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Unit 3
Project Level Financial Management
Learning objectives
At the end of this unit, you should be familiar with:
1. the principle of cash flow forecasting and how it applies to construction projects
2. different approaches for manipulating cash flow such as front end loading and sensitivity
analysis
3. the process of project cost control including cost control tools such as cost value
reconciliation
Contents
3.1 Introduction
3.2 Cash flow forecasting of construction projects
3.3 Project costing and cost control
3.4 Cost value reconciliation
3.5 Summary
3.6 Self-assessment questions
3.1 Introduction
Individual construction projects tend to be large when compared to the overall activity of a typical
construction company. In the case of small to medium size firms, the contractors may be working
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on only a handful of projects at any particular time. Each project has its own characteristics and
contract conditions. Large organisations although may well be working on a large number of
projects at the same time (hundreds), these projects will undoubtedly be run by small to medium
regional offices (see Unit 2).
The key features that define project success are twofold: managing costs to achieve efficiencies, and
creating and enhancing value. These two elements enable project stakeholders to understand the
activities and resources required to meet project goals, as well as the expenditures necessary to
complete the project to the satisfaction of the customer. Project level financial management focuses
on issues such as cost estimation and budgeting, cash flow management, and cost control. On the
other hand, the emphasis of value management is on optimizing project value-given cost, time, and
resource constraints while meeting performance requirements such as functionality and quality.
This unit addresses two main managerial processes involved in project level financial management:
cash flow forecasting and planning; and project costing and cost control using Cost Value
Reconciliation (CVR) method.
3.2
Cashflow forecasting refers to the study of the flow of cash into the business and the flow of cash
out during the day to day trading activities. It is particularly concerned with the timing of these
payments and receipts and the consequent balance of cash remaining due to these transactions.
For example:
Jan
Feb
Mar
Apr
May
1000
1000
2000
6000
500
1500
1000
500
-500
+500
-1000
-5500
Cumulative Cashflow
+4500
+5000
+4000
-1500
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Cash balance
+5000
Payment out
Receipts in
Net Cashflow
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Cash flow forecasting is an accounting function but in certain respects it differs from traditional
bookkeeping practice. Traditional bookkeeping is based on the accrual system and any statement
produced during a particular accounting period will make reference to expenditure incurred
although it may not have been paid for as yet, and similarly income due which has not yet been
received, so that the true liabilities and assets of the company can be revealed. In cash flow
planning this principle is ignored. The actual timing of payments and receipts is the important
factor.
1.
It ensures that the cash resources of the firm are fully utilized.
2.
It ensures that there is sufficient cash made available to meet the anticipated demand.
3.
It provides a reliable guide to lending institutions when negotiating and repaying loans.
4.
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1. A graph of value v. time, value being that monies a contractor will eventually receive for
doing the work.
2. The measurement and certification interval.
3. The payment delay between certification and the contractor receiving the cash.
4. The retention conditions and retention repayment arrangements.
5. A graph of cost v. time the contractors cost liability arising from labour, plant, materials,
subcontracts and other cost headings as necessary.
6. The project costs broken down into the above items.
7. The delay between incurring a cost liability under the above headings and meeting that
liability.
Item 6 can easily be calculated from the contract cost/plan, or for simplification can be
assumed to be uniform throughout the contract programme.
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Items 1 and 5
The graph of value v. time is needed in order to derive the cash in curve, while the cost v. time is
used to derive the cash out curve. Both of the above graphs are very useful tools for performance
control. Clearly the two graphs are related to each other and the production of any can lead to the
calculation of the other. Either of these can be obtained by producing projects plans in network or
bar chart form, and calculating the value or cost of each activity and summing the value in each
time period of either weeks or months, as shown in figures 3.2 and 3.3 in Example 3.1.
However, the above technique of deriving one curve from another assumes that the rate of markup
is uniformly distributed over the contract programme (i.e. there is no Front End Loading). Also,
estimating errors distort the value v. time graph to some extent. In order to evaluate Front-end
loading, over-measure, etc. the value v time and cost v. time have to be produced separately, or by
the use of a computer model.
Example 3.1
A contractor has won a contract to build a building. The project plan and the value of work to be
performed can be seen in figure 3.2. The contractor needs to prepare a cash flow forecast so that
any overdraft requirement can be arranged.
The first step in the cash flow forecasting process is to calculate the cumulative value build-up as
seen at the bottom of figure 3.2. The following step is to calculate the cumulative cost commitment
build-up by subtracting profit margins and following that the cash-in and cash-out values are
calculated to produce the cash flow forecast (see table 3.1). The typical process of a simple cash
flow forecast can be summarised in figure 3.4 or 3.5 (depending on whether cost or value is the
starting point of the calculation).
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Activity
Excavate
Concrete
Foundations
GF slab
Cols G to F 1.1
Floor 1
Cols 1 to F1.2
Floor 2
Cols F1.2 to roof
Roof Structure
Cladding
Services
Finishes
Value in month
Cumulative
Value
1
1
2
1
0.5
2
0.5
0.5
10
0.5
0.5
0.5
11
12
0.5
2
2
0.5
2
0.5
1
3.5
1.5
2.5
2.5
2.5
2.5
2.5
2.5
7.5
10
12.5
15
20
1
1
1
25
0.1
0.1
0.3
0.5
1.5
0.5
0.5
26.5
27
27.5
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30000
25000
20000
15000
10000
5000
0
1
10
11
12
13
14
Figure 3.3 Value vs Time from a Bar Chart (values shown as 000s)
Cost
S-curve
Value
Profit
S-curve
Cash out
Payment
Retention
Cash in
Payment
delay
Cash flow
Figure 3.4 The cash flow mechanism of traditional models (cost curve as a starting point)
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Value
S-curve
Cost
Profit
S-curve
Cash in
Retention
Payment
Cash out
Payment
Cash flow
Figure 3.5 The cash flow mechanism of traditional models (value curve as a starting point)
Example 3.2
Table 3.2 shows a contractors project budget and profit distribution for a newly awarded contract.
The conditions of contract allow interim measurements to be made monthly and payment of the
amount certified, less 10% retention paid to the contractor one month later (the time lag between
certification and cash receipt). Half of the retention is released on practical completion and the other
half is released six months later. An average payment delay of one month between the contractors
cost liability and the cash out may be assumed.
Table 3.2 Project Budget and Profit Distribution
Month no.
1
Value of work each 5
month (000)
Profit (% of value)
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2
6
3
6
4
9
5
9
6
9
7
8
8
7
9
6
10
3
15
10
10
10
-5
-10
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Questions
a) Calculate the maximum amount of capital needed to execute this project.
b) If the contractors cash balance at the start of the contract was 2000 what will be the total
interest that will be paid or earned given the annual interest rate is 12% both ways.
c) If the activities involved in the first two months of the contract are likely to incorporate
quantity variations of plus/minus 30% how would that affect the overall profit and capital
required to support the contract?
Solution
a) In order to calculate the maximum amount of capital needed to execute this project, we need
calculate the cumulative cash flow of the project. Table 3.3 shows the calculations and results.
It can be seen that the maximum negative cash flow figure is 2,950 in month 10.
Month Value
5
1
6
2
6
3
9
4
9
5
9
6
8
7
7
8
6
9
3
10
11
12
13
14
15
16
Profit
(%) Profit Cost
15%
0.75 4.25
15%
0.9
5.1
10%
0.6
5.4
10%
0.9
8.1
10%
0.9
8.1
5%
0.45 8.55
0%
0
8
-5% -0.35 7.35
-10%
-0.6
6.6
-10%
-0.3
3.3
Cum
Value
5
11
17
26
35
44
52
59
65
68
Cum
Cost Ret
4.25 0.5
9.35 1.1
14.75 1.7
22.85 2.6
30.95 3.5
39.5 4.4
47.5 5.2
54.85 5.9
61.45 6.5
64.75 6.8
Cash
in
0
4.5
9.9
15.3
23.4
31.5
39.6
46.8
53.1
58.5
64.6
64.6
64.6
64.6
64.6
68
Cash
out Cashflow
0
0
4.25
0.25
9.35
0.55
14.75
0.55
22.85
0.55
30.95
0.55
39.5
0.1
47.5
-0.7
54.85
-1.75
61.45
-2.95
64.75
-0.15
64.75
-0.15
64.75
-0.15
64.75
-0.15
64.75
-0.15
64.75
3.25
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b) In order to calculate the interest to be paid/earned as a result of the contract cash flow, we need
first to calculate the monthly cash balance given that the contractors had 2,000 at the start of
contract. This is done by adding 2000 to the monthly cash flow values calculated in part (a).
The following step is to start applying interest to the monthly cash balances. This is done by setting
up a column for opening balance (the cash balance at the start of each month) and then applying a
monthly interest rate to that balance to come up with the closing balance (cash balance at the end
of the month).
The example gives an annual interest rate. This needs to be converted to an equivalent monthly one
by the following formula:
1/12
-1
Monthly Opening
Closing
Cashflow Balance Interest balance
0
2.000
0.019
2.019
0.25
2.269
0.022
2.291
0.3
2.591
0.025
2.615
0
2.615
0.025
2.640
0
2.640
0.025
2.665
0
2.665
0.025
2.690
-0.45
2.240
0.021
2.262
-0.8
1.462
0.014
1.475
-1.05
0.425
0.004
0.429
-1.2
-0.771
-0.007
-0.778
2.8
2.022
0.019
2.041
0
2.041
0.019
2.061
0
2.061
0.020
2.080
0
2.080
0.020
2.100
0
2.100
0.020
2.120
3.4
5.520
0.052
5.572
Total interest =
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c) This is a sensitivity analysis question where an input variable is varied and the influence on
the output is assessed. The cost of activities to be carried out at the initial two months of the
projects is estimated by applying a rate to the given quantities. If these quantities are
changed then it is normal practice to apply the same rate to the new quantities (given that the
variations did not influence the progress of the contract and prelims).
Therefore, Table 3.3 needs to be calculated again with the first two months altered as shown in
Tables 3.4 (for a plus 30% variation) and 3.5 (for a minus 30% variation).
Month Value
6.5
1
7.8
2
6
3
9
4
9
5
9
6
8
7
7
8
6
9
3
10
11
12
13
14
15
16
Profit
(%)
15%
15%
10%
10%
10%
5%
0%
-5%
-10%
-10%
Profit Cost
0.975 5.53
1.17 6.63
0.6
5.4
0.9
8.1
0.9
8.1
0.45 8.55
0
8
-0.35 7.35
-0.6
6.6
-0.3
3.3
Cum
Value
6.5
14.3
20.3
29.3
38.3
47.3
55.3
62.3
68.3
71.3
Cum
Cost
5.525
12.155
17.555
25.655
33.755
42.305
50.305
57.655
64.255
67.555
Ret
0.65
1.43
2.03
2.93
3.83
4.73
5.53
6.23
6.83
7.13
Cash
in
0
5.85
12.87
18.27
26.37
34.47
42.57
49.77
56.07
61.47
67.735
67.735
67.735
67.735
67.735
71.3
Cash
out
0
5.525
12.155
17.555
25.655
33.755
42.305
50.305
57.655
64.255
67.555
67.555
67.555
67.555
67.555
67.555
Cashflow
0
0.325
0.715
0.715
0.715
0.715
0.265
-0.535
-1.585
-2.785
0.18
0.18
0.18
0.18
0.18
3.745
Table 3.4 Calculating the cash flow when there is a +30% variation
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Month Value
3.5
1
4.2
2
6
3
9
4
9
5
9
6
8
7
7
8
6
9
3
10
11
12
13
14
15
16
Profit
(%)
15%
15%
10%
10%
10%
5%
0%
-5%
-10%
-10%
Profit Cost
0.525 2.98
0.63 3.57
0.6
5.4
0.9
8.1
0.9
8.1
0.45 8.55
0
8
-0.35 7.35
-0.6
6.6
-0.3
3.3
Cum
Value
3.5
7.7
13.7
22.7
31.7
40.7
48.7
55.7
61.7
64.7
Cum
Cost
2.975
6.545
11.945
20.045
28.145
36.695
44.695
52.045
58.645
61.945
Ret
0.35
0.77
1.37
2.27
3.17
4.07
4.87
5.57
6.17
6.47
Cash
in
0
3.15
6.93
12.33
20.43
28.53
36.63
43.83
50.13
55.53
61.465
61.465
61.465
61.465
61.465
64.7
Cash
out
0
2.975
6.545
11.945
20.045
28.145
36.695
44.695
52.045
58.645
61.945
61.945
61.945
61.945
61.945
61.945
Cashflow
0
0.175
0.385
0.385
0.385
0.385
-0.065
-0.865
-1.915
-3.115
-0.48
-0.48
-0.48
-0.48
-0.48
2.755
Table 3.5 Calculating the cash flow when there is a -30% variation
It can be seen that since the contract has been front-end loaded (i.e. putting higher mark-up at the
initial parts of the projects to improve cash flow) the contractor runs the risk of ending up with a
different overall mark-up rate than one tendered for. The overall tendered profit in this case has
been approximately 4.78% of value (this is calculated by dividing the total profit by total value).
This rate changes to 5.52% when there is a positive variation and 4.26% when there is a negative
one. In cases where there is a combination of a more severe front-end loading and variation, the
influence could be more dramatic resulting in the contractor making an overall loss.
This type of analysis (sensitivity analysis) is easily performed with the aid of computer based
spread sheet.
Example 3.3 (cash flow of facilities management contracts)
You are tendering for a cleaning and landscaping services contract. The duration of the contract is
12 months and is to commence on 1 January. You have decided that you will contract out all of the
services to be provided. These include:
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External landscaping to be done monthly between May and October at 200 per visit.
Cleaning ice/snow for paths and car parks to be carried out as required.
Your assessment suggests that this could happen for one month only between December and
February. The associated monthly cost would approximately be 2000.
The overall mark-up you decided to apply on all of the above cost items is 20%. Cash is usually
paid out during the month following the month the cost incurred in. Your client will pay you a fixed
monthly amount throughout the contract duration. Cash payments from the clients are expected to
be cleared few days after the end of each month. There will be a retention rate of 10% to be applied
and the total amount of money retained will be paid back to you at completion.
Question
Calculate the cash flow of the project.
Solution
This is another example where sensitivity analysis applies. The fact that the contractor is unsure
about when he/she will be required to clear the ice/snow creates uncertainty and risk. The way
forward is to do the calculation three times assuming the cleaning cost to be incurred either in
December, January or February. Table 3.6a shows the calculation for the December scenario whilst
the table 3.6b below lists the cash flow result for the January and February options.
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Month
1
Cleani
ng
300
Int.
Landsc
aping
100
300
Ext.
Landsc
aping
Ice
/snow
cleani
ng
total
cost
3100
value
4040
cum
value
4040
ret
404
cash in
0
cum
cost
3100
cash
out
0
Cash
flow
0
100
3100
4040
8080
808
3636
6200
3100
536
300
100
3100
4040
12120
1212
7272
9300
6200
1072
300
100
3100
4040
16160
1616
10908
12400
9300
1608
300
100
200
3300
4040
20200
2020
14544
15700
12400
2144
300
100
200
3300
4040
24240
2424
18180
19000
15700
2480
300
100
200
3300
4040
28280
2828
21816
22300
19000
2816
300
100
200
3300
4040
32320
3232
25452
25600
22300
3152
300
100
200
3300
4040
36360
3636
29088
28900
25600
3488
10
300
100
200
3300
4040
40400
4040
32724
32200
28900
3824
11
300
100
3100
4040
44440
4444
36360
35300
32200
4160
12
300
100
5100
4040
48480
4848
39996
40400
35300
4696
48480
40400
40400
8080
2000
Table 3.6a Calculating the contract's cash flow when cleaning of ice/snow occurs in December
1152
1488
1824
2160
2696
8080
Table 3.6b Contracts cash flow when cleaning of ice/snow occurs in January or February
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There has been significant research to develop standard value or cost curves (S-curves) and these
are widely accepted and used in commercial software. The accuracy of these curves however, has
been questioned by many researchers. Whilst the debate about the applicability of these curves
carries on, their value should not be under estimated. At the tender stage, contractors do not produce
project plans unless they win the contract. Yet they have to assess cash flow requirements to decide
on how they would be able to fund the project should they win the contract. S-curves are therefore
very appropriate at this stage and the contractor can assess the influence of any inaccuracy in these
curves by sensitivity analysis. It is advisable to use a computer spread sheet when modelling and
using S-curves.
Cash flow management is the overall process of forecasting, manipulating, planning and controlling
cash flow. The usual process of cash flow management starts with the contractor forecasting the
cash flow of a project to be tendered for. Depending on the output of the forecast, the contractor
will attempt to look at some tendering strategies (front-end loading, payment delays, project plans,
potential of over-measure, pricing of prelims, etc.) and manipulate these (if needed) to produce a
satisfactory cash flow.
Once a cash flow forecast is produced, the contractor will produce a plan of how financial resources
will be raised to fund the forecast cash flow. This will undoubtedly entail examining the companys
overall cash balances and overdraft facilities.
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The final stage of the cash flow management process is the monitoring and controlling of the cash
flow during the life of the project. This entails recording progress on the project in terms of value,
cost, cash in and out and comparing those against forecasts. Corrective actions may be necessary in
case of significant discrepancies. Corrective actions may be in the form of chasing clients for
outstanding cash payments, delaying payments to subcontractors and suppliers, altering the project
plans, etc. The contractor will regularly need to update the forecasts in the light of the progress up
to that point in time. The cash flow control process is often done using the cost value
reconciliation (CVR) form which will be addressed later on in this chapter.
3.2.6 Example on manipulating cash flow
Figures 3.6 and 3.7 have been produced to demonstrate examples of the influence of some variables
on cash flow. A typical project cash flow has been produced using a spread sheet based cash flow
model (the same model referred to in the advance cash flow section). The S-curve used to
produce the cash flow is as shown in the first graph of Figure 3.6 (middle curve). The first analysis
was performed to demonstrate the influence of different S-curves on a projects cash flow (second
graph in Figure 3.6). This gives the reader an idea of what happens if the contractor changes project
plans (perhaps to manipulate cash flow) or in the case of inaccurate forecasts of the S-curve.
One thing to look for when comparing different cash flow scenarios is the maximum negative cash
balance during the life of the project (the lowest point in the cash flow profile). As shown the first
two scenarios (1 and 2) have almost identical maximum cash needs (14,000). The third case has a
much higher value (almost 30,000) but when compared with the total project value (1,000,000)
the significance of the deference becomes perhaps less apparent.
Figure 3.7 illustrates three more tests performed to assess the influence of:
Front-end loading (FEL)
Where first there was no FEL, second a 5% mark-up rate was added to the first 30% of the contract
and third as high as 15% was added. Front end loading usually refers to the process of adding
higher mark-up rates at the initial phases of the project, and compensating that with lower mark-up
rates at the latter parts of the contracts, whilst ensuring that the overall desired rate the contractor
wants to submit for tender remains the same.
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Assuming that labour-only subcontractors are paid one month later than when the cost was
committed, the contractor will enhance the projects cash flow significantly when employing less
own labour and more subcontractors. The second graph in Figure 3.7 demonstrates this clearly.
Clients measurement frequency and delay of payment
This demonstrates the importance of making sure that clients pay as stipulated by the contract and
with as less delay as possible. A strong cash flow control system would highlight these delays and
alert management to chase clients. Contractors should also stress on using favourable forms of
contracts that will allow for frequent measurement intervals (maximum monthly). The first scenario
in the graph shows a contract with monthly measurement and one month payment delay while the
second demonstrate the influence of having two month delays instead of one. The third shows the
cash flow in the case of having measurements at two monthly intervals instead of one.
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Comparison between cost to date and work certified to date (limited control value).
Unit costing (checking cost of closely defined operations) - more detailed control possible.
There are some policy/strategic matters, which may be considered from cost records such as:
a) Employment of specialists or own site organisation.
b) Introduction of bonus of adjustment of bonus.
c) Renewal of plant.
d) Size of contract and type of work most suited to organisation.
e) Introduction of work study.
f) Alternative method of construction in the future (if choice is available).
g) Valuation of variations when price is negotiated.
h) Allowance for attendance on subcontractor.
Ideally, cost records from previous projects should be used to estimate the cost of future work. This
however is not always possible and sometimes not desirable. Comparison of cost records with unit
rates in a bill is difficult if not impossible to operate.
Reasons
1) Bill too complex and detailed.
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The simplest form is the keeping of books of account for each contract, enabling profit to be
determined after final account is settled.
Results are generally too late for control purposes but may give:
a) Indication of type of work most suitable for firm.
b) Relative effectiveness of site administration.
c) Determined policy for future tenders.
Management in the construction industry will be concerned to compare value with cost, with the
objective to identify the profit to date on individual contracts. The system suffers from the
disadvantage that there is no breakdown of the profit figure between types of work. It therefore
provides guidance only on which contract require management attention.
Virtually all medium to large contractors perform cost value reconciliation and that involves first of
all the preparation of cost accounts.
Cost accounts
Cost accounts are only prepared at the discretion of the directors of the company and not a legal
requirement. For financial reporting (and tax calculation) the contractor must record the cost of
activities the company is incurring but need not to do it on individual projects basis. Many small
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builders are unable to allocate the financial resources or staff to provide cost accounts and with the
consequential lack of accurate costing information, run greater risks of insolvency.
Analysis of cost
In the building industry the normal practice is to cost net excluding the majority of overheads unless
they are site-related.
Simple historical cost system
It is normal practice in the building industry to cost all items gross (in terms of retention). Any
retention therefore, would be ignored in the cost accounts. Trade discounts, however, would usually
be deducted from the cost. The simplest form of cost system merely amounts to an analysis or
separate cost record for each individual contract. No distinction will be made between the various
elements of cost such as labour, plant and materials. The cost will simply be kept for each project as
a running total entered by hand into cost ledger.
This however, is not particularly helpful to the surveying or management staff, although better than
nothing. It is therefore, normal practice to provide a more detailed cost breakdown under key cost
headings which might be:
Materials.
Own stores.
Nominated suppliers.
Own plant.
Own transport.
Special expenses.
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These basic breakdowns of cost do enable management to identify the total cost allocated to certain
cost centres each month and with the aid of this basic information it is possible to produce a cost
value reconciliation statement. With such a limited cost breakdown, however, there is insufficient
information to relate cost to work sections. More detailed cost breakdowns are discussed later.
Monthly close downs will usually occur at the end of each calendar month to coincide with the
similar close down of the financial accounts. After the close down date most companies allow a
period of up to 14 days for processing the paperwork.
In order to appreciate the reasons why cost records may be inaccurate at any given point in time and
therefore need adjustment before any cost value reconciliation can take place, it will be useful to
examine the thinking behind a typical cost system.
Directly employed labour
The time sheet filled by operative will need to provide the following:
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The wages clerk will be involved in checking time sheets in order to calculate the wages due to
operatives. There will be a delay between the completion of time sheets and the actual payment of
wages. In the construction industry this delay does not exceed three days. The cost of the wages will
usually be charged to the cost accounts each week. At the end of the calendar month when the time
sheet may apply to two accounting periods the accountant will either:
a) Allocate the total cost of the wages to the month in which they are paid, or
b) Divide the cost between the current and next months costs, pro rata to the exact number of
days worked in the respective months.
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3. Before placing an official order (asking the supplier to deliver the materials to the site, the
contractor needs to do the following:
a) Calculations of quantities (BQ could be inaccurate), latest drawings should be used.
b) Timing of deliveries. The buyer should be alert to amendments of contract programme.
Close contract with site should be kept (via site reports).
4. Official order (once this is issued the contractor is legally responsible for paying them).
5. Advice note (acknowledgement of receipt of order by supplier).
6. Delivery note The supplier will ask the site agent to sign the note to confirm that materials
are supplied.
7. Invoice (supplier sends to contractor).
8. Authorisation of payment - contractor checks invoice with quotation, order and delivery
note. Once this is done, copies of the invoice are sent to cost centre and financial accounts.
Own stores
Costing for own stores is a very similar process to that for materials invoices except that the priced
stores issue note will take the place of the materials invoices.
Nominated suppliers
The costing process for nominated suppliers also involves the clients quantity surveyor. At each
interim valuation the builder will pass the original nominated invoices received during the month
for inclusion in the interim certificate. A duplicate copy will be retained by the builder for costing.
Labour and material subcontractors
The procedure for payment of labour and material subcontractor will usually follow that described
for labour only subcontractors. Again cost is recorded gross.
Nominated subcontractor
Although most of the more modern standard forms of construction contract removed nominated
subcontractors some clients continue to use the practice. In the older standard contracts e.g. JCT80,
the payment for nominated subcontractors is controlled by the client and the date of issue of the
valuation certificate. The payment requires from the nominated subcontractor will be received by
the main contractor and passed to the client for checking and approval. The contractor must pay the
nominated subcontractor the amount certified within 17 days of the issue of the certificate. The
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contractor will be unable to certify payments until after the interim certificate has been received
from the architect.
It is probable therefore; that the internal payment certificate will not be raised in time for inclusion
in the current months costing as they will be received by the accountant after the close down date
for the month.
Hired plant
Invoices for hired plant will be processed in the same manner as for materials. Hired plant invoices
may create a problem where the hire period extends across two accounting periods. The account
will need to make the decision as to which accounting period the invoices should be costed in, or
whatever the cost should be split.
Adjustment to the valuation
Where Bill of Quantities is part of the contract documents they will inevitably form the basis of the
quantity surveyors valuation of work in progress. The clients quantity surveyor will prepare the
valuation under a number of headings including preliminaries, measured work, materials on site,
nominated subcontractors and suppliers, provisional sums, variations, fluctuations and claims. The
degree of accuracy of the valuation achieved will vary between these elements. This is particular
important when considering the adjustments that are necessary before reconciliation can be made
with the cost records. The valuation prepared by the client is usually known as external valuation.
The contractor will normally be responsible for correcting and amending the external valuation in
order to achieve a higher degree of accuracy. This amended valuation is known as the internal
valuation.
Internal valuation
The majority of national contractors make provision on their cost value reconciliation format for an
adjustment to the valuation to compensate for any deliberate or accidental errors and weighting. In
addition, each aspect of the valuation (preliminaries, measured work, materials on site, attendance
on nominated subcontractors, provisional work, variation, fluctuations, weighting front and back
end loading and pricing errors) will need examination and appraisal. The necessary adjustment must
then be made to external valuation which will form the basis of the cost value reconciliation.
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Once the builder or contractor is reasonably certain that both the internal valuation and the adjusted
cost accurately reflect the financial position of a contract at a given date, a comparison of the two
figures will reveal the estimated gross profit on the project at that point in time. The majority of
builders enter the respective costs and adjustments and details of both the external and internal
valuations on a standard company cost value reconciliation format. In addition, it is common also to
include other details such as cash received, outstanding retention, claims pending, contract sum,
contract period, extension of time etc. A typical cost value reconciliation format is shown in figure
3.9 below.
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COST-VALUE RECONCILIATION
Project title : Currie primary school
CVR No.: 8
Date: 13/01/2014
Gross value ()
Cost ()
14,044,641.88
111,665.44
Variations
361,251.65
Agreed claims
50,000.99
Fluctuations
0.00
Total Gross
14,567,559.96
Profit/Loss ()
-40,357.96
14,527,202.00
2,400,000.00
2,301,299.17
98,700.93
Sub-contractors
6,400,000.67
6,319,388.84
80,611.83
Plant
1,307,250.17
1,312,215.71
4,965.54
Materials
3,209,308.00
3,412,085.69
202,777.69
Overheads
1,251,001.02
1,033,445.00
217,556.02
Total Gross
14,567,559.96
14,378,434.41
189,125.55
-40,357.96
0.00
-40,357.96
14,527,202.00
14,378,434.41
148,767.59
3.5 Summary
This unit focused on financial management at the project level of organisations and examined the
principles of cash flow as it applies construction projects generally. It also discussed the process of
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project cost control and how such project management tools as cost value reconciliation (CVR) is
used in this regard.
Activities
Duration (months)
Costs ()
Excavation
9,000
Concrete bases
12,000
Erect frames
1.5
18,000
15,000
Fix cladding
4.5
1.5
6,000
Install plant
20,000
Q2. The Planning Department provides the Contract Manager with a budget showing anticipated
value of work to be done each month and at the middle of the month the manager receives a copy of
the certificate showing the value of work completed up to the end of the preceding month.
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The contract period is 12 months. The job is planned to take 10 months and the figures for
the budgeted programme and actual certificate values up to the end of the first 6 months are
given below.
Month
Budget
Actual
5000
5000
15000
5000
30000
15000
30000
20000
50000
25000
50000
30000
40000
30000
30000
10
20000
a) In order to make an appraisal of the situation set out both column of figures on a cumulative
chart.
b) Comment on the possibility of meeting the original target.
c) Assuming that it is now necessary to use the whole of the remaining 6 months of the
contract period, give revised budget figures for this period, and plot the new budget curve on
the graph.
Q3. Prepare a cash flow forecast for the first 6 months of a contract based on the following
information.
Activity
Value
Month
150,000
RC frame
210,000
1-3
External brickwork
100,000
2-4
Roof
50,000
3-4
Services
75,000
4-6
30,000
F External works
Notes
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