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Project Finance Level 1 - Coggle Diagram
Project Finance Level 1
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Provisional Sum
Provisional Sum
Definition - Provisional sums are generally an allowance or estimate included within the contract price that are:
1) Not sufficiently defined, designed or detailed to allow an accurate determination of its costs at the time the contract is entered; and/or
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How are they expended?
1) Under the JCT contracts the contract administrator should issue an instruction for its expenditure
2) Where a contract includes a provisional sum, the final amount payable will be adjusted as the provisional sum is omitted and replaced with the actual cost of the works
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Contract Pricing
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Pricing options
1) Lump sum
Definition - Fixed price or lump sum pricing, provide for payment of a set amount. The amount of fixed price or lump sum is determined by a contractor estimating their cost to provide the work and then adding overhead and profit margin
Advantages
1) The contractor takes on the pricing risk but stands to benefit from increased profit if actual costs turn out to be below the estimated costs
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Disadvantages
1) A lump sum agreement presents a higher risk to a contractor. If the contractor underestimates their cost, the profit margin decreases and may disappear altogether
2) As a result of the additional risks faced by the contractor, they may increase their tender price
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3) Remeasurement
Definition - Works carried out based on pre-agreed unit rates. The actual quantities of work carried out are measured and tendered rates 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
Advantages
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1) Work is tendered on approximate quantities so the contractor will submit a competitive price at tender
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4) Target cost
Definition - The main difference between target price and a conventional contract is the mechanism for sharing risk and opportunity. The target cost is set early in the project, upon completion cost savings or overruns are shared between the contractor and employer based on pre-agreed formula or percentage. This is often termed as the "pain & gain" mechanism
Advantages
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2) Encourages active and equitable risk sharing, based on a clearly defined allocation of risk agreed at the outset of the project
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Preliminaries
Definition - items which cannot be allocated to a specific element, sub-element or component but which are necessary for the contractor to complete the works. These will not become part of the works once the project is complete.
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Fixed vs Time related Prelims - Fixed preliminaries are one-off costs whereas time related preliminaries are dependent on duration
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Cashflow
Cashflow projections
Definition - This is a financial planning tool that shows the predicted flow of cash in and out of a project. This is typically shown month-by-month, for the duration of the project. When the construction phase is underway, the cash flow projection for contractors payments will typically form an 'S curve'.
Contractor cash flow projections will typically show construction costs, materials, labour, plant, preliminaries etc)
Employer cash flow projections usually consider the project is a much broader context and might include costs such as but not limited to:
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- Consultant and legal fees
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- Marketing and sales charges
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- Employer capital salaries
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Contractor payments
If the monthly valuations are behind the cashflow projection - This could be an indication that construction works are behind programme
If the monthly valuations are ahead of the cashflow projection - The project is ahead of programme, or the contractor is overclaiming
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Life Cycle Cost (LLC)
Definition - LCC is an objective method for measuring and managing the lifetime costs of any project or asset. In construction, it enables design option to be compared from a lifetime perspective with a view to understand and reduce overall costs associated with owning and/or operating the asset.
Example: Anyone buying a car would want to know the purchase price, but also its outgoing costs such as fuel consumption, the likely maintenance and the residual value on disposal
.Advantages
1) Long-term value - LCC ensures that the project has the highest possible value, even if upfront costs are not significantly reduced. It provides a mechanism for identifying and addressing issues with the original design. The process will promote better durability, reduced maintenance, fewer risk , operational efficiency and can even lead to an increased building lifespan
2) Green building certification credits - LCC credits are included in many green building certifications schemes such as BREEAM
3) Reliable planning and reduced risk - LCC is an excellent planning tool that cover long spans of time which means you can effectively avoid surprises and reduce financial risk. LCC will also promote
- Consideration of the long-term implications of a decision
- Enables informed decisions to be made on material selection
- Can be used to plan future maintenance requirements
Analysis Period
The LCC period of analysis should be determined by the client. It might be the length of a private finance initiative (PFI) concession, the length of a lease, the anticipated functional life of a whole building or time for first refurbishment
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Whole life costs
Definition - Whole-life costs consider all costs associated with the life of a building, from inception to construction, occupation and operation and even ultimate disposal.
This is considered a better way of assessing value for money than construction costs, which can result in lower short-term costs but higher ongoing costs through the life of the building. This can also apply to things such as design fees, where saving money on fees at the beginning of a project can be outweighed by very much higher ongoing costs through construction and occupation.
Advanced Payments
Definition - Payments issued to the contractor in advance of completing works or procuring materials
The usual rationale for these payments is to assist the cash flow required to cover initial expenses. A typical example would be for the procurement of items with a long lead-in-period.
Disadvantages
1) There may be a commercial risk for the employer e.g. the contractor could go into liquidation after the payment is made
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3) Subject to the nature of the advanced payment, there could be a concern why the contractor is unable to fund the expenditure (potential cash flow issues).
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Valuations
Definition - An interim valuation is a document put forward by the contractor which contains their progress against each of the work elements
The interim valuation involves a revaluation of the whole work, not the work done since the last interim certificate or payment notice were issued. The document acts as a precursor to issuing the next interim payment certificate
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Payment on account
The term 'on account, means a payment for an item of work/materials for which no instruction has been issued but is anticipated
These are used by a QS for any item in a valuation that cannot be agreed under the contract rules, but both sides agree that payment is due
Daywork
The basic principle of a daywork is that the work done is recorded on a day work sheet together with the labour, materials an plant resources utilised to carry out the work
It is generally used when work cannot be priced in a normal way or for uneconomical work
Variation
A variation is an alteration to the scope of work originally specified in the contract, whether by way of an addition, omission, or substitution to the works, or through a change to the manner in which the works are to be carried out
Payment Process
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What happens if the employer fails to pay the amount due on the payment certificate on or before the final date of payment?
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Payless notice
The purpose of a pay less notice is to give the paying party the right to pay less than/withhold all or part of the notified sum
What are the employer's obligations if they wish to withhold the notified sum, but fail to issue a pay less notice?
If the paying party does not serve a valid pay less notice timeously, they are obliged to pay the notified sum without deduction, regardless of whether they have a valid challenge to the sum
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Commercial Models
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build-own-operate (BOO)
The private sector party owns the project and does not have to transfer it to the government entity at the end of the term
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