Commercial Management

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

• I would determine the cumulative costs and value of the project to a set given point in time.
• The cut-off date may coincide with an agreed accounting period or month end period which I would
  establish with the project management team.
• 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.
• The cash flow analysis will typically be based on a number of factors such as:-
  o Under or over valuation of works complete and the impact this may have on cash flow.
  o The contractual payment process so that the incoming payments can be accurately profiled.
  o Month end dates for payments of salaries, leases and other fixed costs.
  o Credit arrangements with subcontractors and suppliers.
• It is important for contracting organisations to maintain positive cashflow where possible in order to
  avoid the need for expensive borrowing 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

Please explain your understanding of the term ‘Contra Charge’?

Answer 7

• Contra charges are issued as a deduction to a sub-contractors works package as a result of a cost item
  that has been incurred due to their activity on site.
• For example a contra charge could be issued due to damage of property or equipment due to a
  subcontractor’s failure to put in place adequate protection of their working area.

Question 8

What processes would you put in place when making a contra charge?

Answer 8

• I would attach supporting photographs, invoices and site records to the contra charge.
• Any replacement materials or attendances provided to assist the subcontractor would also be recorded.
• I would issue an early warning to the subcontractor’s commercial representative to make them aware of
  the contra charges being made and provide then with an opportunity to rectify the damages if possible.
• I would try to ensure the contra charge is agreed with the sub-contractor prior to making adjustments
  to any payment certificates or running final accounts.
• When issuing subsequent payment certificates, pay less notices or final account adjustments, I would
  clearly set out the contra charges as an individual line item for transparency with supporting
  substantiation attached.

Question 9

What is a Risk and Opportunity Register?

Answer 9

• A risk and opportunity register summaries the potential or hypothesised risks that are specific to the
  project.
• Whilst the format and content may vary depending on the nature of the project, its size and value, they
  will typically include an assessment of the likelihood of each risk and the potential impact it may have
  on the project if it is realised.

Question 10

What does a Risk and Opportunity Register look like?

Answer 10

• The register will typically be compiled in a tabulated form with columns provided for:-
  o The name and description of the risk item.
  o An explanation of how the risk will impact the project.
  o The likelihood of the risk occurring.
  o A risk grade based on the probability multiplied by the impact.
  o A risk classification of either High, Medium or Low.
  o A summary of mitigation actions to be taken.
  o The risk owner.
  o The potential cost of the risk.
  o A deadline date of when the risk is to be closed.

Question 11

What is Company Overhead?

Answer 11

• 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 12

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

Answer 12

• 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 13

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

Answer 13

• 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.

Question 14

What Contract Administration Controls do you implement?

Answer 14

• Utilisation of payment and valuation schedules to ensure all parties are aware of key dates in accordance
  with the contract and Housing Grants Construction and Regeneration Act.
• Running final accounts to ensure each party is informed of any adjustments, claims and variations.
• Regular review of revised drawings and contractor’s instruction to ensure all variation and claims items
  are captured.

Question 15

What procedures do you adopt for supply chain and sub-contractor
management?

Answer 15

• My company maintains a database of potential suppliers that allows categorisation of specific trades
  with a current status of either pending approval, authorised or not to be used.
• These categories are based on previous performance in combination with undertaking regular checks
  on items such as insurance certificates being provided, credit checks, maintenance of accident records
  and obtaining copies of quality management accreditations.
• Performance checks will include items such as Health & Safety track record, quality reviews, remedial
  work requirements, programme delays, commercial and contract administration performance.

Question 16

What procedures do you undertake to resolve sub-contract final
accounts?

Answer 16

• Throughout the project I would maintain a running final account of the sub-contract package and look
  to agree any variation items with the sub-contractor on an ongoing basis.
• Having the running final account in place in my experience has supported with reaching a swift final
  account agreement.
• Prior to arranging the final account meeting I would collate the following items to support the
  discussion:-
  o The subcontract order agreement including the BoQ or pricing schedule.
  o The final account submission or final subcontract application for payment.
  o Details of all variations or changes with full substantiation
  o Supporting quantities or take-offs for any re-measurable items.
• During the meeting I would run through the agreed and any pending adjustments with the subcontractor.
• Following discussions and agreement during the meeting I would circulate the final account statement
  for signature by both parties and hold this on file.

Question 17

Could you please provide some examples of mitigation strategies you
could implement if the project was behind programme?

Answer 17

• With input from the project manager, I would review team the current status of the programme and
  consider our options.
• This could include selection of different construction methodologies or programme sequencing.
• It may also be possible to explore the option of reviewing staffing and resource levels to gain further
  efficiencies.
• Out of hours, weekend working or additional resources may also be utilised to bring current progress
  back in line with programme requirements.
• Programme sequencing or acceleration options would need to be balanced against the additional costs
  that are likely to be incurred.
• It may be the case that programme float is sufficient to absorb the delay that has been forecast.
• I would also look to determine the origin of the delay to establish whether an extension of time or
  acceleration claim is applicable.

Question 18

Could you please provide some examples of mitigation strategies you
could implement to safe guard against material price increases?

Answer 18

• We have placed early orders with oursupply chain to safeguard against potential price increases.
• Another strategy we have implemented has been to insert clauses within our current contracts that
  offer a fixed price period. In the event that the project is postponed, the contract then contains a
  mechanism to claim a material price supplement from the client.

Question 19

Please provide some examples of commercial decisions you have
taken to improve the cost efficiencies of your projects?

Answer 19

• On an industrial scheme I negotiated with a local land owner who agreed to dispose the inert excavated
  topsoil which was more advantageous than using local earthwork removal subcontractors.
• The local landowner was also able to provide access across their land to a local water source which was
  much more efficient than using imported water and bowsers on site.
• I have also undertaken comparisons between the outright purchase of plant and equipment vs. short
  term hire to realise cost efficiencies for my projects.
• I have also recently undertaken a comparison between the use of temporary power leasing of
  generators and fuel against the use of a permanent local power sources to realise cost efficiencies.