1. The Budget.

A project Budget is different to the project Estimate. The project Estimate was used to establish the contract price, which may be in the form of a Bill of Quantities, an Activity Schedule, or a Contract Sum Analysis. The project Estimate provides the buying targets or allowances for Preliminaries, Labour, Plant, Material and Subcontractors.

The project Budget is created by the individual or team that will be responsible for delivering the project. The Budget often reflects how the project will be delivered and is separated into a Work Breakdown Structure (WBS) rather than the simple components of Preliminaries, Labour, Plant, Material and Subcontractors. Once the project Budget has been established, it is used as the baseline for measuring the performance of the project.

The project Budget is different to the project Estimate as it is the individual or team’s opportunity to determine the forecast cost of the project based on their delivery strategy. As a result of project Budgets being established at a later point in time than the project Estimate, it can be common for better buying information to be available, and this can be incorporated into the budget. Once completed, it provides the opportunity to compare with the project Estimate to understand whether the project will be as profitable, or not, as the project Estimate.

The project Budget is “The Baseline”.

2. Supply Chain Management .

The Supply Chain can be described as the companies that provide the materials, products, and services necessary for the successful construction of a project, which can be referred to as “Supply Chain Partners”. The Supply Chain is an integral part of the construction process, and it is therefore necessary to ensure that it is managed correctly from the outset.

Procurement and Tendering

Procurement and Tendering is a key part of the Supply Chain management process and is more than simply awarding work to companies. There are a number of considerations that must be made, which include the complexity of the work being procured, the capability of the prospective company and whether there are any key time constraints.

Contract Preparation and Award

It is also necessary to consider the terms and conditions that the Supply Chain Partner will be engaged under. This will require the initial drafting of the contract and once a Supply Chain Partner has been selected, it may also require the negotiation of the terms and conditions.

Contract Administration

To help ensure that a Supply Chain Partner delivers on time and to the correct quality it is essential that the terms of the contract are administered correctly. The improper administration of a contract can lead to disputes, overruns, and loss of cost control.

3. Valuation of Work .

The valuation of work on a construction project can be straight forward when there is no change but, in our experience, the only constant that exists is change. In the context of construction projects, these are often referred to as variations or compensation events, but change can mean loss and expense.

When this happens, costs can increase and at the same time the certainty of the value of the work becomes less certain. This can jeopardise not only the profitability of a project but also the company.

The valuation of additional work and the subsequent recovery can be a contentious issue that can lead to a dispute. We believe in the principle of ‘day-one final accounting’ that relies on the early identification, securing of entitlement, valuation, and agreement of change as the project progresses. This can help reduce the likelihood of disputes and increase the likelihood of recovering a fair amount for the work undertaken.

4. Project Cost and Cost Forecasting .

Understanding the cost of a construction project is fundamental to understanding whether it is performing in line with the Project Budget (“The Baseline”) and whether the project is profitable or not.

Once a project has started, the project cost comprises the Cost to Date and the Cost to Complete. To understand the Cost to Date it is necessary to understand the contents of the cost report and to supplement it, where necessary, with cost accruals for liabilities that have been incurred but not costed. Robust cost forecasting is necessary to determine the Cost to Complete, this requires a good knowledge of the remaining scope of work and the construction programme.

The accuracy of the cost reporting of construction projects is notoriously poor and continuous movements in outturn cost without sufficient justification is common. This leads to unpredictable financial reporting and missed opportunities to take action as the realisation of a loss-making project is only fully appreciated at the end of the project once the costs have been incurred.

5. Cost Value Reconciliation .

Typically referred to as a “CVR”, a Cost Value Reconciliation is simply the profit and loss statement for a construction project. A CVR is an essential tool in understanding the performance of a project and highlighting expenditure issues. The benefit of a properly prepared CVR cannot be overstated as without the proper understanding of how the project is performing it is not possible to make informed decisions.

To compile a reliable CVR it is necessary to have a firm grasp of the costs and also to ensure that the value of the project has been ‘recognised’ correctly. The cost and value are compared to understand the profitability of the project. Construction projects can span a number of months, which means that the value of the project has to be determined as the project proceeds.

The key to the proper evaluation of a CVR is experience. It is the experience of not only knowing how to properly compile the report but the experience that assists in the understanding of why the financial position is what it is. In our experience, even forecasted profitable projects should command the same level of scrutiny as forecasted loss-making projects. A CVR that shows a construction project being forecast to make a profit can provide a false sense of security, but the reported position may not be real.

6. Cashflow Analysis .

It may be a cliché to say that cash is the lifeblood of the construction industry, but it is as true now more than ever. Even profitable construction companies can go out of business if their cash inflow is not sufficient to meet its cash outflow.

Cashflow forecasts allow construction companies to identify any cashflow problems, all the tracking of reported revenue with cash receipts, enable businesses to check they are meeting their financial objectives and help identify where customers are not paying on time.

We recommend that cashflow forecasting is undertaken as part of managing your business to help ensure it does not run into unexpected cash problems. Armed with the foresight of your company’s cashflow it will help you make decisions; it may be that you need to secure an element of external finance to help you through a period where the timing of cash inflows and outflows are out of sync. Failure to foresee this could prove fatal to any business.