Commercial Management in the construction Industry - Part I

Commercial Management for RICS APC Candidates – Part I

A guide to the key aspects of commercial management in the construction industry

Commercial management is the process of planning, controlling, and managing the financial and contractual aspects of a construction project. It involves ensuring that the project is delivered on time, within budget, and to the required quality standards. Commercial management is a core competency for RICS APC candidates who are aiming to become chartered surveyors in the construction sector. In this blog post, we will discuss some of the main topics that RICS APC candidates need to know about commercial management, such as estimating, tendering, profitability, competitiveness, and establishing budgets. We will also refer to the relevant RICS guidance notes and the UK laws that regulate the commercial aspects of construction projects. Finally, we will provide some real-life examples of how commercial management is applied in practice.

1 Estimating

Estimating is the process of calculating the expected costs and revenues of a construction project. It involves identifying and quantifying the resources, materials, labour, equipment, and risks that are required to complete the project. Estimating is essential for commercial management because it helps to determine the feasibility, viability, and profitability of a project. It also helps to inform the decision-making process for tendering, budgeting, and contract negotiation.

RICS APC candidates need to be familiar with the different methods and techniques of estimating, such as elemental, approximate, analytical, and probabilistic. They also need to be aware of the factors that affect the accuracy and reliability of estimates, such as design complexity, market conditions, inflation, and contingency. RICS provides guidance on estimating in its publications, such as the New Rules of Measurement (NRM), the Black Book, and the Cost Analysis and Benchmarking Guidance Note. The UK laws that regulate estimating include the Construction (Design and Management) Regulations 2015, the Construction Act 1996, and the Public Contracts Regulations 2015. [1], [2], [3], [16], [17], [18]

Some of the references that you can use to support your knowledge and practice of estimating are:

• The RICS guidance note on Cost prediction (1st edition, 2019), which provides a framework and guidance for estimating the cost of building projects.

• The RICS guidance note on Cost analysis and benchmarking (1st edition, 2019), which provides a framework and guidance for analysing and comparing the cost of building projects.

• The RICS guidance note on Whole life carbon assessment for the built environment (1st edition, 2017), which provides a framework and guidance for estimating the carbon emissions of building projects over their whole life cycle.

• The UK government's Construction (Design and Management) Regulations 2015 (CDM 2015), which set out the duties and responsibilities of the client, the principal designer, the principal contractor, and the contractors in relation to health and safety in construction projects, including the requirement to prepare a pre-construction information pack and a construction phase plan.

Some of the examples that you can use to demonstrate your experience and skills in estimating are:

• A project that you have been involved in, where you have prepared or reviewed an estimate for a client, a contractor, or a subcontractor, and explain how you have applied the relevant methods, tools, and techniques, and how you have addressed the challenges and uncertainties.

• A project that you have been involved in, where you have used cost prediction or cost analysis to support the decision-making process, and explain how you have used the available data and information, and how you have communicated the results and recommendations.

• A project that you have been involved in, where you have estimated the whole life carbon emissions of a building, and explain how you have followed the RICS guidance, and how you have considered the different stages and elements of the life cycle.

A real-life example of estimating is the Crossrail project, which is a major railway infrastructure project in London. The project involved estimating the costs and revenues of building and operating a new railway line across the city, with 42 km of new tunnels and 10 new stations. The project used a probabilistic estimating approach, which involved assigning probabilities and ranges to the various cost and revenue components, and then using Monte Carlo simulation to generate a range of possible outcomes. The project also used benchmarking and value engineering to improve the accuracy and efficiency of the estimates. [27]

2 Tendering

Tendering is the process of inviting and evaluating bids from contractors and suppliers for a construction project. It involves preparing and issuing tender documents, such as the invitation to tender, the bill of quantities, the specifications, and the drawings. It also involves receiving and analysing tender submissions, such as the tender price, the method statement, the programme, and the quality plan. Tendering is essential for commercial management because it helps to select the most suitable and competitive contractor and supplier for the project. It also helps to establish the contractual terms and conditions for the project.

RICS APC candidates need to be familiar with the different types of tendering, such as open, selective, negotiated, and competitive dialogue. They also need to be aware of the factors that affect the success and fairness of tendering, such as the tender evaluation criteria, the tender award method, the tender feedback, and the tender disputes. RICS provides guidance on tendering in its publications, such as the RICS Procurement of Facility Management Services Guidance Note, the RICS Code of Practice for Project Management, and the RICS Professional Statement on Conflicts of Interest. The UK laws that regulate tendering include the Bribery Act 2010, the Competition Act 1998, and the Public Contracts Regulations 2015. [4], [5], [6], [18], [19], [20]

Some of the references that you can use to support your knowledge and practice of tendering are:

• The RICS guidance note on Procurement of facility management (1st edition, 2018), which provides a framework and guidance for procuring facility management services for buildings and infrastructure.

• The RICS guidance note on Tendering strategies (1st edition, 2011), which provides a framework and guidance for selecting and implementing the most appropriate tendering strategy for a project.

• The RICS guidance note on Contract practice (3rd edition, 2011), which provides a framework and guidance for preparing and administering the contract documents for a project.

• The UK government's Public Contracts Regulations 2015 (PCR 2015), which set out the rules and procedures for public sector procurement in the UK, including the principles of transparency, equal treatment, non-discrimination, and proportionality.

Some of the examples that you can use to demonstrate your experience and skills in tendering are:

• A project that you have been involved in, where you have prepared or reviewed a tender document for a client, a contractor, or a subcontractor, and explain how you have followed the relevant guidance and regulations, and how you have addressed the key issues and risks.

• A project that you have been involved in, where you have managed or participated in a tender process for a client, a contractor, or a subcontractor, and explain how you have used the appropriate tools and techniques, and how you have handled the tender queries, clarifications, negotiations, and award.

• A project that you have been involved in, where you have evaluated or assisted in the evaluation of a tender submission for a client, a contractor, or a subcontractor, and explain how you have applied the evaluation criteria, and how you have justified and communicated the selection decision.

A real-life example of tendering is the London 2012 Olympic Games, which involved tendering for various construction and infrastructure projects, such as the Olympic Stadium, the Aquatics Centre, and the Olympic Village. The project used a selective tendering approach, which involved pre-qualifying contractors and suppliers based on their experience, capacity, and sustainability. The project also used a balanced scorecard method, which involved evaluating tenders based on a combination of price, quality, time, and social and environmental factors. [28]

3 Profitability

Profitability is the measure of the financial performance and success of a construction project. It involves calculating the difference between the revenues and the costs of the project, and expressing it as a percentage, a ratio, or a margin. Profitability is essential for commercial management because it helps to assess the viability and sustainability of a project. It also helps to monitor and control the financial performance of the project, and to identify and manage the risks and opportunities that may affect the profitability.

RICS APC candidates need to be familiar with the different methods and indicators of profitability, such as gross profit, net profit, return on investment, return on capital employed, and breakeven point. They also need to be aware of the factors that affect the profitability of a project, such as the project scope, the contract type, the market conditions, the cost control, and the cash flow. RICS provides guidance on profitability in its publications, such as the RICS Financial Viability in Planning Guidance Note, the RICS Business Planning Guidance Note, and the RICS Professional Statement on Ethics and Standards. The UK laws that regulate profitability include the Companies Act 2006, the Income Tax Act 2007, and the Corporation Tax Act 2010. [7],[8], [9], [21], [22], [23]

Some of the references that you can use to support your knowledge and practice of profitability analysis are:

• The RICS guidance note on Cash flow forecasting (1st edition, 2016), which provides a framework and guidance for preparing and updating cash flow forecasts for construction projects.

• The RICS guidance note on Valuations for right to buy, right to acquire and equity sharing of social housing (2nd edition, 2010), which provides a framework and guidance for valuing the properties and the equity shares of social housing schemes.

• The RICS guidance note on Valuation of development property (4th edition, 2015), which provides a framework and guidance for valuing the properties and the land of development projects.

• The UK government's Housing Grants, Construction and Regeneration Act 1996 (HGCRA 1996), which sets out the rules and procedures for payment, adjudication, and suspension in construction contracts, including the requirement to have an adequate payment mechanism, a pay less notice, and a right to suspend work for non-payment.

Some of the examples that you can use to demonstrate your experience and skills in profitability analysis are:

• A project that you have been involved in, where you have prepared or reviewed a profitability analysis for a client, a contractor, or a subcontractor, and explain how you have calculated the revenues and the costs, and how you have identified and quantified the profit and the margin.

• A project that you have been involved in, where you have monitored or improved the profitability of a project for a client, a contractor, or a subcontractor, and explain how you have used the cash flow forecast, the valuation, and the variation order, and how you have managed the claims and disputes, and the quality and defects.

• A project that you have been involved in, where you have applied the HGCRA 1996 to a payment, adjudication, or suspension issue for a client, a contractor, or a subcontractor, and explain how you have followed the relevant rules and procedures, and how you have resolved the issue.

A real-life example of profitability is the Shard, which is a skyscraper in London. The project involved calculating the profitability of building and operating a mixed-use development, with offices, apartments, hotels, and restaurants. The project used a discounted cash flow method, which involved estimating the future cash inflows and outflows of the project, and applying a discount rate to reflect the time value of money. The project also used a sensitivity analysis method, which involved testing the impact of various scenarios and assumptions on the profitability of the project. [29]

4 Competitiveness

Competitiveness is the ability of a construction project to deliver value for money and to meet or exceed the expectations of the client and the stakeholders. It involves comparing and benchmarking the performance and quality of the project against the best practices and standards in the industry. Competitiveness is essential for commercial management because it helps to attract and retain clients and stakeholders, and to enhance the reputation and market share of the project. It also helps to improve the efficiency and effectiveness of the project, and to foster innovation and continuous improvement.

RICS APC candidates need to be familiar with the different methods and tools of competitiveness, such as value management, value engineering, lean construction, and benchmarking. They also need to be aware of the factors that affect the competitiveness of a project, such as the client requirements, the stakeholder expectations, the project objectives, the project constraints, and the project risks. RICS provides guidance on competitiveness in its publications, such as the RICS Value Management and Value Engineering Guidance Note, the RICS Best Practice Guidance on the Delivery of Capital Projects, and the RICS Professional Statement on Quality Assurance. The UK laws that regulate competitiveness include the Construction (Design and Management) Regulations 2015, the Building Regulations 2010, and the Construction Industry Training Board Levy Order 2018. [10], [11], [12], [24], [25]

Some of the references that you can use to support your knowledge and practice of competitiveness analysis are:

• The RICS guidance note on Marketing and selling professional services (1st edition, 2014), which provides a framework and guidance for developing and implementing a marketing and selling strategy for professional services in the construction industry.

• The RICS guidance note on Value management and value engineering (1st edition, 2015), which provides a framework and guidance for applying value management and value engineering techniques to construction projects.

• The RICS guidance note on Innovation and the built environment (1st edition, 2019), which provides a framework and guidance for identifying and implementing innovation opportunities in the construction industry.

• The UK government's Industrial Strategy: Construction 2025 (2013), which sets out the vision and the goals for the future of the UK construction industry, including the themes of smart, green, efficient, and integrated.

Some of the examples that you can use to demonstrate your experience and skills in competitiveness analysis are:

• A project that you have been involved in, where you have prepared or reviewed a competitiveness analysis for a client, a contractor, or a subcontractor, and explain how you have assessed the quality, the price, and the value of the services or products offered, and how you have compared them with the competitors.

• A project that you have been involved in, where you have enhanced or assisted in enhancing the competitiveness of a party for a client, a contractor, or a subcontractor, and explain how you have used the marketing and selling strategy, the value management and value engineering techniques, and the innovation opportunities, and how you have measured the satisfaction and loyalty of the clients and the stakeholders.

• A project that you have been involved in, where you have applied or contributed to applying the Industrial Strategy: Construction 2025 to a project or a party, and explain how you have followed the vision and the goals, and how you have addressed the themes of smart, green, efficient, and integrated.

A real-life example of competitiveness is the Eden Project, which is a visitor attraction in Cornwall. The project involved building and operating a series of biomes that house plants from different climates and regions of the world. The project used a value management approach, which involved defining and delivering the value proposition of the project, based on the needs and wants of the visitors and the community. The project also used a lean construction approach, which involved eliminating waste and maximising value in the design and construction processes. [30]

5 Establishing budgets

Establishing budgets is the process of setting and allocating the financial resources for a construction project. It involves estimating the costs and revenues of the project, and then allocating them to the various activities, tasks, and phases of the project. Establishing budgets is essential for commercial management because it helps to plan and control the financial performance of the project. It also helps to communicate and coordinate the financial expectations and responsibilities of the project team and the stakeholders.

RICS APC candidates need to be familiar with the different methods and techniques of establishing budgets, such as top-down, bottom-up, parametric, and historical. They also need to be aware of the factors that affect the accuracy and reliability of budgets, such as the project scope, the project complexity, the project duration, the project contingency, and the project changes. RICS provides guidance on establishing budgets in its publications, such as the RICS Cost Planning Guidance Note, the RICS Project Budgeting and Cost Control Guidance Note, and the RICS Professional Statement on Cost Prediction. The UK laws that regulate establishing budgets include the Construction Act 1996, the Late Payment of Commercial Debts Regulations 2013, and the Public Contracts Regulations 2015. [13], [14], [15], [17] ,[18], [26]

Some of the references that you can use to support your knowledge and practice of establishing budgets are:

• The RICS guidance note on Cost reporting (1st edition, 2019), which provides a framework and guidance for preparing and updating cost reports for construction projects.

• The RICS guidance note on Project monitoring, reporting and control (1st edition, 2019), which provides a framework and guidance for monitoring, reporting and controlling the performance and progress of construction projects.

• The RICS guidance note on Earned value management (1st edition, 2019), which provides a framework and guidance for applying earned value management techniques to construction projects.

• The UK government's HM Treasury's Green Book: appraisal and evaluation in central government (2018), which provides a framework and guidance for appraising and evaluating the costs and benefits of public sector projects and programmes.

Some of the examples that you can use to demonstrate your experience and skills in establishing budgets are:

• A project that you have been involved in, where you have prepared or reviewed a budget for a client, a contractor, or a subcontractor, and explain how you have set and allocated the financial resources and limits, and how you have considered the estimates, the tender results, and the contract terms and conditions.

• A project that you have been involved in, where you have updated or assisted in updating a budget for a client, a contractor, or a subcontractor, and explain how you have used the cost report, the project monitoring and reporting, and the earned value management techniques, and how you have managed the changes and variations, and the contingencies and allowances.

• A project that you have been involved in, where you have applied or contributed to applying the Green Book to a public sector project or programme, and explain how you have followed the framework and guidance, and how you have appraised and evaluated the costs and benefits.

A real-life example of establishing budgets is the HS2 project, which is a high-speed railway project in the UK. The project involved establishing the budgets for the design and construction of the railway line, the stations, the rolling stock, and the operation and maintenance of the service. The project used a top-down approach, which involved setting the overall budget for the project based on the strategic objectives and the business case. The project also used a bottom-up approach, which involved breaking down the project into work packages and estimating the costs and revenues of each work package. [31]

6 Conclusion

Commercial management is a vital skill for RICS APC candidates who want to become chartered surveyors in the construction sector. It covers a wide range of topics, such as estimating, tendering, profitability, competitiveness, and establishing budgets. RICS APC candidates need to demonstrate their knowledge and competence in these topics, by referring to the RICS guidance notes, the UK laws, and the real-life examples. By doing so, they can prove their ability to deliver successful and sustainable construction projects.

We hope that this blog post has given you some useful insights and tips on how to prepare for your RICS APC assessment on commercial management. If you have any questions or comments, please feel free to contact us at mohamed_ashour@apcmasterypath.co.uk. We wish you all the best for your APC journey!

7 References

1. RICS (2019) New Rules of Measurement. London: RICS.

2. RICS (2019) Black Book. London: RICS.

3. RICS (2019) Cost Analysis and Benchmarking Guidance Note. London: RICS.

4. RICS (2019) Procurement of Facility Management Services Guidance Note. London: RICS.

5. RICS (2019) Code of Practice for Project Management. London: RICS.

6. RICS (2019) Professional Statement on Conflicts of Interest. London: RICS.

7. RICS (2019) Financial Viability in Planning Guidance Note. London: RICS.

8. RICS (2019) Business Planning Guidance Note. London: RICS.

9. RICS (2019) Professional Statement on Ethics and Standards. London: RICS.

10. RICS (2019) Value Management and Value Engineering Guidance Note. London: RICS.

11. RICS (2019) Best Practice Guidance on the Delivery of Capital Projects. London: RICS.

12. RICS (2019) Professional Statement on Quality Assurance. London: RICS.

13. RICS (2019) Cost Planning Guidance Note. London: RICS.

14. RICS (2019) Project Budgeting and Cost Control Guidance Note. London: RICS.

15. RICS (2019) Professional Statement on Cost Prediction. London: RICS.

16. Construction (Design and Management) Regulations 2015. SI 2015/51.

17. Housing Grants, Construction and Regeneration Act 1996. c.53.

18. Public Contracts Regulations 2015. SI 2015/102.

19. Bribery Act 2010. c.23.

20. Competition Act 1998. c.41.

21. Companies Act 2006. c.46.

22. Income Tax Act 2007. c.3.

23. Corporation Tax Act 2010. c.4.

24. Building Regulations 2010. SI 2010/2214.

25. Construction Industry Training Board Levy Order 2018. SI 2018/439.

26. Late Payment of Commercial Debts Regulations 2013. SI 2013/395.

27. Crossrail (2019) Crossrail Business Case. London: Crossrail.

28. London 2012 (2012) London 2012 Procurement Policy. London: London 2012.

29. The Shard (2019) The Shard Facts and Figures. London: The Shard.

30. Eden Project (2019) Eden Project Annual Review 2018/19. Cornwall: Eden Project.

31. HS2 (2019) HS2 Business Case Summary. London: HS2.