Contractor’s Post-contract Cost Management Processes

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

2. The two main areas of focus Post contract cost management Client/Employer Contractor School of the Built Environment

3. 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. School of the Built Environment

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

5. 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. School of the Built Environment

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

7. Contractor’s project cashflow • Value of works executed – (influencing elements) • Variations • Additions • Omissions • Provisional Items • Materials on and off site • Subcontractors • Nominated • Domestic • 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 School of the Built Environment

8. 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 are analysed periodically (usually monthly) to determine whether projected targets are being met. School of the Built Environment

9. 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. School of the Built Environment

10. 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 School of the Built Environment

11. 1000 XBZ Hotel Project 1020 superstructure 1010 substructure 1021 structural frame 1022 external cladding 1011 excavation 1021.02 placing of concrete 1021.01 provision of concrete 1021.03 beams and columns 1021.021 suspended slab • Contractor’s project cashflow • Typical work package/cost coding system School of the Built Environment

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

13. Typical Contractor’s project cashflow Planned Cashflow School of the Built Environment

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

15. Typical site level Action Plan to manage the cost control process School of the Built Environment

16. Typical Headoffice level Action Plan to manage the cost control process - Projects Director’s role School of the Built Environment

17. A situation of improper project cashflow management. School of the Built Environment

18. Cashflow improvement through early implementation of effective intervention measures. School of the Built Environment

19. 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 tender for. School of the Built Environment

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

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