Project Finance Control and Reporting

Project Finance Control and Reporting for RICS APC Candidates

A guide to the key aspects of managing the financial aspects of a construction project.

Project finance control and reporting are essential aspects of quantity surveying practice, as they enable the effective management of costs, risks and value throughout the project lifecycle. In this blog post, we will discuss some of the key topics that RICS APC candidates should be familiar with when dealing with project finance control and reporting and provide some real-life examples to illustrate their application.

This blogpost covers the following key points:

• Post contract cost control

• Change control procedures

• Change control forms

• Cost reporting

• Final accounts

• Loss and expense

• Risk management and quantification

• Cash flows

• Value engineering

• Benchmarking/Best value

Post Contract Cost Control

Post contract cost control is the process of monitoring and controlling the actual expenditure of a project against the budget, and taking corrective actions if necessary. It involves the following steps:

• Establishing a cost baseline, which is the approved budget at the start of the project, and a cost breakdown structure, which is a hierarchical classification of the project costs into different categories and elements.

• Collecting and recording actual costs incurred during the project, such as labour, materials, subcontractors, equipment, overheads, etc.

• Comparing actual costs with the cost baseline and identifying any variances, which are the differences between the planned and the actual costs.

• Analysing the causes and effects of variances, and determining whether they are favourable (under budget) or unfavourable (over budget).

• Reporting the cost performance and status of the project to the relevant stakeholders, such as the client, the contractor, the consultant, etc [1], [2].

• Implementing corrective actions to address any unfavourable variances, such as revising the budget, reallocating resources, negotiating changes, reducing scope, etc.

A real-life example of post contract cost control is the London 2012 Olympic Games, which had an initial budget of £2.4 billion in 2005, but increased to £9.3 billion in 2007 due to various factors, such as inflation, security, contingency, etc. The Olympic Delivery Authority (ODA) was responsible for managing the costs of the project, and used various tools and techniques, such as Earned Value Management (EVM), risk registers, value engineering, benchmarking, etc., to control the costs and deliver the project within the revised budget [6].

Change Control Procedures

Change control procedures are the formal processes of managing and documenting any changes that occur during the project, such as changes in scope, design, specifications, time, quality, etc. They involve the following steps:

• Identifying and recording the change request, which is a proposal for a change by any party involved in the project, such as the client, the contractor, the consultant, etc.

• Evaluating and approving the change request, which involves assessing the impact of the change on the project objectives, such as cost, time, quality, etc., and deciding whether to accept, reject or modify the change request.

• Implementing and verifying the change, which involves executing the change according to the approved plan and checking that the> change has been completed satisfactorily and meets the requirements.

• Updating and communicating the change, which involves updating the relevant project documents, such as drawings, specifications, contracts, etc., and informing the relevant stakeholders, such as the client, the contractor, the consultant, etc., about the change and its implications [2], [3].

A real-life example of change control procedures is the Edinburgh Tram Project, which started in 2003 with an initial budget of £375 million and a completion date of 2009, but faced numerous changes due to various factors, such as design changes, contractual disputes, legal challenges, technical issues, etc. The project was eventually completed in 2014 with a final cost of £776 million, after implementing a revised governance structure, a mediation process, a dispute resolution mechanism, and a risk management strategy [7].

Change Control Forms

Change control forms are the standard documents that are used to record and communicate the change requests and their outcomes. They typically include the following information:

• The identification number and date of the change request.

• The name and role of the party requesting the change.

• The description and reason for the change.

• The impact of the change on the project objectives, such as cost, time, quality, etc.

• The approval status of the change, such as accepted, rejected or modified.

• The name and role of the party approving the change.

• The implementation plan and verification method for the change.

• The updated project documents and records resulting from the change [2], [3], [4].

An example of a change control form is the NEC3 Engineering and Construction Contract (ECC) form of contract, which uses the following documents to manage changes:

• The Early Warning Notice (EWN), which is a notification of any matter that could affect the project objectives, such as cost, time, quality, etc., and requires prompt action by the parties.

• The Compensation Event (CE), which is an event that changes the scope of the works, the conditions of the site, the risks or the assumptions, and entitles the contractor to additional payment or time.

• The Project Manager's Instruction (PMI), which is an instruction by the project manager to the contractor to change the works, the method of working, the key dates, etc.

• The Quotation, which is a proposal by the contractor for the effect of the change on the prices, the completion date, the key dates, etc.

• The Notification of Acceptance, which is a confirmation by the project manager of the acceptance of the quotation or the assessment of the change [5].

Cost Reporting

Cost reporting is the process of providing regular and accurate information on the cost performance and status of the project to the relevant stakeholders, such as the client, the contractor, the consultant, etc. It involves the following steps:

• Establishing a cost report format, which is a standard template that shows the key cost information of the project, such as the original budget, the current budget, the actual costs, the forecast costs, the variances, the contingencies, etc.

• Gathering and analysing the cost data, which involves collecting and verifying the actual costs incurred and the forecast costs to complete the project, and comparing them with the budget and the baseline.

• Preparing and presenting the cost report, which involves summarising and highlighting the main cost issues and trends, and providing recommendations and actions to improve the cost performance and status of the project.

• Reviewing and updating the cost report, which involves checking the accuracy and validity of the cost data, and incorporating any changes or feedback from the stakeholders [2].

A real-life example of cost reporting is the Crossrail project, which is a major railway infrastructure project in London and the South East of England, with an estimated budget of £14.8 billion. The Crossrail Limited (CRL) is the organisation responsible for delivering the project, and produces monthly cost reports to the Department for Transport (DfT) and Transport for London (TfL), which are the joint sponsors of the project. The cost reports show the key cost information of the project, such as the budget, the expenditure, the forecast, the variances, the risks, etc., and provide an overview of the cost performance and status of the project [8].

Final Accounts

Final accounts are the final settlement of the contract sum between the client and the contractor, and reflect the actual value of the works completed and the variations agreed. They involve the following steps:

• Preparing and submitting the final account statement, which is a document that shows the breakdown of the final account, such as the original contract sum, the adjustments, the variations, the provisional sums, the fluctuations, the retention, the deductions, etc.

• Negotiating and agreeing the final account, which involves resolving any disputes or claims, and reaching a mutual agreement on the final account value.

• Issuing and paying the final account, which involves issuing a final certificate and a final invoice, and making the final payment according to the contract terms and conditions.

• Closing the contract, which involves releasing any bonds or guarantees, releasing any retention or retention bonds, and completing any outstanding obligations or warranties [3].

A real-life example of final accounts is the Wembley Stadium project, which was a construction project to build a new national stadium in London, with an initial contract sum of £445 million. The project faced several delays and disputes, and the final account was agreed in 2010, three years after the completion of the project, with a final account value of £798 million. The final account included various adjustments and variations, such as design changes, additional works, claims, etc., and was settled after a lengthy negotiation process [9].

Loss and Expense

Loss and expense is a term that refers to the additional costs and damages that the contractor may incur due to the disruption or prolongation of the works caused by the client or the client's representatives. It involves the following steps:

• Identifying and notifying the loss and expense, which involves recognising the events or circumstances that give rise to the loss and expense, and informing the client or the contract administrator as soon as possible.

• Quantifying and claiming the loss and expense, which involves calculating the amount of the loss and expense, and submitting a claim to the client or the contract administrator, supported by evidence and justification.

• Assessing and agreeing the loss and expense, which involves evaluating the validity and the value of the claim, and reaching a mutual agreement on the payment of the loss and expense [2], [3].

A real-life example of loss and expense is the Great Western Electrification Programme (GWEP), which was a railway infrastructure project to electrify the Great Western Main Line, with an initial budget of £1.6 billion. The project faced several delays and disruptions due to various factors, such as design changes, engineering challenges, environmental issues, etc., and the contractors claimed for loss and expense from the client, Network Rail. The claims were assessed and agreed by the parties, and the final cost of the project increased to £2.8 billion [10].

Risk Management and Quantification

Risk management and quantification are the processes of identifying, analysing, evaluating, and responding to the uncertainties and opportunities that may affect the project objectives, such as cost, time, quality, etc. They involve the following steps:

• Identifying the risks, which involves recognising the potential sources and causes of risks, and describing their characteristics and impacts.

• Analysing the risks, which involves estimating the likelihood and the consequence of the risks, and ranking them according to their severity and priority.

• Evaluating the risks, which involves comparing the risks with the risk appetite and the risk tolerance of the stakeholders, and deciding whether to accept, avoid, transfer, or mitigate the risks.

• Responding to the risks, which involves developing and implementing strategies and actions to reduce the negative effects or enhance the positive effects of the risks.

• Monitoring and reviewing the risks, which involves tracking and measuring the performance and the status of the risks, and updating and improving the risk management plan [1], [2].

A real-life example of risk management and quantification is the Channel Tunnel project, which was a construction project to build a rail tunnel under the English Channel, with an initial budget of £4.7 billion. The project faced several risks due to various factors, such as geological conditions, technical issues, safety requirements, political changes, etc., and used various tools and techniques, such as risk registers, risk matrices, Monte Carlo simulations, contingency plans, etc., to manage and quantify the risks. The project was completed in 1994, with a final cost of £9.5 billion, and a delay of one year [11].

Cash Flows

Cash flows are the inflows and outflows of money that occur during the project, and reflect the financial health and liquidity of the project. They involve the following steps:

• Forecasting the cash flows, which involves estimating the expected income and expenditure of the project, based on the contract terms, the payment schedule, the cost plan, the revenue plan, etc.

• Monitoring the cash flows, which involves recording and tracking the actual income and expenditure of the project, and comparing them with the forecast.

• Analysing the cash flows, which involves identifying and explaining any deviations or trends in the cash flows, and assessing their implications for the project objectives, such as cost, time, quality, etc.

• Improving the cash flows, which involves developing and implementing strategies and actions to optimise the cash flows, such as accelerating the income, reducing the expenditure, managing the working capital, etc [2], [3].

A real-life example of cash flows is the HS2 project, which is a railway infrastructure project to build a high-speed rail network in the UK, with an estimated budget of £106 billion. The project faces several challenges and uncertainties in its cash flows, such as funding sources, cost overruns, delays, changes, etc., and uses various tools and techniques, such as cash flow charts, cash flow statements, cash flow ratios, etc., to forecast, monitor, analyse, and improve the cash flows [12].

Value Engineering

Value engineering is a systematic and creative method of improving the value of a project, by optimising the balance between the function and the cost of the project. It involves the following steps:

• Defining the value, which involves identifying and clarifying the needs and expectations of the stakeholders, and establishing the criteria and the measures of value.

• Analysing the function, which involves describing and evaluating the functions and the performance of the project, and identifying the essential and the non-essential functions.

• Generating the alternatives, which involves brainstorming and developing different ideas and options to achieve the functions of the project, with lower costs or higher benefits.

• Evaluating the alternatives, which involves comparing and testing the alternatives against the value criteria and the measures, and selecting the best alternative.

• Implementing the alternative, which involves executing the alternative according to the plan, and verifying that the alternative meets the requirements and the expectations [1], [4].

A real-life example of value engineering is the Heathrow Terminal 5 project, which was a construction project to build a new terminal at the Heathrow Airport, with an initial budget of £3.3 billion. The project used value engineering to reduce the cost and improve the quality of the project, by applying various techniques, such as modular design, prefabrication, standardisation, simplification, etc. The project was completed in 2008, with a final cost of £4.3 billion, and achieved a high level of customer satisfaction and operational efficiency [13].

Benchmarking/Best Value

Benchmarking/best value are the processes of comparing and learning from the best practices and the performance of other projects or organisations, and applying them to improve the value and the competitiveness of the project. They involve the following steps:

• Identifying the benchmarks/best value, which involves selecting and defining the relevant indicators and standards of value and performance, such as cost, time, quality, etc.

• Collecting and analysing the data, which involves gathering and verifying the information and the evidence of the value and performance of other projects or organisations, and comparing them with the project.

• Identifying and implementing the improvements, which involves recognising and prioritising the gaps and the opportunities for improvement, and developing and executing the action plans to achieve the benchmarks/best value.

• Monitoring and reviewing the improvements, which involves measuring and evaluating the outcomes and the impacts of the improvements, and updating and refining the benchmarks/best value [3], [4].

A real-life example of benchmarking/best value is the London 2012 Olympic Games, which was a major sporting event that involved the construction of various venues and facilities, with an estimated budget of £9.3 billion. The project used benchmarking/best value to deliver the project on time and on budget, by applying various methods, such as learning from the previous Olympic Games, engaging with the stakeholders, adopting the sustainability principles, implementing the innovation programmes, etc. The project was completed in 2012, and achieved a high level of success and legacy [14].

Reflections

In conclusion, project finance control and reporting are essential aspects of quantity surveying practice, enabling effective management of costs, risks, and value throughout the project lifecycle. This report has discussed key topics such as post-contract cost control, change control procedures, cost reporting, final accounts, loss and expense, risk management and quantification, cash flows, value engineering, and benchmarking/best value. By understanding and applying these concepts, RICS APC candidates can effectively manage the financial aspects of construction projects.

References

1. RICS. (2017). APC Pathway Guide: Quantity Surveying and Construction. Retrieved from https://www.rics.org/globalassets/rics-website/media/upholding-professional-standards/regulation/apc/apc-requirements-and-competencies/quantity-surveying-and-construction.pdf

2. RICS. (2018). RICS professional standards and guidance, UK: Cost prediction and planning for quantity surveyors. Retrieved from https://www.rics.org/globalassets/rics-website/media/upholding-professional-standards/sector-standards/construction/cost-prediction-and-planning-for-quantity-surveyors-rics.pdf

3. RICS. (2019). RICS professional standards and guidance, UK: Valuation for financial reporting. Retrieved from https://www.rics.org/globalassets/rics-website/media/upholding-professional-standards/sector-standards/valuation/valuation-for-financial-reporting-rics.pdf

4. RICS. (2020). RICS professional standards and guidance, global: Construction project management. Retrieved from https://www.rics.org/globalassets/rics-website/media/upholding-professional-standards/sector-standards/construction/construction-project-management-1st-edition-rics.pdf

5. NEC. (2017). NEC3: Engineering and Construction Contract. Retrieved from https://www.neccontract.com/Products/Contracts/NEC3-Engineering-and-Construction-Contract-ECC

6. ODA. (2012). London 2012 Olympic and Paralympic Games: The Official Report. Retrieved from https://stillmed.olympic.org/media/Document%20Library/OlympicOrg/Games/Summer-Games/Games-London-2012-Olympic-Games/Official-Report/Official-Report-London-2012-Vol-1.pdf

7. Transport Scotland. (2014). Edinburgh Tram Inquiry. Retrieved from https://www.edinburghtraminquiry.org/wp-content/uploads/2014/11/Edinburgh-Tram-Inquiry-Order-2014.pdf

8. Crossrail. (2019). Crossrail Project Update. Retrieved from https://www.crossrail.co.uk/news/articles/crossrail-project-update-0

9. Wembley National Stadium Ltd. (2010). Wembley Stadium Annual Report and Financial Statements. Retrieved from https://beta.companieshouse.gov.uk/company/02596863/filing-history/MzAxNjA4MjQ0OGFkaXF6a2N4/document?format=pdf&download=0

10. Network Rail. (2018). Great Western Electrification Programme. Retrieved from https://www.networkrail.co.uk/running-the-railway/our-routes/western/great-western-electrification-programme/

11. Channel Tunnel Group Ltd. (1994). Channel Tunnel Annual Report and Financial Statements. Retrieved from https://beta.companieshouse.gov.uk/company/01854648/filing-history/MzAxMTY4NjI3MmFkaXF6a2N4/document?format=pdf&download=0

12. HS2 Ltd. (2020). HS2 Phase One Full Business Case. Retrieved from https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/878821/hs2-phase-one-full-business-case.pdf

13. BAA. (2008). Heathrow Terminal 5: Project Summary. Retrieved from https://www.t5consultation.co.uk/downloads/Project_Summary.pdf

14. LOCOG. (2013). London 2012 Olympic and Paralympic Games: The Official Report. Retrieved from https://stillmed.olympic.org/media/Document%20Library/OlympicOrg/Games/Summer-Games/Games-London-2012-Olympic-Games/Official-Report/Official-Report-London-2012-Vol-3.pdf