
- Proactive risk and contingency management
- Implementing a robust change control process
- Management of provisional sums within budget
- Regular cost reporting which is also forward looking
- Rolling final account with closure process for financial impact of change
Types of Contingency
Design Contingency – percentage of the concept budget allowed for programmatic and design changes over the course of the design process. This percentage should diminish as design goes from concept to contract document stage.
Construction Contingency – Percentage of the concept budget allowed for unforeseeable conditions encountered during the construction phase
Project Contingency – Design Contingency + Construction Contingency
How is contingency calculated?
- Calculated as a % for design and a % for construction. i.e. 5% for design and 8% for construction
- Benchmarked against other similar schemes at early stage estimating
- Priced from a risk register by identifying cost effects in terms of time, prelims, labour, OH&P, materials etc.
Change Control Process
A robust change management process is vital to ensure the financial success.
With any major construction project, it is important to establish the change control process at an early point within the feasibility stage. This process is summarised below:
- Establish the change control strategy
- Define the change control process
- Document the process as a project-specific procedure
- Establish a change control log
- Monitor and log changes
- Agree with the client or supplier as to whether the changes logged are acceptable or should be rejected
- Produce a cost reconciliation statement, summarising where the changes are included
- Report overall costs with agreed changes
The primary tool we use in respect to this is Early Warning System. This system facilitates the timeous recording of all elements of change and potential change in a consolidated single location, thereby allowing the extent of change to be easily identified at any given moment of time.
All those involved in the project should have the ability to flag yp potential change, in order to allow the project team to assess the likely outcome. To do so, a formal change request should be raised. The change request template should include, as a minimum, the following sections:
- The change request number
- The date raised
- A description of the change
- The cost and time implications
- Justification of the change
- An approved or authorised section
- A note of the type of change
- A distribution section
Regular meetings should be held to review any changes raised in that week / month. A decision can be made as to whether to approve each change as having:
- A financial impact
- No financial impact
What is a Cost Reconciliation Statement
The cost reconciliation statement should be sufficiently detailed to explain all significant movements of money during the course of the contract, including the funding source for changes. The software solution chosen to manage the change will influence the way the budgets are maintained. All records should be saved electronically, in order to establish an audit trail for change
Purpose of Financial Reporting
The purpose of financial reporting is to aid in the overall financial management of a project, by providing a profile of expected costs and an indication of when they will be incurred.
An accurate financial reporting system will provide the client with the information needed to ensure that the project remains affordable and that funds are available at the right time. It will compare the latest estimated out-turn cost with the previously approved budget and will ensure that the budget is not exceeded without justification .
Why would a cash flow be below the target cash flow?
Why would a cash flow be below the target cash flow?
- Site conditions
- Adverse weather
- Re-sequencing of works (perhaps due to procurement of sub-contractor)
- Materials being stored off site (and not claimed for)
- Project progressing slower than anticipated
- Materials not being delivered on time
- Cash flow not being accurate in the first place
How is a Provisional Sum Expended?
The architect / CA has to issue an Architects Instruction for its instruction
How are Provisional Sums dealt with in Final Account?
The provisional sums are included in the contract and are deducted and the actual substituted.
The provisional sum is omitted from the adjusted Contract Sum and the value of the variation added back. A provisional sum is therefore only an allowance for work which may or may not be carried out.
What is a Final Account?
Settling a final account can be a long drawn out process, bringing together all financial aspects of the contract. The goal is, of course, to agree a fair valuation of the works undertaken by the contractor and enable the contract administrator to issue the final certificate, thereby concluding the project works.
Reaching an agreement between parties may involve much negotiation and the final accounts prepared from these should be able to withstand the most stringent financial audit as it is legally binding.
Once agreed, the final accounts will necessitate the financial settlement with the contractor and the issuing of a final certificate.
