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)