Commercial management (of construction works)
| Question | Answer |
|---|---|
| What is Cost Value Reconciliation (CVR)? | Cost Value Reconciliation (CVR) is the process of comparing the actual cost of construction with earned value to determine profitability of project. Actual costs incurred might include direct costs (materials, labour, subcontractor fees, and any other expenses directly related to the construction work) and indirect costs (overheads, administrative expenses, and other costs not directly tied to specific project activities.) The value of work completed (value earned) might include work certified (the value of work that has been completed, inspected, and approved by the client or project manager) and work not yet certified (the value of work that has been completed but not yet certified). By comparing costs and value, CVR helps assess the profitability of a project. This analysis can inform decision-making and adjustments to project execution strategies. CVR helps track the financial health of a project by continuously comparing costs against the value of work done. This enables early detection of cost overruns and other financial issues. |
| How would you prepare a Cost Value Reconciliation? | 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 no high value fluctuations in costs or value are expected during the reporting period. I would also ensure that all works in progress is accounted for and the reported values are inline with subcontractor’s measures and liabilities. Risk and contingency items would be included for items not yet agreed. 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. |
| How would you ensure that your Cost Value Reconciliation is accurate and up to date? | I ensure that any forecast revenue on variation items only forms part of my calculations providing that the variation item in question is agreed, this is done to ensure the current profit margin in accurate and not over stated. A reduced profit margin is assumed if variations are paid on account or only partly agreed with the client. Contingency items are retained within the Cost Value Reconciliation for any outstanding risks to the project or pending cost items. I also arrange regular meetings to conclude the agreement of variation items for each of the sub-contract packages so a backlog of pending items does not form. |
| What is a Cash Flow Analysis? | A cash flow analysis highlights the movement of income and expenditure into and out of a business over time. If the level of 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 under or over valuation of works complete and the impact this may have on cash flow. The contractual payment process is also considered so that the incoming payments can be accurately profiled. Credit arrangements with subcontractors and suppliers are also factored in to the calculations. It is important for contracting organisations to maintain positive cashflow where possible in order to avoid the need for expensive borrowing arrangements. |
| Why is Cashflow required? | Identify potential shortfalls in cash balances in advance – think of the cash flow forecast as an “early warning system”. This is, by far, the most important reason for a cash flow forecast. Make sure that the business can afford to pay suppliers and employees. Suppliers who don’t get paid will soon stop supplying the business; it is even worse if employees are not paid on time. Spot problems with customer payments – preparing the forecast encourages the business to look at how quickly customers are paying their debts. Note – this is not really a problem for businesses (like retailers) that take most of their sales in cash/credit cards at the point of sale. As an important discipline of financial planning – the cash flow forecast is an important management process, similar to preparing business budgets. External stakeholders such as banks may require a regular forecast. Certainly if the business has a bank loan, the bank will want to look at cash flow forecasts at regular intervals. |
| What are the ways to overcome negative cashflow? | – Ask for Advance against BG – Ask for adhoc payment against work done – renegotiate payment terms – payment for material off site – get waiver of retention of title, vesting certificate, insurance – partial release of retention |
| Please explain your understanding of the term ‘Accruals’? | 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 be paid and may be released at a given point in time. |
| What processes would you put in place when making a contra charge to a subcontractor? | I would attach supporting photographs, invoices and site records to the contra charge. Any replacement materials or attendances put in place 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 incoming contra charges 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. |
| What does a Risk and Opportunity Register look like? | The register will typically be compiled in a tabulated form with columns provided for the name and description of the risk item, an explanation of how the risk will impact the project, the likelihood of the risk occurring, a risk grade based on the probability multiplied by the impact, a risk classification of either high, medium or low, a summary of mitigation actions to be taken, the risk owner, the potential cost of the risk and a deadline date of when the risk is to be closed. |
| What are the essentials of good cost control and reporting? | – Not too complicated or expensive – Report must be simple and easy to understand at all levels – Provide executive summary – Cost and level of progress to date must be made available at the same time as well as predictions as to the cost to complete the scheme. |
| What is supply chain management? | Supply chain management (SCM) is the coordination of a business’ entire production flow, from sourcing raw materials to delivering a finished item in an efficient manner. The focus of SCM is to add value to the product or service at each stage of the chain so that it meets or exceeds customer expectations. |
| What is Earned Value Management (EVM)? | Earned Value Management (EVM) is a project management technique for measuring project performance and progress in an objective manner. It is a systematic process used to find variances in projects based on the comparison of work performed and work planned. EVM is used on the cost and schedule control and can be very useful in project forecasting. |
| What are different elements of EVM? | 1. A project schedule that identifies work to be accomplished. Sometimes incorrectly called a Project Plan. 2. A valuation of planned work, called planned value (PV) or budgeted cost of work scheduled (BCWS) 3. Pre-defined “earning rules” (also called metrics) to quantify the accomplishment of work, called earned value (EV) or budgeted cost of work performed (BCWP) 4. Actual Cost (AC )which is also known as Actual Cost of Work Performed (ACWP) 5. A plot of project cumulative costs vs time especially to show both early date and late date curves |
| What are the different variances and index of EVM? | 1. Schedule variance SV = EV – PV If the variance is equal to 0, the project is on schedule. If a negative variance is determined, the project is behind schedule and if the variance is positive the project is ahead of schedule. 2. Cost Variance CV = EV – AC If the variance is equal to 0, the project is on budget. If a negative variance is determined, the project is over budget and if the variance is positive the project is under budget. 3. Schedule Performance Index SPI = EV/PV An SPI equal to or greater than one indicates a favorable condition and a value of less than one indicates an unfavorable condition. 4. Cost Performance Index CPI = EV/AC A CPI equal to or greater than one indicates a favorable condition and a value of less than one indicates an unfavorable condition 5. Estimate at Completion EAC = Budget at Completion BAC/CPI |
| What is Subcontractor liability in Interim Payment Certificate? | It is an assessment of a subcontractor’s value included within the interim valuation or final account compared with the value that the contractor will be paid for the same elements of work. |
| What is Internal Rate of Return (IRR)? | Internal rate of return (IRR) is a metric used in capital budgeting measuring the profitability of potential investments. Internal rate of return is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero |
| What are the contents of a Monthly Payment Certificate? | Preliminaries, Measured works, Variations, Provisional Sums, Prime Cost items, Materials on-site and off-site, Dayworks, Claims, Fluctuations (If applicable) |
| What is a Risk register? | A Risk Register, also referred to as a Risk Log, is a master document which is created during the early stages of your project. It is a tool that plays an important part in your Risk Management Plan, helping you to track issues and address problems as they arise. |
| How to manage expenditure of Provisional Sums? | Before spending the Provisional Sum, Contractor should get instruction/nomination letter from Engineer to spend the Provisional Sums. |
| How to plot the S-curve? | Plot cumulative costs/value/quantities against vertical axis and time against horizontal axis. |
| What is Discounted Cashflow? | All future cash flows are estimated and discounted by using cost of capital to give their present values (PVs). It is used to estimate the attractiveness of an investment opportunity. |
| How is PC rate adjustment done in post-contract stage? | While doing rate analysis again, fixed rate items will remain unchanged such as labour, transportation etc., other % items will change such as wastage, spares, OHP etc. |
| How is PS adjustment done in post-contract stage? | Replace PS sum with actual approved amount, any % items such as attendance, OHP will vary accordingly, LS items such as Builder’s work shall vary as per change in scope or will remain fixed. |
| What is Unit Cost method? | Unit cost is the cost of one product or activity. It is also known as the average cost or cost per unit sold. It gives an insight into production efficiency to the business owners. |
| What are the types of cashflow? | There are two main types of cash flow forecast. • The cash flow forecast of a company (i.e. a contractor or consultant) – otherwise known as organisational cash flow. • The cash flow forecast of a particular construction contract or project – otherwise known as project cash flow. |
| What is the use of cashflow? | 1. Obtaining loans and bank monitoring 2. Contractor progress monitoring 3. Managing cash in a business 4. Forecasting business performance 5. Stakeholder management |
| What is an S curve? | The S-curve stands for ‘standard’ curve but it also takes the shape of the letter ‘S’ when shown on a graph. This represents the lower level of periodic expenditure at the beginning of a contact (due to site set up and relatively inexpensive enabling works) and the lower level of expenditure at the end of a contact (due to the vast majority of materials being on site, reduced number of trades on site and reduction of contractor’s staff overhead). These S-curves are ascertained by a formula, which uses data from previously similar construction projects. |
| What information is required while preparing a cashflow? | 1. Contract documents to understand the contract value, type of contract whether lumpsum or remeasure, payment terms, retention, DLP, milestone payments, material on/off site etc. 2. Project programme 3. Client brief – Should it be produced for the whole development or just the construction contract? Should gross or net values be used? 4. Adjustment for cyclical events (holiday periods, industry shut downs, winter working, etc.) 5. Forecasting risk allowance spend 6. Taxes |
| What could be the reasons for actual payments being below the cash flow? | a site conditions b adverse weather c re-sequencing of works (perhaps due to procurement of subcontractors) d materials being stored off site (and not claimed for) e project progressing slower than anticipated f materials not being delivered on time, and g cash flow not being accurate in the first place. |
| What could be the reasons for actual payments being above the cash flow? | Some of the reasons for a contractor being ahead of cash flow are: a front-end loading b contractor being ahead of programme by working faster than envisaged c re-sequencing of works meaning that higher value works are carried out earlier d materials being stockpiled on site far before they are required e materials off site not taken into account when producing cash flow forecast f the inclusion of variations g contractor purposely accelerating the works to complete earlier (and therefore expending less preliminaries) h the sign of a distressed contractor (or subcontractor) or supplier, and i cash flow not being accurate in the first place. |
| What is a successful project? | A successful construction project is one that is delivered ‘on time’, ‘on budget’ and ‘on quality’: for example, to quality standards defined within the contract documents. |
| What is Commercial Management? | Managing project withing budget and achieving profitability, includes activities such as Estimating, budgeting, cashflow analysis, cost/value analysis, procurement of subcontracts, financial management of subcontracts |
| Who is Commercial Manager? How it is different from QS? | One of the key things that differentiates commercial management from general quantity surveying skills is the ability to take an overview of a project or contract. To do this, it is crucial to understand how all the individual quantity surveying skills are pieced together, to commercially manage construction works. |
| What is the difference between commercial management and project financial control & reporting? | Commercial management involves activities aimed at ensuring project is completed within budget thereby ensuring profitability such as estimating, budgeting, cashflow etc. Project Financial Control & Reporting involves post contract cost control, change management activities. |
| What is Capital Budget? | a budget allocating money for the acquisition or maintenance of fixed assets such as land, buildings, and equipment. |
| What is Capital Costing vs. Activity Costing? | Activity-based costing (ABC) is a costing method that assigns overhead and indirect costs to related products and services. |
| What is tracking & controlling Budgets? | Reviewing budgets regularly to track business spending, expenses, and performance against the budget’s figures. Identifying reasons for variance, which occurs when actual spending and business expenses are higher than budgeted. Taking quick corrective action where variance is identified. |
| What are the disadvantages of the Project Bank Accounts? | it can be expensive to set up and run; it increases administration which can be problematic for smaller suppliers |
