Contractors Postcontract Cost Management Processes Project Cashflow Forecasting

Contractor’s Post-contract Cost Management Processes (Project Cashflow Forecasting & Postcontract Cost Control) Dr Fiona Grant Department of Building School of the Built Environment Engineering and Surveying 1

The two main areas of focus Post contract cost management Client/Employer Department of Building School of the Built Environment Engineering and Surveying Contractor 2

Contractor’s Cashflow Forecasting Cashflow? • The movement of money IN and OUT of a business. • For a contractor, this movement of money represents his income and expenditure. Department of Building School of the Built Environment Engineering and Surveying 3

Contractor’s Cashflow Forecasting Company Level • Annual budgetary estimates/forecasts/turnover based on: -Current projects Project Level • Project specific, based on: -Project income -Project expenditure -Probable projects -Possible projects -Anticipated tender conversions Department of Building School of the Built Environment Engineering and Surveying 4

Contractor’s project cashflow Elements of the cashflow: – Cost • Cost is the expenditure incurred by the contractor on a project and includes all overheads and finance cost associated with the project. – Value of Works executed • Value refers to all costs plus the contractor’s margin of profit. It is the figure paid by the client following the issuing of interim and final certificates. Department of Building School of the Built Environment Engineering and Surveying 5

Contractor’s project cashflow • Types of costs Types of contractor’s costs Direct Costs Indirect Costs Labour Materials Plant Department of Building School of the Built Environment Engineering and Surveying Preliminary costs General overheads Finance cost 6

Contractor’s project cashflow • Value of works executed – (influencing elements) – Variations – Provisional Items – Materials on and off site – Subcontractors – Timing, frequency and accuracy of interim valuations. – Fluctuations – Retention & retention guarantees or bonds – Advance Mobilization Loan – Liquidated and Ascertained (L&A) damages – Period of honouring interim payment certificates • Additions • Omissions • Nominated • Domestic Department of Building School of the Built Environment Engineering and Surveying 7

Contractor’s project cashflow Reconciling Cost and Value • Before the commencement of works the contractor would analyse the tender price in terms of: – Net cost of production – Overheads – Profit • During the course of works income and expenditure analysed periodically (usually monthly) to determine whether projected targets are being met. Department of Building School of the Built Environment Engineering and Surveying 8

Contractor’s project cashflow Reconciling Cost and Value • after submitting a successful tender, budgets or target costs for the various elements of the project are established to help plan and execute the works. These target costs are used as yardsticks against actual costs. • involves analysing what was planned during the tendering stage of the project and comparing with what actually takes place on site in order to effect corrective measures. • main purpose therefore is to reveal how efficiently an item of work is being carried out. • involves the control of all site activities and variables in order to take the relevant action to correct or improve productivity. Department of Building School of the Built Environment Engineering and Surveying 9

Contractor’s project cashflow The process of project cashflow forecasting: • Break the project down into work packages • Estimate the individual costs • Allocate cost codes • Allocate target costs • Build into the system a time-related element Department of Building School of the Built Environment Engineering and Surveying 10

Contractor’s project cashflow Typical work package/cost coding system 1000 XBZ Hotel Project 1020 superstructure 1010 substructure 1021 structural frame 1011 excavation 1021. 01 provision of concrete 1022 external cladding 1021. 02 placing of concrete 1021. 021 suspended slab Department of Building School of the Built Environment Engineering and Surveying 1021. 03 beams and columns 11

Contractor’s project cashflow The planning and operating phases Planning Operating Set up budget/cost targets Authorise Cost data Cost & collection accounting progress & & works recording comparison on site Cost/value reconciliation & management accounting Department of Building School of the Built Environment Engineering and Surveying 12

Typical Contractor’s project cashflow Planned Cashflow Department of Building School of the Built Environment Engineering and Surveying 13

Contractor’s project Cashflow Curve and Saw-tooth Diagram Gross Profit Planned Cashflow Curves Department of Building Engineering and Surveying School of the Built Environment 14

Typical site level Action Plan to manage the cost control process Department of Building School of the Built Environment Engineering and Surveying 15

Typical Headoffice level Action Plan to manage the cost control process - Projects Director’s role Department of Building School of the Built Environment Engineering and Surveying 16

A situation of improper project cashflow management. Department of Building School of the Built Environment Engineering and Surveying 17

Cashflow improvement through early implementation of effective intervention measures. Department of Building School of the Built Environment Engineering and Surveying 18

Benefits of an effective project cashflow management process: - helps identify the inefficient use of plant and labour, and the excessive waste of materials on site. - acts as a basis to support claims when variations result in the works being carried in a manner other than planned for. - it provides cost data for the future management of other projects. - facilitates the estimating process of future project by providing valuation data base. - enables appropriate budgets to be set for future projects. - enables effective reappraisal of future projects to determine how they could be carried out more efficiently or which ones to 19 tender for. Department of Building Engineering and Surveying School of the Built Environment

Contractor’s project cashflow management – A summary Budget Forecast Schedule Variance Machinery & Equipment Cost Sub-contracts Materials Costs Project Risk Factors Cost-Value Reconciliation Overheads Bill Rates Claims Variation Orders Monthly Valuations Department of Building School of the Built Environment Labour Costs Engineering and Surveying 20

Recommended reading • Ashworth, A. (1999) Cost Studies of Buildings. Chapter 19 • Walker I & Wilkie R (2002) Commercial Management in Construction. Chapter 5 & Appendix 1 Department of Building School of the Built Environment Engineering and Surveying 21