Commercial management of Construction (Q&A)

Q: Limitations of earned value management (EVM)

It is not considering the quality of the works. Hence, even if project is within budget, ahead of schedule and scope is fully executed, the client may not be happy due to poor quality of works.

Q: Interim valuations and payment provisions

Under the Housing Grants, Construction and Regeneration Act 1996, a party to a construction contract in excess of 45 days in duration is entitled to 'interim' or 'stage' payments. The timing, frequency and calculation of such payments are all determined by the provisions of the relevant contract. These provisions vary considerably from contract to contract. Many contracts require the works to be valued at pre-determined dates, following which an interim payment certificate will be issued and payment made. Procedures for payment 'by milestone' are becoming more common, but the traditional route of payment for work done is still the most popular procedure.

The Act provides that all construction contracts should have a compliant payment mechanism that allows the person receiving payment to know in advance when and how much he will be paid. It also provides for a formal notice procedure if any monies are to be withheld and gives the party receiving payment the right to suspend work if proper payment is not made and also to refer any amount that is in dispute to adjudication.

Adjudication is a form of dispute resolution in which a nominated third party (the adjudicator) decides the matter referred to him within 28 days subject to any extension to this time that the parties might allow in accordance with the adjudication rules.

It is important, therefore, that proper payment is made in accordance with the contractual payment provisions. The provisions of most standard forms of construction contract now incorporate compliant payment mechanisms in accordance with the Act.

Q: Elements of interim valuations –

Preliminaries
Measured works
Variations
Provisional Sums
Prime Cost items
Materials on-site and off-site
Dayworks
Claims
Fluctuations (If applicable)

Q: Subcontractor liability –

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.

Q: What are the sources of cost data that are often used by surveyors. –

Historic cost information from previous projects, manufacture / supplier literature, BCIS, Cost models and cost data published in industry magazines, Price books.

Q: What information would typically accompany a budget estimate for a construction project? –

A covering letter, Executive summary, Specification notes, Assumptions, Exclusions, cash flow information, Drawings and other information upon which the estimate is based, List of value enhancing alternative suggestions or options, A risk register.

Q: If the client require to know urgently ‘how much will be construction cost of the project’, how you will deal the situation?

First, contact senior member of your office to get advise. Get more information from client (like site location, site condition, development area, type of building, time scale, site access, any restrictions etc)

Based on this prepare a rate / m2 based on historic cost data information, inform the client about the exclusions, and finally give a range of expected cost. – Record the conversation in writing.

Q: How you will prepare and submit cost data for in-house and external use in relation to areas such as

Cost of preliminaries, comparative cost of different construction techniques and taxation allowances. –

Take BOQ of at least 5 projects. Make a format. Enter the data. Consider a base date. Analyse the rates and find an optimum rate, remove OH &P for external usage.

Q: Type of information a QS should provide during the design stage –

(1) Statement of Cost

(2) Indication of specifications

(3) Statement of floor areas

(4) Cash flow forecast

(5) Assumptions and exclusions

(7) Inflation.

Q: Value management – Is a term used to describe the overall structured team based approach to a

Construction project. It involves clearly defining the client’s strategic objectives, considering a optimum design solutions within the context of the client’s business objectives and deciding which of these provide the optimum lifetime value to the client, as well as a review of the process after occupancy. It is not simply cost cutting.

• To avoid unnecessary costs

• Increase functionality

• Increase value for money

• Satisfy client’s requirement

Q: What is Value engineering?

It is a tool in VM. It is a systematic approach to delivering the required functions (or components) to the required quality at the least cost. i.e. the method of ensuring that the client gets the best possible value for money in terms of safety, performance and delivery targets. It is a structured form of consensus decision making that compares and assesses the design solutions against the value systems declared by the client.

Q: Value engineering exercise –

• Collecting the Information

• Functional analysis

• Idea generation

• Idea evaluation and selection

• Proposal development & validation.

• Implementation

(Normally Stages 2 to 4 conducted within a work shop)

Q: Cash flow –

Cash flow refers to the movement of cash into or out of a business, a project, or a financial product. It is usually measured during a specified, finite period of time.

Measurement of cash flow can be used;

• To determine a project's rate of return or value. The time of cash flows into and out of projects are used as inputs in financial models such as internal rate of return, and net present value.

• To determine problems with a business's liquidity. Being profitable does not necessarily mean being liquid. A company can fail because of a shortage of cash, even while profitable.

• As an alternate measure of a business's profits when it is believed that accrual accounting concepts do not represent economic realities. For example, a company may be notionally profitable but generating little operational cash (as may be the case for a company that barters its products rather than selling for cash). In such a case, the company may be deriving additional operating cash by issuing shares, or raising additional debt finance.

• Cash flow can be used to evaluate the 'quality' of Income generated by accrual accounting. When

Net Income is composed of large non-cash items it is considered low quality.

• To evaluate the risks within a financial product. E.g. matching cash requirements, evaluating default risk, re-investment requirements, etc.

Cash flow is a generic term used differently depending on the context. It may be defined by users for their own purposes. It can refer to actual past flows, or to projected future flows. It can refer to the total of all the flows involved or to only a subset of those flows. Subset terms include 'net cash flow', operating cash flow and free cash flow.

Q: Internal rate of return (IRR)-

IRR Is a rate of return used in capital budgeting to measure and compare the profitability of investments. It is also called the discounted cash flow rate of return (DCFROR) or simply the rate of return (ROR). In the context of savings and loans the IRR is also called the effective interest rate. The term internal refers to the fact that its calculation does not incorporate environmental factors (e.g. the interest rate or inflation).

Source: J Thomas (July 2010)

Commercial management of Construction (Q&A)

Q: What is a Cost Plan?

A schedule showing how much of a developer’s budget is to be spent on each element of his project so that the design and construction can be controlled within the forecast.

Q: Purpose of Cost planning process is mainly divided into three parts

• To set a realistic cost limit

• To decide how the money is to be spent

• To check that the money is being spent as intended.

Q: Preliminaries estimates

• This is prepared to enable the clients to understand his financial commitments at the early stage of the project

• Also enables the designer to design within the available budget in a controlled manner.

Q: Different methods of preliminary estimates

• Conference estimate

• Financial methods

• Unit method

• Superficial method

• Cube method

• Storey enclosure method

• Elemental method (this is an extension of superficial method)

• Approximate quantity method.

Q: Different elements of a building - For cost planning purpose

• Substructure

• Superstructure

• Internal finishes

• Fittings and furnishings

• Services

• External works

• Preliminaries

• Contingencies

Q: How to prepare Cost Plan for a project from cost plans of existing projects –

By adjusting time, quality, fluctuation, location factors.

Q: Cost Value reconciliation (CVR) –

This is a format used to compare actual cost against valuation on a project specific basis. This is to bring together the established totals for cost and value to illustrate the profitability of a company. Its intention is to ensure that the profits shown in company accounts are accurate and realistically display the current financial position. CVR provides close control over project cost, company provisions and overheads, and value earned.

Its purposes are,

• Statutory requirements or for audit purpose (Only in some countries like UK)

• To get information which can have a direct impact on a company management.

• To identify the potential problems or critical elements of a contract.

Q: At what stage of a project you will prepare a cost plan? Would you still use it when the project is underway?

Cost plan is prepared in the beginning of the project before issuing tender.

Yes. If it was identified later that there was flaws in the design leading to uneconomic construction and the Construction has not progressed beyond the alteration stages, but the Net Saving potential is considerably reduced with Time. VE is to be preferably done initially when there is a better chance of identifying & overcoming Potential problems at an early stage thus giving better value for money.

Q: What are the stages of design of a project?

Concept

Schematic

Detailed design

Q: Some terms in Cost Value management –

• BCWP – Budgeted Cost of Work Performed

• BCWA – Budgeted Cost of Work accomplished.

• BCWS – Budget Cost Work Scheduled.

• ACWP – Actual Cost of Work Performed

• ACWA – Actual cost of work accomplished.

• CPI – Cost Performance Index = EV / AC (Earned Value / Actual Cost) should be above 1

• VAC – Value At completion.

• EAC – estimate at completion (projection of total cost to complete the work)

Q: Difference between Cost Management and Value Management –

• CM focuses on issues like estimation and budgeting, cash flow management, cost control.

• VM focuses on Optimizing project value

Q: Type of cost control techniques.

• Budget monitoring system

• Cost coding system

• Earned Value Management

• Network analysis.

Q: Earned Value Management (EVM) –

It is a project management technique for measuring project progress in an objective manner. EVM will combine measurements of scope, schedule and Cost in a single integrated system. This will provide an early warning of performance problems. It is the management of value of the work actually accomplished at the cost rates set out in the original budget. EVM information provides the efficiency with which the budgeted money is used relative to realized value. This helps to forecast estimated cost and schedule to the project completion.

Q: Earned Value –

Is a concept used to express the progress of a project in terms of financial value. (Eg. If I have completed half of a project valued one million, I can say that I have earned Dhs.500,000. in fact the real current value may be nothing since no benefit can be generated from a half completed project.)

Source: J Thomas (July 2010)

Commercial management of Construction (Q&A)

Q: What are the essential of good cost control & reporting?

• Not too complicated or expensive

• Reports that are easily understood by all levels.

• 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.

Q: What is Cost management / Cost control?

Cost management or Cost control is the process which ensures the estimated final contract sum is within the client’s approved budget or cost limit.

Q: What are the major elements that affects smooth cost control?

• Engineer’s Instructions and VOs

• Provisional sum adjustments

• Claims

Q: What is the Annual Budget?

Annual projected estimate of company’s financial performance in terms of income and expenses. Once established, it does not alter and is used as a tool against which to monitor actual performance. Also budget can be used for different elements of a project.

Q: What is Supply Chain management (SCM)?

A process that attempts to fully integrate the network of all organizations and their related activities 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/client expectations.

Q: Major elements of Time management?

• Information about nominated subcontractors, Client’s own workers or direct contracts.

• Programmes and method statements (Progress reporting, acceleration of works)

Q: Major elements of Quality management?

• Materials standards (BSI, ISO, ANSI standards)

• Workmanship (Specify tolerance levels, Quality assurance schemes, ISO 9000, TQM)

Q: Cost planning:

Cost planning is a technique by which the budget is allocated to the various elements of an intended building project to provide the design team with balanced cost framework within which to provide a successful design.

Q: TQM on site comprises:

At least the following:

• To maintain the highest standards of workmanship which consistently satisfy or exceed the requirements of the client, as defined in the specifications, and to consistently deliver the highest levels of service in a timely and cost-effective manner.

• To assess and improve client perceptions with regard to Company's service levels.

• Aim to innovate through advanced methods of design and construction, whilst ensuring safe systems of work with minimal impact upon the environment.

• To provide continual staff and employee training in order to ensure personnel development, with particular emphasis on matters concerning Quality, environment safety and health.

Q: TQM Techniques for controlling these issues would be:

• Quality management plan – describing how the management team will implement its quality policy

• Operational definitions – provides not just a definition of an operation but also how it is measured in the quality control process

• Checklists – A structured tool used to verify that a set of required steps has been performed

• Regular Audits - A structured review of quality management activities that may be scheduled or random and conducted by trained in-house or external auditors

• Inspection – Activities such as measuring, examining and testing to determine if results comply with requirements

• Control Charts – A graphical display of results over time

• Pareto Diagrams – A histogram ordered by frequency of occurrence linked to a category or identified cause

• Statistical Sampling – Choosing a part of the population of interest for inspection.

• Flowcharting – Use of flowcharts to help analyse how problems occur

• Trend Analysis – Using mathematical techniques to forecast future outcomes based on historical results

• Quality Assurance - The main output from the quality assurance process is quality improvement. This may lead to change requests and corrective action.

Q: What is meant by a Cost Planning?

It is the Cost Control during the design process. But during construction phase there is no cost plan. Then the cost report is used as tool to control the cost.

There are two main forms of cost planning  

(1) External (designing to a cost) and

(2) Comparative (Costing a design) But in practice the method used may be mixture of two.

Q: Cost planning procedure

1. Different stages of development process are:
2. Inception,
3. Feasibility,
4. Outline proposal stage
5. Schematic design
6. Detail Design
7. Production Information
8. BOQ
9. Tender stage 

In this at feasibility study the budget is prepared. During Outline proposals the Outline Cost Plan is prepared. During Schematic Design stage the Detailed Cost Plan is prepared. Parallel to this the Cost Checks are done during the Scheme Design and Detailed Design stage. Finally cost analysis is doing after the tenders are received.

Source: J Thomas (July 2010)