Commercial Management in the Construction Industry - Part II

Commercial Management for RICS APC Candidates – Part II

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

Commercial management is the discipline of managing the financial and contractual aspects of a construction project. It involves planning, monitoring and controlling the costs, revenues, risks and opportunities of the project, as well as ensuring compliance with the contractual obligations and the 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 cover some of the main topics related to commercial management that RICS APC candidates need to know and demonstrate in their assessments. These topics are:

• Cash flows

• Reporting financial progress against budget

• Procurement of labour

• Procurement of plant and materials

• Procurement of sub-contracts

For each topic, we will provide a brief overview, a reference to the relevant RICS guidance notes and UK laws, and a real-life example from the construction industry.

1 Cash flows

Cash flow is the movement of money in and out of a project. It is a vital indicator of the financial health and viability of a project, as it shows the ability of the project to generate and sustain positive cash flow, and to meet its financial obligations. Cash flow management is the process of forecasting, monitoring and controlling the cash flow of a project, and taking corrective actions when necessary.

RICS APC candidates need to understand the principles and methods of cash flow management, and how to apply them to different types of projects and contracts. They also need to be aware of the factors that affect the cash flow of a project, such as payment terms, variations, retention, claims, disputes, taxation and financing.

The RICS guidance note on cash flow forecasting (1st edition, 2014) provides a comprehensive overview of the purpose, benefits and techniques of cash flow forecasting for construction projects. It also includes examples of cash flow statements and graphs, and a checklist of best practices. The guidance note is aligned with the RICS rules of conduct and the RICS professional statement on ethics and professional behaviour. [1]

The UK laws that regulate the payment practices and procedures in the construction industry are the Housing Grants, Construction and Regeneration Act 1996 (as amended by the Local Democracy, Economic Development and Construction Act 2009), and the Scheme for Construction Contracts (England and Wales) Regulations 1998 (as amended in 2011). These laws establish the statutory right to interim and final payments, the payment notices and pay less notices, the adjudication process, and the suspension of work for non-payment.[6] , [7], [8]

A real-life example of cash flow management in the construction industry is the Crossrail project, which is a major railway infrastructure project in London and the South East of England. The project has a budget of £14.8 billion and a completion date of 2022. The project is funded by a combination of government grants, Transport for London (TfL) borrowing, and a business rate supplement. The project has a complex contractual structure, involving multiple tiers of contractors and sub-contractors, and different forms of contracts, such as design and build, target cost, and lump sum. The project has faced several challenges and risks that have affected its cash flow, such as delays, cost overruns, design changes, technical issues, and Covid-19 impacts. The project has implemented various measures to manage its cash flow, such as regular and accurate forecasting, robust reporting and auditing, effective contract administration and dispute resolution, and proactive stakeholder engagement and communication.

2 Reporting financial progress against budget

Reporting financial progress against budget is the process of measuring and communicating the actual performance of a project in terms of costs and revenues, and comparing it with the planned or budgeted performance. It is a key aspect of commercial management, as it enables the project team and the client to monitor and evaluate the financial status and performance of the project, and to identify and address any deviations or issues that may arise.

RICS APC candidates need to know how to prepare and present financial reports for construction projects, and how to interpret and analyse the information and data contained in them. They also need to understand the different types of financial reports, such as cost reports, value reports, profit and loss statements, and cash flow statements, and the different formats and methods of reporting, such as earned value analysis, variance analysis, and trend analysis.

The RICS guidance note on cost reporting (1st edition, 2017) provides a detailed framework and guidance on the principles and practice of cost reporting for construction projects. It covers the objectives, scope and content of cost reports, the roles and responsibilities of the parties involved, the frequency and timing of reporting, and the quality and accuracy of reporting. It also includes examples of cost report templates and formats, and a glossary of terms and definitions. The guidance note is aligned with the RICS rules of conduct and the RICS professional statement on ethics and professional behaviour. [2]

The UK laws that relate to the reporting of financial progress against budget in the construction industry are the Companies Act 2006, the Construction Industry Scheme (CIS) Regulations 2005, and the Value Added Tax (VAT) Act 1994. These laws set out the requirements and obligations for the preparation and filing of financial statements and accounts, the deduction and payment of tax and national insurance contributions, and the registration and charging of VAT. [10], [11], [12]

A real-life example of reporting financial progress against budget in the construction industry is the London 2012 Olympic and Paralympic Games, which was a major sporting event that involved the delivery of multiple venues and infrastructure projects in London and across the UK. The project had a budget of £9.3 billion and a completion date of 2012. The project was overseen by the Olympic Delivery Authority (ODA), which was responsible for reporting the financial progress of the project to the government and the public. The project used a range of financial reports, such as cost reports, value reports, cash flow reports, and risk reports, to monitor and control the costs and revenues of the project, and to ensure transparency and accountability. The project also used various reporting tools and techniques, such as earned value analysis, variance analysis, and trend analysis, to measure and communicate the performance of the project against the budget and the baseline. The project achieved a successful delivery of the project within the budget and the time frame, and with a positive legacy for the UK.

3 Procurement of labour

Procurement of labour is the process of acquiring and managing the human resources required for the delivery of a construction project. It involves identifying the labour needs and specifications of the project, sourcing and selecting the suitable labour suppliers and workers, negotiating and agreeing the terms and conditions of employment, and administering and monitoring the performance and payment of the labour.

RICS APC candidates need to understand the principles and methods of procurement of labour for construction projects, and how to apply them to different types of projects and contracts. They also need to be aware of the factors that influence the procurement of labour, such as the availability and demand of labour, the skills and qualifications of labour, the cost and quality of labour, and the legal and ethical issues of labour.

The RICS guidance note on procurement of labour (1st edition, 2016) provides a comprehensive overview of the purpose, benefits and challenges of procurement of labour for construction projects. It also includes guidance on the best practices and procedures of procurement of labour, such as the preparation of labour briefs, the evaluation and selection of labour suppliers and workers, the formation and management of labour contracts, and the assessment and improvement of labour performance. The guidance note is aligned with the RICS rules of conduct and the RICS professional statement on ethics and professional behaviour. [3]

The UK laws that regulate the procurement of labour in the construction industry are the Employment Rights Act 1996, the Employment Agencies Act 1973, the Gangmasters (Licensing) Act 2004, and the Modern Slavery Act 2015. These laws establish the rights and obligations of the employers and the workers, the standards and requirements for the labour suppliers and agencies, the licensing and enforcement of the labour providers and gangmasters, and the prevention and prosecution of the exploitation and trafficking of labour. [19], [20], [21], [22]

A real-life example of procurement of labour in the construction industry is the Hinkley Point C project, which is a nuclear power station project in Somerset, England. The project has a budget of £22.5 billion and a completion date of 2026. The project is expected to create around 25,000 job opportunities during the construction phase, and around 900 permanent jobs during the operation phase. The project has a complex and diverse labour supply chain, involving multiple tiers of contractors and sub-contractors, and different sources and categories of labour, such as direct employees, agency workers, self-employed workers, and migrant workers. The project has implemented various measures to procure and manage its labour, such as the development of a labour strategy and a labour relations plan, the establishment of a labour supply chain forum and a labour relations team, the adoption of a fair and transparent recruitment and selection process, and the provision of training and development opportunities for the workers.

4 Procurement of plant and materials

Procurement of plant and materials is the process of acquiring and managing the physical resources required for the delivery of a construction project. It involves identifying the plant and materials needs and specifications of the project, sourcing and selecting the suitable plant and materials suppliers and products, negotiating and agreeing the terms and conditions of supply, and administering and monitoring the delivery and payment of the plant and materials.

RICS APC candidates need to understand the principles and methods of procurement of plant and materials for construction projects, and how to apply them to different types of projects and contracts. They also need to be aware of the factors that influence the procurement of plant and materials, such as the availability and demand of plant and materials, the specifications and standards of plant and materials, the cost and quality of plant and materials, and the environmental and social impacts of plant and materials.

The RICS guidance note on procurement of plant and materials (1st edition, 2015) provides a comprehensive overview of the purpose, benefits and challenges of procurement of plant and materials for construction projects. It also includes guidance on the best practices and procedures of procurement of plant and materials, such as the preparation of plant and materials briefs, the evaluation and selection of plant and materials suppliers and products, the formation and management of plant and materials contracts, and the assessment and improvement of plant and materials performance. The guidance note is aligned with the RICS rules of conduct and the RICS professional statement on ethics and professional behaviour.[4]

The UK laws that regulate the procurement of plant and materials in the construction industry are the Sale of Goods Act 1979, the Supply of Goods and Services Act 1982, the Consumer Rights Act 2015, and the Construction Products Regulation 2013. These laws establish the rights and obligations of the buyers and the sellers, the standards and requirements for the supply of goods and services, the protection and redress for the consumers, and the conformity and performance of the construction products. [13], [14], [15]

A real-life example of procurement of plant and materials in the construction industry is the HS2 project, which is a high-speed railway project that will connect London, Birmingham, Manchester and Leeds. The project has a budget of £106 billion and a completion date of 2033. The project is expected to require around 2 million tonnes of steel, 15,000 km of cables, 200,000 concrete segments, and 180,000 sleepers. The project has a complex and diverse plant and materials supply chain, involving multiple tiers of contractors and sub-contractors, and different sources and categories of plant and materials, such as prefabricated components, modular systems, recycled materials, and low-carbon materials. The project has implemented various measures to procure and manage its plant and materials, such as the development of a plant and materials strategy and a plant and materials management plan, the establishment of a plant and materials supply chain forum and a plant and materials management team, the adoption of a fair and transparent procurement and tendering process, and the provision of innovation and sustainability incentives for the suppliers.

5 Procurement of sub-contracts

Procurement of sub-contracts is the process of acquiring and managing the services of sub-contractors for the delivery of a construction project. It involves identifying the sub-contracting needs and specifications of the project, sourcing and selecting the suitable sub-contractors and sub-contracts, negotiating and agreeing the terms and conditions of sub-contracting, and administering and monitoring the performance and payment of the sub-contractors.

RICS APC candidates need to understand the principles and methods of procurement of sub-contracts for construction projects, and how to apply them to different types of projects and contracts. They also need to be aware of the factors that influence the procurement of sub-contracts, such as the scope and complexity of the project, the risk and responsibility allocation, the cost and quality of the sub-contractors, and the legal and ethical issues of sub-contracting.

The RICS guidance note on procurement of sub-contracts (1st edition, 2015) provides a comprehensive overview of the purpose, benefits and challenges of procurement of sub-contracts for construction projects. It also includes guidance on the best practices and procedures of procurement of sub-contracts, such as the preparation of sub-contract briefs, the evaluation and selection of sub-contractors and sub-contracts, the formation and management of sub-contract agreements, and the assessment and improvement of sub-contract performance. The guidance note is aligned with the RICS rules of conduct and the RICS professional statement on ethics and professional behaviour. [5]

The UK laws that regulate the procurement of sub-contracts in the construction industry are the Housing Grants, Construction and Regeneration Act 1996 (as amended by the Local Democracy, Economic Development and Construction Act 2009), the Scheme for Construction Contracts (England and Wales) Regulations 1998 (as amended in 2011), and the Contracts (Rights of Third Parties) Act 1999. These laws establish the statutory rights and obligations of the parties to a sub-contract, the payment practices and procedures, the adjudication process, and the enforcement of sub-contract terms. [7], [8], [9]

A real-life example of procurement of sub-contracts in the construction industry is the Thames Tideway Tunnel project, which is a sewerage infrastructure project that will create a 25 km tunnel under the River Thames in London. The project has a budget of £4.2 billion and a completion date of 2024. The project is delivered by a consortium of three main contractors, who have sub-contracted various aspects of the project to a number of sub-contractors, such as tunnelling, civil engineering, mechanical and electrical engineering, and environmental services. The project has a complex and diverse sub-contracting supply chain, involving multiple tiers of sub-contractors and sub-contracts, and different forms and models of sub-contracting, such as design and build, target cost, and framework agreements. The project has implemented various measures to procure and manage its sub-contracts, such as the development of a sub-contracting strategy and a sub-contracting management plan, the establishment of a sub-contracting supply chain forum and a sub-contracting management team, the adoption of a fair and transparent procurement and tendering process, and the provision of collaboration and innovation incentives for the sub-contractors.

6 Conclusion

In summary, effective cash flow management, financial reporting against budget, procurement of labor, plant and materials, and sub-contracts are essential components of successful construction project management. RICS guidance notes provide comprehensive frameworks and best practices for navigating these processes, while UK laws ensure compliance and fairness. Real-life examples such as the Crossrail project, the London 2012 Olympic Games, Hinkley Point C, HS2, and the Thames Tideway Tunnel illustrate the practical application of these principles in large-scale construction endeavors, emphasizing the importance of strategic planning, transparent communication, and efficient resource allocation for project success.

7 References

References used in this blog post:

1. RICS (2014) Cash flow forecasting. 1st edition. RICS, London.

2. RICS (2017) Cost reporting. 1st edition. RICS, London.

3. RICS (2016) Procurement of labour. 1st edition. RICS, London.

4. RICS (2015) Procurement of plant and materials. 1st edition. RICS, London.

5. RICS (2015) Procurement of sub-contracts. 1st edition. RICS, London.

6. Housing Grants, Construction and Regeneration Act 1996. Available at: https://www.legislation.gov.uk/ukpga/1996/53/contents (accessed 25/10/2021).

7. Local Democracy, Economic Development and Construction Act 2009. Available at: https://www.legislation.gov.uk/ukpga/2009/20/contents (accessed 25/10/2021).

8. Scheme for Construction Contracts (England and Wales) Regulations 1998. Available at: https://www.legislation.gov.uk/uksi/1998/649/contents/made (accessed 25/10/2021).

9. Scheme for Construction Contracts (England and Wales) Regulations 2011. Available at: https://www.legislation.gov.uk/uksi/2011/2333/contents/made (accessed 25/10/2021).

10. Companies Act 2006. Available at: https://www.legislation.gov.uk/ukpga/2006/46/contents (accessed 25/10/2021).

11. Construction Industry Scheme (CIS) Regulations 2005. Available at: https://www.legislation.gov.uk/uksi/2005/2045/contents/made (accessed 25/10/2021).

12. Value Added Tax (VAT) Act 1994. Available at: https://www.legislation.gov.uk/ukpga/1994/23/contents (accessed 25/10/2021).

13. Sale of Goods Act 1979. Available at: https://www.legislation.gov.uk/ukpga/1979/54/contents (accessed 25/10/2021).

14. Supply of Goods and Services Act 1982. Available at: https://www.legislation.gov.uk/ukpga/1982/29/contents (accessed 25/10/2021).

15. Consumer Rights Act 2015. Available at: https://www.legislation.gov.uk/ukpga/2015/15/contents/enacted (accessed 25/10/2021).

16. Construction Products Regulation 2013. Available at: https://www.legislation.gov.uk/uksi/2013/1387/contents/made (accessed 25/10/2021).

17. Employment Rights Act 1996. Available at: https://www.legislation.gov.uk/ukpga/1996/18/contents (accessed 25/10/2021).

18. Employment Agencies Act 1973. Available at: https://www.legislation.gov.uk/ukpga/1973/35/contents (accessed 25/10/

19. Employment Rights Act 1996. Available at: https://www.legislation.gov.uk/ukpga/1996/18/contents

20. Employment Agencies Act 1973. Available at: https://www.legislation.gov.uk/ukpga/1973/35/contents

21. Gangmasters (Licensing) Act 2004. Available at: https://www.legislation.gov.uk/ukpga/2004/11/contents

22. Modern Slavery Act 2015. Available at: https://www.legislation.gov.uk/ukpga/2015/30/contents/enacted