Project Finance, Design Economics & Cost Planning,Quantification & Costing.

Question 1

What are the typical responsibilities of the cost manager on a construction project?

Answer 1

Subject to the scope of service, typical responsibilities may include:
• Manage risk allowance expenditure.
• Initiate action to avoid overspending.
• Prepare pricing documents for tendering.
• Evaluate and analyse tender bids.
• Prepare interim valuations.
• Value variations and compensation events.
• Assess the contractor’s financial claims.
• Negotiate and agree final accounts.
• Issue financial reports or statements.
• Provide initial cost advice on capital investment costs.
• Produce cost estimates and cost plans.
• Provide advice on whole life costs.
• Produce cost reports, estimates, and forecasts.
• Prepare and maintain the cash flow forecast.

Question 2

What is the structure of NRM 1?

Answer 2

• 1: General introduction.
• 2: Measurement rules for order of cost estimating.
• 3: Measurement rules for cost planning.
• 4: Tabulated rules of measurement for elemental cost planning.

Question 3

What is the structure of NRM 2?

Answer 3

1: General introduction.
• 2: Detailed measurement of building works.
• 3: Rules of measurement for building works.

Question 4

What is the structure of NRM 3?

Answer 4

1: General introduction.
• 2: Measurement rules for building maintenance works.
• 3: Measurement rules for order of cost estimating.
• 4: Cost planning of R and M works.
• 5: Calculation of annualised costs for R and M works.
• 6: Elemental cost planning.

Question 5

How does NRM define the ‘cost limit’ for the project?

Answer 5

NRM 1 definition: The maximum expenditure the client is prepared to make in relation to the completed building. Includes construction costs, the cost of professional services, certain other project costs, items required post completion and during its operation, and risk allowances.

Question 6

How does NRM define the ‘base cost estimate’ for the project?

Answer 6

NRM 1 definition: An evolving estimate of known factors without any allowances for risk and uncertainty, or an element of inflation. The base cost estimate is the sum of the works cost estimate, the project and design team fees estimate, and the other development and project costs estimate.

Question 7

What is an ‘order of cost estimate’?

Answer 7

NRM 1 definition: An estimate based on benchmark data for a similar type of project based on the client’s strategic definition or initial brief. Its purpose is to establish the affordability of a proposed development for a client. It takes place prior to the preparation of a full set of working drawings or bills of quantities and forms the initial build-up to the cost planning process. Order of cost estimates are a method of cost prediction.

Question 8

Which RIBA Stage is the order of cost estimate typically produced?

Answer 8

RIBA Stage 1 – Preparation and Briefing.

Question 9

What are the RIBA Stages of Work?

Answer 9

• Stage 0: Strategic Definition.
• Stage 1: Preparation and Briefing.
• Stage 2: Concept Design.
• Stage 3: Spatial Coordination.
• Stage 4: Technical Design.
• Stage 5: Manufacturing and Construction.
• Stage 6: Handover.
• Stage 7: Use

Question 10

Can you explain the term ‘cost per functional unit’?

Answer 10

NRM 1 definition: The unit rate that, when multiplied by the number of functional units, gives the total building works estimate (i.e. works cost estimate minus the main contractor’s preliminaries and the main contractor’s overheads and profit). The total recommended cost limit (i.e. the cost limit, including inflation) can also be expressed as a cost per functional unit when reporting costs.

Question 11

What typical information should accompany an order of cost estimate?

Answer 11

• Covering letter.
• Executive summary.
• Cost limit.
• Specification notes.
• Assumptions.
• Exclusions.
• Drawings and other information upon which the estimate is based.
• A schedule of value-enhancing options.
• Risk register.
• Cash flow information

Question 12

What is a cost plan?

Answer 12

NRM1 definition: In the context of cost prediction, a cost plan is ‘an estimate based on a specific design’.
• A statement showing an apportionment of an estimate of or an agreed budget between cost headings.
• Cost planning is a method of cost prediction.

Question 13

Do you need a programme to complete the cost plan?

Answer 13

Preliminaries are typically presented as a weekly rate in developed cost plans; therefore, a programme or at least some high-level dates will be required.
• The key information usually required is:
• Design and tendering periods.
• Start on site date.
• Construction period.
• Completion date.

Question 14

What is a cost plan risk allowance?

Answer 14

NRM 1 definition: A quantitative allowance set aside as a precaution against risks and future requirements to allow for uncertainty of outcome.

Question 15

When calculating the total fee estimate for a project, what component fees might be included?

Answer 15

Consultant fees:
• Project and design team.
• Other specialist consultants.
• Survey fees.

Contractor fees:
• Management and staff.
• Specialist support staff.
• Contractor’s design management fees.
• Contractor design team fees (if applicable).
• Framework fees (if applicable).

Others:
• Planning permission application fees.
• Statutory undertaker fees.

Question 16

What benefit does the client get out of accurate cost planning?

Answer 16

• The cost plan confirms to the client that the scheme is affordable (or not).
• Cost planning places the client in an informed position to make commercial decisions.
• The cost plan can act as a value management tool to ensure the client gets a building that not only meets their needs but also represents best value

Question 17

How would you deal with a cost plan that is over budget?

Answer 17

• Communicate the matter to the client and project team in a clear and concise manner.
• Identify areas where potential savings can be made, possibly in terms of material specification or redesign

Question 18

How can the cost manager help control the design to keep the project within budget?

Answer 18

• Explain to the design team where the cost plan sits against the budget and discuss the limitations.
• Identify and communicate areas of design which may not be economical.
• Regular project risk reviews and asking the design team to focus on mitigating key design risks.
• Explain how changes in the design will impact the cost plan.
• Contribute to value engineering and/or cost-saving sessions

Question 19

In your view, what are some of the key reasons we have cost overrun on a project?

Answer 19

• Ambiguous client briefs or changes in the later stages of the project.
• Unrealistic cost estimates.
• Project risk is realised or not properly managed.
• Inadequate management control or processes.
• Uncoordinated design.
• Unknown external factors (for example, global pandemics).
• Unsuitable tendering and/or procurement strategy selection.
• Statutory authority influences, such as onerous planning permission conditions.
• Inflation or changing market conditions.

Question 20

What allowance would you make for contractor OH&P in the cost plan?

Answer 20

The percentage will vary due to various factors, such as:
• Project location.
• Level of perceived risk.
• Project type and value.
• Market conditions.

Question 21

What is a provisional sum?

Answer 21

Provisional sums are generally an allowance or estimate included within the contract price that are:
• Not sufficiently defined, designed, or detailed to allow an accurate determination of its cost at the time the contract is entered; and/or
• Work that the employer may or may not wish to be carried out.

Question 22

What types of provisional sums are there?

Answer 22

• Defined and undefined.

Question 23

Please explain the deferral between defined and undefined provisional sums?

Answer 23

Defined:
• The contractor is deemed to have allowed for programming and preliminaries within the contract.

Undefined:
• The contractor does not allow for planning, programming or preliminaries. This means the contractor may be entitled to an extension of time and/or additional preliminaries when the actual works are undertaken.

Question 24

What are prime cost sums (PC sums)?

Answer 24

• A sum of money included in a unit rate to be expended on materials or goods from suppliers (e.g., supply-only ceramic wall tiles at £50/m²).
• It is a supply-only rate for materials or goods where the precise quality of those materials or goods is unknown.
• PC sums exclude all costs associated with fixing, installation, fees, OH&P, etc.

Question 25

Can you name some of the pricing documents we might use at tender stage?

Answer 25

• Bill of quantities (BoQ). • Schedule of rates (SoR). • Contract sum analysis (CSA). • Schedule of work (SoW). • Priced activity schedule

Question 26

Can you name some of the pricing options for construction contracts?

Answer 26

• Lump sum. • Cost-plus (also known as cost reimbursable). • Remeasurement. • Target cost. • Guaranteed maximum price (GMP).

Question 27

What is a lump sum contract?

Answer 27

• Fixed price or lump sum pricing, as the name indicates, provides for payment of a set amount. • The amount of the fixed price or lump sum is determined by a contractor by estimating their cost to provide the work, and then adding overhead and a profit margin

Question 28

What is a cost-plus contract?

Answer 28

Cost-plus contracts, otherwise known as cost reimbursable contracts, involve the employer paying the contractor for the costs incurred during the project, plus a pre-agreed percentage for profit.

Question 29

What are the key advantages of cost-plus contracts?

Answer 29

• Since cost-plus contracts are flexible by nature, inaccuracies in the initial bid aren’t as detrimental as they are with lump sum contracts. • Cost-plus contracts allow employers to make design changes along the way, as contractors know they’ll be paid for the extra time or materials that those changes incur

Question 30

When might a cost-plus strategy be appropriate to use?

Answer 30

• A cost-plus strategy might be used where the nature or scope of work to be carried out cannot be properly defined at the outset. • This pricing strategy would suit emergency work such as infrastructure repairs or immediate reconstruction following a fire

Question 31

What is a remeasurement contract?

Answer 31

• Works are carried out based on pre-agreed unit rates. • The actual quantities of work carried out are measured, and the tendered rates are applied to those quantities. • The contractor is paid for the actual work they have done, so the final value of the project will be derived based on the unit prices and exact quantities

Question 32

What are the key advantages of remeasurement contracts?

Answer 32

• Since the work is tendered on approximate quantities, the contractors will submit competitive prices in their tender. • The contractor’s risk is comparatively low (compared to a lump sum contract).

Question 33

What are the key disadvantages of remeasurement contracts?

Answer 33

• There is less cost certainty until the project is complete. • General accuracy of cash flow forecasting is lower. • The risk for the employer is higher (compared to a lump sum contract

Question 34

What is a guaranteed maximum price (GMP) contract?

Answer 34

• A guaranteed maximum price contract (GMP) sets a limit that the employer will pay their contractor, regardless of the actual costs incurred (i.e., the contract sum will not exceed a specified maximum). • If the actual cost of the works is higher than the guaranteed maximum price, then the contractor must bear the additional cost. • If the cost is lower than the guaranteed maximum price, the contract should set out which party will benefit from the savings. Usually, the savings will be split between the employer and contractor using a pre-agreed formula or percentage

Question 35

What are the key advantages of a GMP?

Answer 35

• Establishes the employer’s maximum financial commitment (subject to employer variations). If the contractor’s costs exceed the target cost, only the target cost is paid. • Both the contractor and employer have the potential to benefit from savings

Question 36

What are the key disadvantages of a GMP?

Answer 36

The contractor will have to share any savings made while taking on the risk of cost overrun

Question 37

What are contractor preliminaries?

Answer 37

• Items that cannot be allocated to a specific element, sub-element, or component. • Preliminaries are typically items that are necessary for the contractor to complete the works but will not actually become part of the works once the project is complete. • Contractor preliminaries may include items such as: • Management and staff. • Site establishment. • Temporary services. • Security. • Safety and environmental protection. • Insurances

Question 38

When assessing the costs for contractor preliminaries (at tender stage), what are the key considerations to determine if they are fair and reasonable?

Answer 38

• Length of contract • Type of project (new build, refurbishment, infrastructure, etc.) • Size of the project and overall build cost. • Need for temporary works. • Security requirements. • Method and sequencing of works (working hours, supervision, management, etc.) • Extent of the contractor’s design responsibilities.

Question 39

What is inflation?

Answer 39

NRM 1 definition: Sustained increase in the general price level of resources (ISO 15686-5). • It is included as an allowance in the order of cost estimate or cost plan for fluctuations in the basic prices of labour, plant, equipment, and materials.

Question 40

What are the two types of inflation as defined in NRM 1?

Answer 40

• Tender inflation: • An allowance included in the order of cost estimate or cost plan for fluctuations in the basic prices of labour, plant, equipment, and materials during the period from the estimate base date to the date of tender return. • Construction inflation: • An allowance included in the order of cost estimate or cost plan for fluctuations in the basic prices of labour, plant, equipment, and materials during the period from the date of tender return to the mid-point of the construction period.

Question 41

What do TPIs show?

Answer 41

• They measure the movement in prices agreed between clients and contractors at ‘commit to construct’, normally when the tender is accepted. • These indices are typically used for adjusting estimates and budgets to different dates

Question 42

What is a bill of quantities (BoQ)?

Answer 42

• Bills of quantities are a means of breaking a project down into exact quantities that are measured in an industry-wide recognised format. • Includes all components of a building (or project) as well as preliminaries. • Usually based on mature drawings and specifications; at tender stage, the contractor inserts their cost or rate against each item. • The document then forms a precise tool for pre and post-contract cost control (such as managing variations, project expenditure, and cash flow

Question 43

What are the key disadvantages of using a BoQ?

Answer 43

• Expensive and time-consuming to produce. • Potential for errors when measuring the project

Question 44

What are the key advantages of using a BoQ?

Answer 44

• Ideal for post-contract cost control. • Simplified tender analysis. • Very detailed and comprehensive. • All the tenderers are pricing the same items and quantities. • Effective document for interim payments and preparing the final account

Question 45

What are the two key types of BoQ?

Answer 45

Firm BoQ: • NRM 2 definition: The reliability of the tender price will increase in relation to the accuracy of the quantities provided (i.e., the more precisely the work is measured and described). • In theory, if there were no design changes, a firm BQ would provide a price at the tender stage, which would equal the final cost. Approximate BoQ: • NRM 2 definition: Approximate BQs are used when there is not enough detail to prepare a firm BQ, or where it is decided by the client that the time or cost of producing a firm BQ is not warranted. • Such contracts do not provide a lump sum price, but rather tender price totals (i.e., a quantified schedule of rates), since the quantities are subject to remeasurement on completion by the quantity surveyor/cost manager.

Question 46

When would a BoQ with approximate quantities be used?

Answer 46

Since the quantities are approximate, this type of BoQ is suitable for a remeasurement form of contract.