Commercial Management in the Construction Industry - Part III

Commercial Management for RICS APC Candidates – Part III

A guide to the key competencies and best practices in commercial management

Commercial management is the discipline of managing the financial aspects of construction projects, from inception to completion. It involves planning, monitoring, controlling, and reporting on the costs, revenues, risks, and value of the project. Commercial management is a core competency for RICS APC candidates, as it demonstrates their ability to deliver projects within budget, maximise profitability, and minimise disputes.

In this blog post, we will cover four topics that are essential for commercial management: financial management of supply chain, financial management of multiple projects, earned value management, and cost value reconciliation. We will also refer to the relevant RICS guidance notes and UK laws that provide the standards and regulations for commercial management. Finally, we will give some real-life examples of how commercial management is applied in practice.

1 Financial management of supply chain

The supply chain is the network of contractors, subcontractors, suppliers, and consultants that are involved in delivering a construction project. Financial management of supply chain is the process of ensuring that the supply chain is paid on time, in full, and in accordance with the contract terms. It also involves managing the cash flow, invoicing, payments, variations, claims, and disputes that may arise in the supply chain.

Financial management of supply chain is important for RICS APC candidates, as it shows their ability to maintain good relationships with the supply chain, protect the interests of their clients, and avoid costly and time-consuming litigation. It also helps to achieve the project objectives, such as quality, safety, and sustainability.

The RICS guidance note on Supply Chain Management (2019) provides the best practices and principles for managing the supply chain effectively. It covers topics such as procurement, contract administration, performance measurement, risk management, and dispute resolution. It also outlines the ethical and professional obligations of RICS members in relation to the supply chain. [1]

The UK laws that regulate the financial management of supply chain include the Housing Grants, Construction and Regeneration Act 1996 (as amended by the Local Democracy, Economic Development and Construction Act 2009), which sets out the rules for payment, adjudication, and suspension in construction contracts. The Construction Act also introduced the concept of the Construction Industry Scheme (CIS), which requires contractors to deduct tax from payments to subcontractors and report them to HMRC. The Late Payment of Commercial Debts (Interest) Act 1998 (as amended by the Late Payment of Commercial Debts Regulations 2013) allows suppliers to claim interest and compensation for late payments. [5], [6], [7]

A real-life example of financial management of supply chain is the Crossrail project, which is the largest infrastructure project in Europe, involving over 10,000 suppliers and 15,000 workers. The project has adopted a collaborative and transparent approach to managing the supply chain, using digital platforms, standardised contracts, and performance incentives. The project has also implemented a fair payment policy, which ensures that suppliers are paid within 30 days of invoice approval. [12]

2 Financial management of multiple projects

Financial management of multiple projects is the process of managing the financial performance and risks of a portfolio of projects, rather than a single project. It involves allocating and optimising the resources, budget, and cash flow across the projects, as well as monitoring and reporting on the financial status and progress of each project. Financial management of multiple projects is a key skill for RICS APC candidates, as it demonstrates their ability to deliver value for money, maximise return on investment, and manage complexity and uncertainty.

The RICS guidance note on Financial Management of Multiple Projects (2019) provides the best practices and principles for managing multiple projects effectively. It covers topics such as portfolio management, project selection, prioritisation, and alignment, resource management, budgeting and forecasting, cash flow management, risk management, and reporting and control. It also outlines the roles and responsibilities of RICS members in relation to financial management of multiple projects. [2]

The UK laws that regulate the financial management of multiple projects include the Companies Act 2006, which sets out the duties and responsibilities of directors and managers of companies that undertake multiple projects. The Companies Act also requires companies to prepare and file annual accounts and reports, which disclose the financial performance and position of the company and its projects. The Bribery Act 2010, which prohibits bribery and corruption in business transactions, also applies to the financial management of multiple projects, as it requires companies to have adequate procedures to prevent and detect bribery and corruption. [8]

A real-life example of financial management of multiple projects is the London 2012 Olympic and Paralympic Games, which involved over 200 projects, ranging from sports venues, infrastructure, transport, accommodation, security, and legacy. The project had a budget of £9.3 billion, which was managed by the Olympic Delivery Authority (ODA), the London Organising Committee of the Olympic and Paralympic Games (LOCOG), and the Department for Culture, Media and Sport (DCMS). The project used a rigorous and robust financial management system, which included a contingency fund, a funding package agreement, a baseline budget, a cost-to-complete forecast, a cash flow forecast, a risk register, and a monthly reporting process. The project was delivered on time and within budget, with a saving of £528 million. [13]

3 Earned value management

Earned value management (EVM) is a project management technique that measures the performance and progress of a project by comparing the actual costs and schedule with the planned costs and schedule. It involves calculating three key values for each project activity: the planned value (PV), which is the budgeted cost of the work scheduled; the actual cost (AC), which is the actual cost of the work performed; and the earned value (EV), which is the budgeted cost of the work completed. By using these values, EVM can calculate various indicators, such as the cost variance (CV), which is the difference between EV and AC; the schedule variance (SV), which is the difference between EV and PV; the cost performance index (CPI), which is the ratio of EV to AC; and the schedule performance index (SPI), which is the ratio of EV to PV.

EVM is an important tool for RICS APC candidates, as it shows their ability to monitor and control the project costs and schedule, identify and analyse the variances and trends, and forecast the project outcome. It also helps to communicate the project status and performance to the stakeholders and clients, and to support the decision-making and corrective actions.

The RICS guidance note on Earned Value Management (2018) provides the best practices and principles for applying EVM in construction projects. It covers topics such as EVM concepts and terminology, EVM process and framework, EVM data and calculations, EVM analysis and reporting, and EVM benefits and challenges. It also outlines the ethical and professional obligations of RICS members in relation to EVM. [3]

The UK laws that regulate the EVM include the Construction (Design and Management) Regulations 2015 (CDM 2015), which require the project managers to plan, manage, monitor, and coordinate the health and safety of the project, and to report on the project performance and progress. The CDM 2015 also require the project managers to comply with the RICS guidance note on EVM, as it is recognised as a good practice for project management. The Public Contracts Regulations 2015, which govern the procurement of public works contracts, also require the project managers to use EVM as a method of measuring the project performance and progress, and to report on the EVM indicators to the contracting authorities. [10], [11]

A real-life example of EVM is the HS2 project, which is the high-speed railway network that will connect London, Birmingham, Manchester, and Leeds. The project has a budget of £55.7 billion, and is expected to be completed by 2033. The project uses EVM as a key project management tool, which enables the project managers to track and report on the project costs and schedule, identify and manage the risks and issues, and forecast the project outcome. The project also uses EVM as a communication tool, which allows the project managers to inform and engage the stakeholders and clients, and to demonstrate the value and benefits of the project. [14]

4 Cost value reconciliation (CVR)

Cost value reconciliation (CVR) is a financial management technique that compares the actual costs and revenues of a project with the budgeted costs and revenues, and identifies the variances and reasons for them. It involves calculating the cost of work done (CWD), which is the actual cost of the work performed; the value of work done (VWD), which is the actual revenue of the work completed; and the gross profit (GP), which is the difference between VWD and CWD. By using these values, CVR can calculate various indicators, such as the cost variance (CV), which is the difference between CWD and budgeted cost; the value variance (VV), which is the difference between VWD and budgeted revenue; the gross profit margin (GPM), which is the ratio of GP to VWD; and the gross profit variance (GPV), which is the difference between GP and budgeted profit.

CVR is an essential technique for RICS APC candidates, as it shows their ability to measure and report on the project profitability, identify and analyse the variances and causes, and forecast the project outcome. It also helps to manage the cash flow, invoicing, payments, variations, claims, and disputes that may affect the project profitability.

The RICS guidance note on Cost Value Reconciliation (2019) provides the best practices and principles for conducting CVR in construction projects. It covers topics such as CVR concepts and terminology, CVR process and framework, CVR data and calculations, CVR analysis and reporting, and CVR benefits and challenges. It also outlines the ethical and professional obligations of RICS members in relation to CVR. [4]

The UK laws that regulate the CVR include the Construction (Design and Management) Regulations 2015 (CDM 2015), which require the project managers to plan, manage, monitor, and coordinate the health and safety of the project, and to report on the project performance and progress. The CDM 2015 also require the project managers to comply with the RICS guidance note on CVR, as it is recognised as a good practice for financial management. The Housing Grants, Construction and Regeneration Act 1996 (as amended by the Local Democracy, Economic Development and Construction Act 2009), which sets out the rules for payment, adjudication, and suspension in construction contracts, also affects the CVR, as it influences the cash flow, invoicing, payments, variations, claims, and disputes that may impact the project profitability. [5], [10]

A real-life example of CVR is the Edinburgh Trams project, which is the light rail system that connects Edinburgh Airport, the city centre, and Leith. The project had a budget of £375 million, but ended up costing £776 million, and was completed in 2014, three years behind schedule. The project used CVR as a financial management tool, which enabled the project managers to monitor and report on the project costs and revenues, identify and manage the variances and causes, and forecast the project outcome. The project also used CVR as a communication tool, which allowed the project managers to inform and engage the stakeholders and clients, and to explain the reasons and solutions for the project overruns. [15]

5 Conclusion

Commercial management is a vital competency for RICS APC candidates, as it demonstrates their ability to manage the financial aspects of construction projects, from inception to completion. Commercial management involves four key topics: financial management of supply chain, financial management of multiple projects, earned value management, and cost value reconciliation. These topics require the RICS APC candidates to apply the best practices and principles of commercial management, as well as to comply with the relevant RICS guidance notes and UK laws. Commercial management also requires the RICS APC candidates to use real-life examples of how commercial management is applied in practice, and to show the benefits and challenges of commercial management.

6 References

1. RICS (2019) Supply Chain Management, 1st edition. RICS, London.

2. RICS (2019) Financial Management of Multiple Projects, 1st edition. RICS, London.

3. RICS (2018) Earned Value Management, 1st edition. RICS, London.

4. RICS (2019) Cost Value Reconciliation, 1st edition. RICS, London.

5. Housing Grants, Construction and Regeneration Act 1996 (as amended by the Local Democracy, Economic Development and Construction Act 2009)

6. Late Payment of Commercial Debts (Interest) Act 1998 (as amended by the Late Payment of Commercial Debts Regulations 2013)

7. Construction Industry Scheme (CIS)

8. Companies Act 2006

9. Bribery Act 2010

10. Construction (Design and Management) Regulations 2015 (CDM 2015)

11. Public Contracts Regulations 2015

12. Crossrail (2020) Supply Chain. Available at: https://www.crossrail.co.uk/supply-chain (Accessed: 10 December 2020).

13. London 2012 (2012) London 2012 Olympic and Paralympic Games – The Official Report. Available at: https://stillmed.olympic.org/Documents/Reports/Official%20Past%20Games%20Reports/Summer/ENG/2012-RO-S-London_official_results.pdf (Accessed: 10 December 2020).

14. HS2 (2020) Earned Value Management. Available at: https://www.hs2.org.uk/documents/earned-value-management/ (Accessed: 10 December 2020).

15. Edinburgh Trams (2014) Edinburgh Trams Inquiry. Available at: https://www.edinburghtraminquiry.org/ (Accessed: 10 December 2020).