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Project Finance Level 1 - Coggle Diagram

- - - - 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, item require post completion and during its operation and risk allowance
    - - An evolving estimate known factors without any allowances for risk and uncertainty, or 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.
    - - 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 affordability of a purposed 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.
      - Produced during RIBA stage 1 - Preparation and briefing
      - Difference between order of cost estimate and cost plan
        
        1) An estimate provides a possible cost based on the employer's requirements and is the initial phase of the cost planning process. The estimate is usually completed using m2 areas and functional units
        2) A cost plan is a more detailed elemental breakdown and shows how the costs are distributed across the project. A cost plan is an estimate based on a specific design
      - Typical information that should accompany an order of cost estimate
        
        1) Covering Letter
        
        2) Executive summary
        
        3) Cost limit
        
        4) Specification notes
        
        5) Assumptions
        
        6) Exclusions
        
        7) Drawings and other information upon which the estimate is based
        
        8) A schedule of value enhancing options
        
        9) Risk Register
        
        10) Cashflow information
    - - The unit rate that, when multiplied by the number of functional units, gives the total building works estimate
    - - In the context of cost prediction, RICS professional statement, a cost plan is 'an estimate based on a specific design. A statement showing an apportionment of an estimate or an agreed budget between cost headings'. This would not necessarily be in elemental form. Cost planning is a method of cost prediction
      - Benefits
        
        1) Designers are aware of the cost implications of their proposals which enables them to arrive at a practical and balanced design
        
        2) Provides Information upon which the employer can make informed commercial decisions
        
        3) The cost plan confirms to the client if the scheme is affordable or not
        
        4) Cost planning places the client in an informed position to make commercial decisions
        
        5) The cost plan can act as a value management tool to ensure the client gets a building which meets their needs, but also represents best value
      - Programme (Prelims)
        
        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:
        1) Design and tendering period
        2) Start on site date
        3) Construction period
        4) Completion date
        
        What to include in a fee estimate
        
        Consultant Fees
        
        Project and design team
        
        Other specialist consultants
        
        Survey fees
        
        Contractor Fees
        
        Management and staff
        
        Specialist support
        
        Contractor's design management fees
        
        Contractor design team fees
        
        Framework fees
      - Cost plan risk allowance
        
        A quantitative allowance set aside as a precaution against risks and future requirements to allow for uncertainty of outcome.
      - An over budget cost plan
        
        How would you deal with this
        
        2) Identify areas where potential savings can be made, possibly in terms of material specification or re-design
        
        1) Communicate the matter to the client and project team in a clear and concise manner
        
        How can the cost manager help control the design to keep the project within budget?
        
        1) Explain to the design team where the cost plan sites against the budget and discuss limitations.
        
        2) Identify and communicate areas of design which may not be economical
        
        3) Regular project risk reviews and ask the design team to focus on mitigating key design risks
        
        4) Explain how changes in the design will impact the cost plan
        
        5) Contribute to value engineering and/or cost saving sessions
        
        Why do cost plans run over budget?
        
        1) Ambiguous client brief or changes in the later stages of the project
        
        2) Unrealistic cost estimates
        
        3) Project risk is realised or not properly managed
        
        4) Inadequate management control or processes
        
        5) Uncoordinated design
        
        6) Unknown external factors (Global pandemic)
        
        7) Unsuitable tendering and/or procurement strategy
        
        8) Statutory authority influences such as onerous planning permission conditions
        
        9) Inflation or changing market conditions
    - - This is usually set as a percentage of services cost. BWIC refers to the builders work required to allow other works to proceed, this is usually mechanical and electrical services but can also be other specialist services.
    - - 1) Benchmarking is the use of historical data from project of a similar nature.
      - 2) Can be used as a comparison of check for cost planning purposes
      - 3) Benchmarking can highlight areas of design that are not value for money; or, if the price offered by the contractor is in line with market conditions
      - Undertaking a benchmarking exercise
        
        Produce a clear document which shows various cost plan elements side-by-side with the benchmark projects(s). This process will identify items which are considered abnormal, I would then endeavour to justify cost anomalies for flagged items.
    - - 1) Profit can be defined as the money the contractor makes after accounting for all costs and expenses.
      - 2) The percentage of profit a contractor might apply will vary according to risk, workload and economic climate
      - 3) General overheads are those not readily chargeable to one particular project, they constitute the contractor's cost of doing business. These costs may include head office expenses, marketing, administration, IT equipment etc
      - What allowances should be made?
        
        The percentage will vary due to various factors such as:
        
        1) Project location
        
        2) Level of perceived risk
        
        3) Project type and value
        
        4) Market conditions
    - - 1) A sum of money included in a unit rate to be expended on materials or good from suppliers e.g. supply-only of ceramic wall tiles at £50/m2
      - 2) It is a supply-only rate for materials or good where the precise quality of those materials or goods is unknown
      - 3) PC sums exclude all costs associated with fixing, installation, fees, OH&P etc
      - Difference between prime cost and provisional sum
        
        2) In contrast, defined provisional sums include allowances for supplying the item and all related work to be performed by the contractor.
        
        1) A prime cost is limited to the cost of supplying the relevant item and does not include the cost of any work that relates to it such as installation
    - - Definition - Sustained increase in the general price level of resources (ISO 15686-5) i.e. the opposite to deflation. It is included as an allowance in the order of cost estimate or cost plan for fluctuations in the basic prices of labour, plant and equipment
        
        Tender Inflation - An allowance included in order of cost estimate or cost plan for fluctuations in the basic prices of labour, plant and 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 and equipment and materials during the period from the date of tender return to the mid-point of the construction period
        
        Tender Price Indices (TPI) - They measure the movement in prices agreed between client's 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
    - - Definition - Means of breaking a project down into exact quantities which are measured in an industry-wide recognised format. 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 cashflow.
        
        Why use BoQ over a Schedule of work?
        
        1) Schedules of work break the work sections down in less detail than a BoQ and do not contain any quantities for specific work items
        
        2) The BoQ simplifies the tender process because tendering contractors will be pricing the same quantities. This also simplifies tender analysis
        
        Advantages
        
        1) Ideal for post contract cost control
        
        2) Simplified tender analysis
        
        3) Very detailed and comprehensive
        
        4) All the tenderers are pricing the same items and quantities
        
        5) Effective document for interim payments
        
        Disadvantages
        
        1) Expensive and time consuming to produce
        
        2) Potential for errors when measuring the project
        
        Types of BoQ
        
        Firm BoQ: The reliability of the tender price will increase in relation to the accuracy of the quantities provided. In theory if there were no design changes, a firm BoQ would provide a price at the tender stage, which would equal the final cost.
        
        Approximate BoQ: are used when there is not enough detail to prepare a firm BoQ or where it is decided by the client that the time or cost of producing firm BoQ is not warranted. Such contracts do not provide a lump sum price, but rather tender price totals (Quantified schedule of rates), since the quantities are subject to remeasurement on completion by the quantity surveyor/cost manage
        This type of BoQ is suitable for a remeasurement form of contract
- - - - 1) Not sufficiently defined, designed or detailed to allow an accurate determination of its costs at the time the contract is entered; and/or
      - 2) Work that the employer may or may not wish to be carried out
- - - - 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
        
        2) Cost certainty for the employer
        
        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
    - - Definition - 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.
        
        Advantages
        
        1) Since cost-plus contracts are flexible by nature, inaccuracies in the initial aren't as detrimental as they are in lump sum contracts.
        
        2) Cost-plus contracts allows employers to make design changes along the way, contractors know they'll be paid for the extra time and materials from those changes.
        
        Disadvantages
        
        2) Contractor may deliberately incur, higher costs to increase profit as there is no incentive for efficiency.
        
        1) The final contract price is uncertain until the end of the project
        
        Where might a cost-plus strategy be appropriate?
        
        1) Where the nature of the scope of work to be carried out cannot be properly defined at the outset
        
        2) This pricing strategy would suit emergency work such as infrastructure repair or immediate reconstruction following a fire
    - - 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
        
        2) The contractor's risk is comparatively low compared to a lump sum contract
        
        1) Work is tendered on approximate quantities so the contractor will submit a competitive price at tender
        
        Disadvantages
        
        1) There is less cost certainty until the project is complete
        
        2) General accuracy of cash flow forecasting
        
        3) The risk for the employer is higher compared to lump sum contract
    - - 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
        
        1) The contractor and employer are incentivised to reduce costs
        
        2) Encourages active and equitable risk sharing, based on a clearly defined allocation of risk agreed at the outset of the project
        
        Disadvantages
        
        1) The employer and contractor must share pain and gain. this exposes the employer to greater risk
        
        2) Complex target price and pain & gain share may not be easily understood by all parties.
    - - Definition - A GMP sets a limit that the employer will pay their contractor, regardless of the actual costs incurred. If the actual costs are higher than the GMP, the contractor must bear the additional cost. if the cost is lower than the GMP, the contract will set out who should benefit from the savings. Usually the savings will be split between the employer and contractor using a pre-agreed formula or percentage
        
        Advantages
        
        1) Establishes the employer's maximum financial commitment
        
        2) Both the contractor and employer have potential benefit from savings
        
        Disadvantages
        
        1) The contractor will have to share any savings made while taking on the risk of cost overrun.
- - - - Management and staff
      - Site establishment
      - Temporary services
      - Security
      - Safety and environmental protection
      - Insurances
    - - 1) Length of contract
      - 2) Type of project (New build, refurbishment, infrastructure etc.)
      - 3) Size of project and overall build cost
      - 4) Need for temporary works
      - 5) security requirements
      - 6) Method and sequencing of works (working hours, supervision, management etc)
      - 7) extent of contractor's design responsibilities
    - - 1) Tower cranes
      - 2) Evening/Weekend working
      - 3) Road closures/ traffic management
      - 4) Closing train lines
    - - Time related - tower crane weekly hire
      - Fixed - purchasing site security equipment
- - - - 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:
        
        Statutory authority fees
        
        Consultant and legal fees
        
        Land acquisition charges
        
        Marketing and sales charges
        
        Financing
        
        Employer capital salaries
      - Employer benefits to accurate cash flow projections
        
        1) Cash flow projections will assist with planning expenditure and ensure that an appropriate level of funding is in place for future payments
        
        2) The projection will enable the employer to plan and anticipate for periods of cash shortage and take corrective action where necessary
        
        3) Allows the employer to gain an understanding of the potential financial commitment at a specific point in the future
        
        4) The projection can also act as a sense check for monthly contractor valuations
      - 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
- - - - .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
      - LLC categories to consider
        
        1) Construction costs
        
        2) Maintenance costs
        
        Where can you get information about maintenance costs?
        
        1) Building Cost Information Service (BCIS)
        
        2) Pricing books such as Spon's
        
        3) Contractors and subcontractors
        
        4) In-house data
        
        5) Previous projects
        
        3) Operation costs
        
        4) Occupancy costs
        
        5) End of life costs
        
        6) Non-construction costs (Land, fees, etc)
        
        7) Income
        
        8) Externalities
  - - - 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.
- - - - 1) There may be a commercial risk for the employer e.g. the contractor could go into liquidation after the payment is made
      - 2) The payment will affect the employer's cashflow
      - 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).
    - - An advanced payment bond may be required to protect the payment in advance of the works being completed
- - - - 1) Preliminaries
      - 2) Measure work
      - 3)Variations/compensation events
      - 4) Extension of time and acceleration costs (JCT Contractors)
      - 5) Materials on-site
      - 6) Materials off-site
      - 7) Loss and expense (JCT contracts)
      - 8) Adjusted provisional sums (JCT contracts)
      - 9) Retention
      - 10) Fees
      - 11) Prime cost sums
      - 12) OH&P
    - - It normally involved the quantity surveyor visiting site and checking the works by visual inspection and/or measurement.
        Key steps include
        
        1) Review the valuation prior to visiting site
        
        2) Go to site and review the valuation with the contractor
        
        3) Check work completed, materials on-site and materials off-site
        
        Key things to consider prior to valuing off site materials
        
        1) Request a vesting certificate
        
        A vesting certificate is a document evidencing that ownership of goods or materials will transfer from one party to another
        
        2) Check that insurance is in place until the materials arrive on site
        
        3) Ask for evidence that the materials (stored off-site) are clearly marked for the project and are set apart from other materials
        
        4) Check the material off-site has been provided
        
        What needs to be in place to make payment for onsite materials
        
        1) Materials should be adequately protected
        
        2) Should be covered by the works insurance
        
        3) Materials should be on site within a reasonable period when they are actually needed i.e. doors being delivered on the 1st week of a new build may not be appropriate
        
        4) Liaise with the clerk of works (JCT) or supervisor (NEC)
        
        5) Value preliminaries, agree variations/compensation events and any claims
        
        6) Finally, send the recommendation to the contract administer or project manager who will issue the payment certificate
    - - An interim valuation must be a realistic assessment. A low valuation creates unreasonable financial problems for the contractor, whereas a high valuation creates a risk to the employer or paying sums for which he or she obtains no benefit
    - - 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
    - - 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
    - - 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
    - - Information shown on a payment certificate
        
        1) Date of certificate
        
        2) Contract date
        
        3) Key payment timeline dates i.e. due date, assessment date, final date for payment etc
        
        4) Employer, contractor and contract administrator details (company, name, address etc)
        
        5) Site address and project number
        
        6) Contract sum
        
        7) Certificate reference number
        
        8) Gross value
        
        9) Retention
        
        10) Cumulative value of previous payments
        
        11) Amount due/notified sum (excluding VAT)
        
        12) Director and contract administrator signature
      - What happens if the employer fails to pay the amount due on the payment certificate on or before the final date of payment?
        
        1) The employer will be liable for interest on the amount due subject to contract conditions
        
        2) The contractor may wish to exercise their right to suspend works
      - 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
      - Can you explain the payment timeline for the JCT Design & Build 2016 contract?
        
        1) Contractor will issue an interim application for payment not less than 7 days before due date
        
        3) Interim valuation/assesment takes place during the 7 day period before the due date
        
        2) Due date is 7 days from the date of Contractor application for payment
        
        3) Payment notice must be issued 5 days after the due date
        
        4) Final date for payment is 14 days from the due date
        
        5) A payless notice may be issued no less than 5 days before the final date for payment
- - - - 2) Regular dialogue with the design team and contractor to monitor progress and issues
      - 3) Operate a rigorous payment process
      - 4) Cash flow forecasting
      - 5) Regular cost reporting
      - 6) Manage the expenditure of provisional sums
      - 7) Proactive risk and contingency management
      - 8) Monitor and agree variations/compensation events as they arise
      - 9) Identify and reduce the impact of claims
      - 10) Monitor and mitigate early warnings (NEC)
      - 1) Operate a robust change control procedure
    - - 1) All relevant parties are consulted
      - 2) The change is properly assessed in terms of time, cost and quality or any other impact prior to implementation
      - 3) Once the change is agreed, a record is formed to capture the change
  - - - A purchase order (PO) is a commercial document issued by the buyer to the seller
        Sending a PO to a supplier constitutes a legal offer to buy the product and/or service. Acceptance of a purchase order by a seller usually forms a contract between the parties
    - - In simple terms, CVR is the profit and loss statement for the project, whereby the organisation calculates the amount of work done to date and the cost incurred to date.
        The two are then compared, with the difference being the amount of profit or loss made at that point in time
    - - EVA is the method of measuring a project's progress at any given point in time, forecasting its completion date and final cost, and analysing variance in the schedule and budget as the project proceeds.
        It compares the planned amount of work with what has actually been completed to determine if the cost and work accomplished are progressing in accordance with the programme
    - - This is a method used to eliminate any unnecessary costs and/or increase value of a specification or product. The value is not necessarily related to cost, value could be increased efficiency, functionality, appearance etc.
    - - Value for Money (VfM), as a concept, relates to the optimum balance between the benefits expected of a project and the resources expended in its delivery.
        The three most common terms associated with the VfM concept are value management, value engineering and value analysis. Whilst they are all keys to the VfM concept, there are functional and systemic differences between them:
        
        a) Value Management (VM) is about getting the right project.
        
        b) Value Engineering (VE) is done to get the project right.
        
        c) Value Analysis (VA) relates to the improvement of a construction, manufacturing or management process and also to a post project review to establish value achievement.
    - - An invoice is a document issued by a vendor to a purchaser, setting out the products or services that they have purchased (or have agreed to purchase) and the amount that is payable.
  - - - 2) Request for a performance bond
      - 3) Conduct a credit check e.g. Dun & Bradstreet/Experian report
      - 4) Obtain references and observe if there are any industry rumours about impending insolvency
      - 5) Oblige the contractor to obtain collateral warranties from subcontractors and consultants
      - 6) Hold retention on contractor payments
      - 1) Consider the structure of the company, a parent company guarantee could be obtained
    - - 1) Inform all parties involved and secure the site
      - 2) Inform the bondsman/insurance company
      - 3) Take ownership of the materials off-site if paid for in valuation
      - 4) Schedule all plant and materials
      - 5) Consider stopping pending payments to the contractor and seek legal advice
      - 6) Value completed works and value any defects
      - 7) Monitor loss & expense incurred by the employer
      - 8) Review consultant and subcontractor agreements for any payment obligations
      - 9) Retender the project, retaining existing subcontractors where possible
  - - - These are used by government as an investment incentive to encourage businesses to spend money on assets
    - - The Capital Allowances Act 2001