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Questions in notes

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Commercial Management Questions & Answers from Class Notes

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Questions in notes

  1. 1. BUDGETS & CASHFLOWS Sample Exam Q1 When a main contractor is forecasting his turnover for the coming year, before an overall picture can be arrived at, he must take account of all current and potential work. (a) Compare a list of the different types of projects which should be taken into account and critically evaluate the importance of each project type in the overall turnover calculation. (b) Critically explore why a main contractor needs to forecast his turnover for the current year including what problem areas he may face when compiling his data. Ans: (a) Current Contracts: Work in progress/ contracts part complete / Signed contracts not yet started These are definite contracts for which the value of is, definite and known. Probable Contracts: Phased works - 2nd, 3rd Phase / Negotiated / Private Development Possible Contracts: Incoming Tenders / Client Base / Prequalification / Negotiation Tender Conversion Rates: Analysis of tender success rates / ratio 1:4 etc / Historical data / turnover & proit / experience / project suitability / expansion programme Information Collection: Current Project Value + Probable Project Value + Possible Project Value (tender Conversions) = - Basis for Turnover Forecast - Profit Forecast - Overheads allocation - Possible shortfalls (b) To determine staff levels for coming year and thus wages and salary expenses. To determine if he can cover overheads or needs to make cuts To determine if downsizing needs to be considered To determine if borrowing or overdraft facilities need to be arranged or amended Problems when compiling data include: o Only current work is definite, rest is not guaranteed o Probable/possible contracts are reliant on economic climate which is vague o Tendering is unpredictable
  2. 2. Sample Exam Q2 (a) Describe in detail the methods used by main contractor to isolate the profit amount in a newly awarded contract. (b) In your opinion, how can profit margins on a project change from tender submission to contract award? Ans: (a) o Start with the original tender o Check tendered prelims & profit o Do sub-contractor analysis (possible increase in profit on packages once awarded) o Reprice materials o Consider positives & negatives – Risk Assessment o Full preliminaries assessment (b) o Better buying on subcontractor packages & materials o Errors o Variations o Claims o Over-spend on prelims Sample Exam Q3 (a) What is a cashflow forecast and how is it completed? (b) How is a cashflow forecast beneficial both to the Main Contractor and the client? Ans: (a) A cash flow forecast is a schedule or graph which plots the amount of turnover on a given project against actual programme dates. This can also be described as an S-curve. The programme of works and the priced BOQ is used when compiling a cashflow forecast. (b) Benefits: Contractor Client - Dates for incoming monies - Estimate dates for outgoing monies - Bank Reference - Know when need to draw down Money - Check performance Sample Exam Q4 Once a tender has been awarded to a main contractor, why is it useful for him to prepare a preliminaries budget for the contract and how is this budget used? Ans:
  3. 3.  The preliminary costs on a contract are a particular area where a job can go wrong  Prelims can often be under-estimated at tender stage  Often more supervision may be needed thus increasing costs  The contract can run over on programme thus increasing prelims also INTERIM VALUATIONS Sample Exam Q5 (a) Why are interim valuations of such importance to a main contractor? (b) What are the main components of an interim valuation? Ans: (a) - Important to ensure full and timely payment for work carried out - Interim valuation may be only source or income for contractor to fund building operation - Vital for main contractors cashflow - RIAI Clause 35, IEI Clause 60 - covers interim payment policy (b) Valuation should be gross value of work less retention, advance payments and amount due on previous interim cert Following should be included in valuation:  Preliminaries  Measured Works  Valuation of architects instructions or variations  Remeasurement of provisional items, prime cost sums and provisional quantities  Valuation of nominated sub-contractors and suppliers  Unfixed material son site and where allowed materials off site  Fluctuations, where allowed within contract provisions Sample Exam Q6 What are the different formats used for compiling an interim valuation and give examples where different formats are used? Ans: Stage Payment Method: o Usually used when constructing units of a similar nature ie housing project o Must understand how project will be construction before establishing stage descriptions o Produce a schedule in line with programme o BOQ forms basis foe compiling stage value o Valuations simple to complete by ticking off completed units or percentage complete
  4. 4. Individual Item Assessment Method: o Usually used for once off project type eg: factory etc o Scroll through BOQ item by item and put percentage complete or site measurement against each item Sample Exam Q7 How are preliminaries dealt with when compiling an interim valuation? Ans: Several formats for including prelims on valuation: - Really dependant on level of detail given when tendering - Can be priced against each item – sub divided into time related and fixed - Lump sum based on % of work done basis - Lump sum divided evenly among interim valuation dates Agreement on prelims should be made prior to or at first interim valuation Lump sum divided evenly among months can result in under payment as in early stages there is large portion expended on site set up. Contractor may decide to font load to cover this early expense. Prelims: Advantage: guaranteed a block of money every valuation Disadvantage: If BOQ under-measured or lot of variations at BOQ rates, then prelims may overrun Undervaluing prelims: Commercial decision to run with high BOQ rates and only small figure for prelims Advantage: High BOQ rates for remeasures and variations Disadvantage: Money against prelims will not cover actual – if little work done on site then low valuation Sample Exam Q8 (a) Is a main contractor entitled to payment for unfixed materials on and off site? (b) In your opinion is this of importance to the main contractor? Ans: (a) Contracts generally allow for payment of unfixed material on site if: - Not brought to site prematurely - Adequately stored - Protect from weather Payment for material off site is at the sole discretion of the architect.
  5. 5. - Agreement should be made prior to manufacture - Proof of ownership may be required by client – vesting certificate - Materials will have to be set apart from other materials and marked with employers name (b) Payment for these materials are important to contractors as: o They can account for a large % of an interim valuation value o Has a major effect on a contractors cashflow o Long lead in times means early ordering and thus parting with money far in advance of fixing on site o Material may have to be ordered in full loads and then used intermittently FINAL ACCOUNTS / VARIATIONS Sample Exam Q9 What are the key components of a final account submission? Ans: Included in Final Account:  Preliminaries  Measured Works  Valuation of architects instructions or variations  Remeasurement of provisional items, prime cost sums and provisional quantities  Valuation of nominated sub-contractors and suppliers  Fluctuations, where allowed within contract provisions Preparation: Contract Sum (Excl VAT) Omissions: - PC Sums - Provisional Sums - Provisional Quantity Items - Valuation of omitted work resulting from architects instructions - Agreed deductions due to defects etc Additions: - Agreed totals for nominated subbies & suppliers including attendances & profit - Valuation of variations - Valuation of expended provisional sums and approximate quantities - Amounts established under loss and expense - Price fluctuations is applicable - 50% retention Sample Exam Q10 (a) What are the variations and where do they occur?
  6. 6. (c) What are the four main methods of pricing variations? Ans: (a) “A variation is defined as the alteration or modification of the design, quality or quantity of the works” Ivor Seeley Variations and extras occur when: o There is a discrepancy between the contract drawings/BOQ/architects instruction etc o Complying with statutory requirements o Alterations to design, quality or quantity of work o Restoration works in making good damage Should get architects instruction of CVI, agree costs before commencing, keep records (b) Four methods of pricing variations include: 1. BOQ rates – similar work 2. Adjusted BOQ rates – if similar work but different conditions 3. Build Up New Rate – no similar work in BOQ 4. Dayworks – impossible to measure or foresee SUB-CONTRACTORS Sample Exam Q10 Why is it common for main contractors to subcontract a large percentage of their work? Include what you perceive to be the advantages and disadvantages. Ans: Advantages: o Pass the potential risk on to others o No obligation in respect to long term employment – lower costs – no labour disputes o Non-productive overtime eliminated o Reduced problems with standing time due to inclement weather o Specialist areas covered o Cost certainty / possible savings i.e. plant Disadvantages: o Contractor must monitor quality of subbies work o Contractor is fully responsible for subbies work, quality, programme and cost o Contractors reputation can be damaged by poor performance subbies o Disputes with subbies often arise
  7. 7. Sample Exam Q11 When a sub contractor submits a quotation for a given work package, there may be issues surrounding the price which will have to be taken into account when the Commercial Manager is analysing that quotation. Outline what issues may arise, and also factors other than price which should be taken into account when procuring a subcontractor. Ans: o Price may be incomplete o Specification may be qualified – ie not pricing what you are supposed to o Subcontractor may have inserted his own conditions o Price may be subject to huge attendance Other factors: o Unable to meet programme o Poor record on quality o No expertise o Too much work on at current time o No supervision o Reputation for EOT’s and/or disputes Sample Exam Q12 (a) Draw a flow chart mapping the procedures carried out by a commercial manager from subcontractor procurement to final account. (b) Give a brief narrative on various forms used when carrying out the above procedures. Ans: PROCUREMENT SCHEDULE INVITATION TO TENDER ANALYSE SUB-CONTRACTOR QUOTATIONS PRE-ORDER MEETING PLACE ORDER/SUB-CONTRACT PAYMENTS & CERTIFICATES
  8. 8. FINAL CERT/ REMEASURE Procurement schedule o Project broken down into work packages o Key dates inserted o Projected start and completion dates from programme entered o Actual dates eventually recorded o Document updated throughout project Invitation to Tender Includes: o Site location o Names of consultant and employer o Main contract and sub contract conditions o Fixed or fluctuating price o Schedule of applicable dayworks o Return date o Site access o Contract period for main contract o Start date and duration of subcontract works o Discount levels required o Details of attendances Analyse Sub Contractor Price o Price important but not only criteria for award o Returned quotations compared against BOQ rates o All returned quotes analysed o Checked item by item o Could be priced differently ie lump sum, rates etc o Compare like with like Sub Contract Order: o Full schedule of BOQ items o Schedule of drawings sent at tender stage o Dates for commencement and completion o Full price including any discounts etc o Pre-contract correspondence o Project specific details such as retention etc Sub Contractor Payments: o QS must monitor/access/and sanction all payments o Subbie valuations should coincide with main contract valuations o Can help main contactor with their valuation and CVR’s
  9. 9. o Should check cumulative payments do not exceed order and if so Overpayment, because: o Work carried out without instruction o Additional works not recorded o Misrepresentation of agreement o Dayworks Sub Contractor Final Account o Agree measures o Agree variations o Deduct counter charges o Retention o Final Certificate COST VALUE RECONCILATIONS (CVR’s) Sample Exam Q13 CVR’s - How are they used? Ans: o Used to compare the actual costs allocated to a project against the value of works carried out, measured and valued at contract rates plus the value of materials on site o Basically monitors project performance in terms of labour, plant, materials etc against original tender figures – flags over runs o Can be used to compare projects profitability/turnover against budgeted or forecasted figures o Can be used when assessing tenders on similar projects Sample Exam Q14 Cost Value Reconciliations can take a substantial amount of time to compile. Some commentators advise that they are of limited use and costly to compile. Critically evaluate the use of CVR’s advising on the key components that make them up. Ans: Key Components: o Value of work to a specific date o Actual costs – adjusted with accruals o Profit / Loss
  10. 10. o Can be used to monitor the performance of the contract ESTIMATING Sample Exam Q14 When compiling a labour rate for an item of work, the estimator has to consider a number of factors along with the basis wage rate. What are these factors? Ans: 1. Guaranteed minimum CIF wage 2. Guaranteed Bonus 3. Guaranteed week (inclement weather allowance) 4. Public & Annual holidays 5. Non productive overtime worked as company policy 6. Additional payments – lunch money , travel allowance, tool allowance etc 7. PRSI 8. Levies – CIF Pension, Health Levy, Sick Pay etc Sample Exam Q15 When ordering materials for any given project, is it good practice to base the order on quantities in the BOQ? Give reasons for your answer. Ans: No as: - Quantities may be incorrect in BOQ - Quantities are measured net (don’t include laps / don’t allow for waste / cutting etc) - Materials may only come in certain lengths or sizes - Site measure is essential Sample Exam Q16 As a commercial manager with a large main contractor, you have been asked by the Financial controller to outline the advantages and disadvantages of hiring plant. Advise. Ans: (Same as Scenario Lecture 10B) Advantages of hiring plant: • Low maintenance costs – plant hire co. maintains and repairs • Contractors money not tied up in expensive plant – so cash flow not effected! • Easy to return idle plant when insufficient work available
  11. 11. • Plant hire company will supply skilled operatives/drivers and contractor does not have permanent operator wages to pay • Can hire for the minimum period necessary Disadvantages of hiring plant: • Hired plant is more expensive than owned plant over lifetime of machine • You don’t own the plant – money paid out • Particular machines may not be available from the hire company when needed • Possible problems with standing time – still have to pay even if machine not being used i.e. in bad weather • No tax benefits – cannot write off capital allowance against tax Sample Exam Q17 Calculate a rate per m2 for 100mm of blockwork wall. Blockwork; 100mm thick; in cement mortar (1:3) block size 440x215x100mm Constants Blocks 10nr/m2 of blockwork Mortar 0.007m3/m2 of blockwork Blocklayer 0.4 hours/m2 of blockwork Labourer 0.2 hours/m2 of blockwork Costs Labourer €18 per hour Blocklayer €28 per hour Blocks €500 per thousand Mortar €100 per m3 Waste on Blocks 5% Waste on Mortar 15% Profit & Overheads 10% Ans: Materials Blocks 10nr/m2 €500/1000x10= €5.00 + 5% = € 5.25 Mortar €100 per m3 x 0.007= €0.7 + 15% = € 0.805 Labour Blocklayer 0.4hrs x €28 = €11.20 Labourer 0.2 hrs x €18 = € 3.60 Sub Total €20.855 + P & O @ 12% €2.086
  12. 12. TOTAL Rate per m2 of Blockwork €22.94 VARIATIONS & DAYWORKS Sample Exam Q20 If you are the project manager on a medium sized contract and the client enters the site and instructs you to change the skirtings on the building from red deal to oak, how do you handle this request? Ans: (Same as Scenario – Lecture 13) 1) Firstly you advise the client that you cannot proceed without an architect’s instruction. 2) You make contact with the architect and advise him of the request 3) You or the commercial manager compile a cost for the variation – include a restocking charge from the supplier for taking back unusable materials 4) Do not proceed without an architect’s instruction 5) Confirmation of verbal instruction in some cases may be issued in writing CLAIMS Sample Exam Q21 The various standard forms of contract used on both building & civil engineering projects generally contain clauses relation to Extension of Time claims from the main contractor. Give a critically evaluation of Extension of Time claims made by the Main contractor under the following headings: (a) Key criteria for an Extension of Time claim (b) Good practice on the main contractor’s side in relation to compiling an Extension of Time claim. Ans: (a) Key Criteria: - Contractor submits written notification to architect - Cause of delay - Relevant events - Architect advises employer - Architect makes assessment (b) Good Practice: - Regular contract review meetings - Notice in form of short simple letter
  13. 13. - Delay schedule - Delay plotted on contractors programme - Accurate records should be kept incl photos and site records of labour and plant as staff may not still be employed by end of contract DISPUTE RESOLUTION Sample Exam Q22 Litigation is the most effective way to resolve a construction dispute – Discuss. Why might litigation be the best way? Why would other ways be better? Do you agree with hypothesis? COST PLANS Sample Exam Q23 Explain the term “Cost Plan” and how it is used in the Construction industry? Ans: A cost plan is a detailed estimate of the value of works generally based on priced approximate quantities of building elements. - Gives client an idea of costs – basis for budget - Can be basis for Budget Value Management Value Engineering Cashflow forecasts - Can be used for bank requirements