Project Finance

Question 1

What has the rate of inflation in UK construction been over the last 3 years?

Answer 1

2022: peaked at10.4%
2023: slowed to 4.6%
2024: 2.6%

Now at 2.5% and expected to rise to 3.8%

Question 2

What is a cashflow?

Answer 2

A financial planning tool that predicts the flow of cash in and out of a project.
Typically shown month-by-month and for the duration of the project.

Question 3

How can a cashflow help clients during the construction period?

Answer 3

• It allows the client to understand their financial commitment over the construction period. Can help them understand if any external funding will be required.
• Acts as a check against valuations and can either signify financial difficulties or issues with programme.

Question 4

How would you produce a cashflow?

Answer 4

Using a cash flow projection or forecast S-Curve tool, ensuring the the parameters and past data the s-curve is based on is similar.

If possible I would use the total cost of the works and a detailed programme to provide a more accurate version.

Question 5

In your submission you talk around assessing variations and reporting on the cost. If you had a discrepancy in the valuation of a variation with a contractor, what sum would you include within your cost report?

Answer 5

My assessment of the valuation would be included within the cost plan however I would include narrative around the disagreement as a highlight to make the client aware of what is happening.

Question 6

What factors can affect a cashflow?

Answer 6

• Retention
• Sectional completion
• Advance payments
• Early material orders
• Defects liability period
• Materials on and off site
• Variations
• Provisional Sums

Question 7

Can you tell me what the importance of a cashflow is?

Answer 7

Allows client to understand financial commitment over the duration of the project

Used as a check against valuations and give early indication of financial difficulties

Estimate when extending funding is required

Question 8

What is the correct contractual procedure for managing provisional sums within the contract?

Answer 8

EAI/CAl issued to expend the provisional sum, this is then omitted from the contract and the actual cost added back into the contract to form part of the agreed final sum.

Question 9

Can you give me an example of a defined provisional sum you have included in a contract recently?

Answer 9

• Asbestos removal
• Firestopping
• Removal & disposal of FF&E
• Installation of kitchen

Question 10

How are variations managed in terms of cost under the contract?

Answer 10

The Valuation Rules.
Any additional or substituted works should have consistent values with similar items already included in the contract sum.
If no similar items are included in the contract sum, a fair and reasonable valuation should be made.

Once sum is agreed and Employer’s Agent Instruction has been issued, the contract sum is adjusted to include the additional sum.

Question 11

Outline a typical change control process that you would implement on your projects?

Answer 11

• Ensure that the process is included within contract prelims.
• If contractor wishes to propose a change to the Employer’s Requirements, it should issue a change request, accompanied by all supporting design and cost information.
• This will then be reviewed by the EA and the QS before seeking approval or rejection from the Employer.
• On agreement of design and cost proposals, the EA will then issue an Employer’s Agent Instruction.
• Contract sum will then be adjusted to incorporate additional sum.

Question 12

What might it suggest if the contractor’s application for payments are higher than their submitted cash flow?

Answer 12

• They have cashflow issues
• There’s been an advance material order (materials on site)
• They are ahead of programme
• Variations
• Re-sequencing
• Contractor accelerating the works (to save on prelims)

Question 13

What might it suggest if the contractor’s application for payments are lower than their submitted cash flow?

Answer 13

• Adverse weather
• Behind programme
• Delay to materials being delivered
• Materials stored off site (and not claimed for)
• Re-sequencing of works

Question 14

Are there any risk factors inherent in construction cask flow forecasting?

Answer 14

• Changes in design spec (sequencing and value)
• Inflation (value of money)
• Interest & exchange rates
• Complexities of the building
• Estimating error

Question 15

What is retention?

Answer 15

Sum of money held by the Employer as a safeguard for defective or non-conforming work or materials provided by the Contractor.

Also latent defects and possible failure to complete the project.

Question 16

Is there any RICS guidance or project finance?

Answer 16

RICS Guidance documents on:

• Interim valuations and payment
• Retention
• Cash flow forecasting

Question 17

What is a contingency?

Answer 17

A provision made for unexpected events or uncertainties