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

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

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

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

Value of Works executed 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

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

Value of works executed – (influencing elements) 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

Reconciling Cost and Value 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

Reconciling Cost and Value 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

The process of project cashflow forecasting: 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

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

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

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

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

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

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

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

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

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

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

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