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www.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: Internalwww.derby.ac.uk/technologyCollege of Science and EngineeringNatural and Built Environmentwww.derby.ac.uk/technologywww.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: Internal6HX503 CIVIL ENGINEERING CONSTRUCTIONMANAGEMENT SESSION 7AFINANCIAL and COMMERCIALMANAGEMENTToday’s agenda• Review Tutorial 5B• Check Understanding of assignment (5 Dec)• Commercial Contracts in Civil Engineering• Financial Management– Measurement Valuation– Budgets• Commercial Management– Cost Value Reconciliationwww.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: Internal6HX503CIVIL ENGINEERING CONSTRUCTIONMANAGEMENTQuality Systems 2Session 5BTutorialDr Brian Counterwww.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: InternalInspection and Test Planswww.derby.ac.uk/technologywww.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: InternalCan you find out how we assureQuality Assurance (Technicalcompliance)• Inspection and Test Plans• Technical Specs• SI• GI• As built drawings• Records of checks• Random site checks• Surveyswww.derby.ac.uk/technologywww.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: Internalwww.derby.ac.uk/technologyYour Portfolio same for all main sections▪ 1 page for Quality (Technical)▪ Essential systems for your context▪ Essential standards for your context▪ Best Practice▪ QA systems▪ Technical reviews▪ Planning▪ 1 or 2 Examples from a work environment▪ Comments on benefits and improvement areas as anintroduction and conclusion to the portfoliowww.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: InternalCase Study and Tutorial Exercisewww.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: Internalwww.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: Internalwww.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: Internalwww.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: Internalwww.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: InternalExercise – Case Study• Tip up Lorry delivering stone at lineside• 6 am in November• Gate unlocked?• Stone tipped in right location?• Lorry left site with tipper up?• Light footbridge over tracks and access road• Bridge section fell onto lorry• Bridge section fell onto track• Train hit bridge and derailedwww.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: InternalExerciseReview some of the major hazards– access– clearances– night time– machinery movement– machinery systems– external suppliers– human factorsIdentify Risk AssessmentsPropose ProceduresSuggest audit regimewww.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: InternalAssignment Title: ManagementPortfolio (3000 words 12-15 pages)Tips:• This is Working System to justify processes• Link to context as much as possible• Include all parts• Include 2 examples for each section – it is not necessary to submit a fulldocument; a screen shot of the title page will suffice.• Recommendations• The report should be well written and presented. The projects used as casestudies should be clearly stated. The use of charts, tables and otherillustrations to simplify and facilitate understanding of processes are stronglyrecommended.www.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: Internalwww.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: InternalWhat is a contract?• The formation of a contract involves acceptanceof an offer, an intention to have a legally bindingagreement, performance and payment.• “Transfer of risk” is often referred to but, in reality,the allocation of risk, not its transfer, is a majorelement in any contract.Is there ever an attempt to transfer risk?www.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: InternalBUILDING & CIVIL ENGINEERINGCONTRACTUAL ARRANGEMENTS• From 1800 to 1960’s a client wouldcommission an architect to preparedrawings– Basis for competitive tender– Traditional system• “In no other important industry is theresponsibility for design so far removedfrom the responsibility for production”– Emmerson, H (1962) Survey of problems beforethe construction industries; HMSOwww.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: InternalTHE CONTRUCTION PROCESS• CONCEPTION• DESIGN• DOCUMENTATION• TENDERING ANDESTIMATING• CONSTRUCTION• COMMISSIONINGwww.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: InternalCONTRACTSIntroduction to standard forms of construction contracts• ICE Conditions of Contract (One version, for use withpublic or private clients, intended for major civil engineeringprojects) Also ICE Minor Works• GC/Works/1 (1998): Contract for building and civilengineering major works (typically Government contracts).• FIDIC Conditions of Contract (International)• JCT Joint Contracts Tribunal• RIBA Contracts• NEC• Why have standard forms of contract?www.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: InternalWe will look at the Engineering &Construction Contract (often called theNew Engineering Contract) becausethe ECC is used for nearly all roadprojects, it focuses on “risk analysis”and aims to eliminate conflict.www.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: InternalThe Engineering and ConstructionContract (ECC)Adopted in 1999 by the Highways Agency followingdevelopment by the Institution of Civil Engineers.It is applicable to all types of projects. It has variousoptional clauses so that it can be used in a range ofprocurement routes.It is written in “plain English” and is intended to be amanagement tool for running a project, whoseprocedures promote a team approach. Used bymany in partnering agreements.www.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: InternalThe intent of this form of contract is made clear in its firstparagraph which requires the “Employer, the Contractor,the Project Manager and the Supervisor act in a spirit ofmutual trust and co-operation”. Sub-contractors are notacceptable unless they agree, as part of their contract, “toact in a spirit of mutual trust and co-operation”. Thisstatement has a very significant effect on the proceduresassociated with the resolution of disputes.A decade of extensive international use followed,culminating in the development and launch of the NEC3contract suite in 2005. This included a new Term ServiceContract and Framework Contract, joined in 2010 by aSupply Contract.NEC3 2005www.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: Internal• NEC is published as a set of core clauses common to allprojects along with a variety of other clauses, enabling itsuse under a variety of procurement methods.• To enable this to happen easily, there is a set of pre –configured versions:1. Priced contracts with activity schedule.2. Priced contract will bill of quantities.3. Target contract with activity schedule.4. Target contract with bill of quantities.5. Cost reimbursable contract.6. Management contract.www.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: InternalNEC Matrixwww.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: Internalwww.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: InternalNEC3 CoreThe six main options aresupplemented by 15secondary options whichcan be used as required.Not all secondary optionscan be used with themain ones.www.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: InternalOption A: Lump Sum priced contract with activityschedule•The Contractor offers to provide the works described in the contractfor a sum of money.•The lump sum is adjusted if a compensation event occurs (contractorrequired to undertake additional works).•The activity schedule is normally written by the Contractor since he isthe one who knows what activities will be carried out. Each activity ispriced as a lump sum by the Contractor which is the amount paidwhen he has completed the activity.•In pricing an activity, the Contractor takes responsibility for estimatingquantities and resources, and assessing and pricing risks that are his.www.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: InternalOption B: Priced contract with bill of quantities•The Employer provides a bill of quantities which is priced by theContractor. The contract price is the sum of prices for all items in the billwhich may include lump sums for certain items.•When the work is done, if it is found by re-measurement that theestimated quantity is not correct, it is corrected and payment is made tothe Contractor to reflect the actual work carried out.• Under this option, unlike Option A, the Employer takes the risk of thecorrectness of the quantities.•Option B would normally be used where the risk of change in quantities isrelatively high. It is not appropriate for design and build contracts since theContractor, who designs and prepares the detailed design and plans isresponsible .www.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: InternalOption C: Target Cost contract with activity schedule•In this option the Contractor tenders (or negotiates) a target priceusing an activity schedule. Each activity is priced as a lump sumand a Fee is also tendered as a percentage for subcontract workand for the Contractor’s own direct work.•The initial target price is the sum of the activity prices and the fee.During the course of the contract, the target price is adjusted tocater for compensation events that are set out in the contract.Payment is made on the basis of actual costs with an incentivemechanism for the Contractor to minimise costs. Savings and overruns are shared between the parties. The sharing of risk in thetarget cost approach is likely to reduce the occurrence of disputes.Key components are establishing the target and final cost andhow the contractor establishes the actual costs.www.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: InternalOption D: Target Cost contract with bill of quantitiesThis is similar to Option C except that the target price isestablished by means of a bill of quantities rather thanan activity schedule. During the course of the contract,the target price is adjusted to allow for changes ofquantities as well as for compensation events.Thus, the Employer carries a rather greater risk than isthe case with Option C.www.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: InternalOption E: Cost Reimbursable contractUnder this option the Contractor takes a very small risk since he ispaid his actual cost plus the Fee with only a small number ofconstraints to protect the Employer from inefficient working orincompetence by the Contractor. It is used when the work to becarried out cannot be defined at the outset and the risks are high.It may also be used for emergency work.Option F: Management ContractThis option is suitable for management contracts in which all ormost of the work is done by subcontractors, and the Contractormanages the procurement and the work undertaken by thesubcontractors. Payment is made to the Contractor for the cost ofthe sub-contracts plus a management fee.The Employer carries most of the risk.www.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: Internalwww.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: InternalNEC4 Launched 26 June 2017www.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: InternalNEC4There are five key changes made in NEC4They have obviously listened to the feedbackreceived and it appears that NEC4 will besimpler to operate than its predecessor(NEC3). On face value the requirement for Zclauses will hopefully diminish but they areunlikely to disappear altogether.www.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: Internalwww.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: InternalNew Contracts – CHANGE 1The NEC has introduced two new contracts into its suite of contracts.Design Build and Operate (DBO) Contract – The DBO combines thefunctions of design, construction, operation and/or maintenance toenable it to be procured from a single supplier. This new contract allowsfor a range of different services to be provided before, during and afterengineering and construction works are completed (including FacilityManagement services).Alliance Contract (ALC) – This will be published in consultation formand aims to fully integrate the team for large complex projects. Thiscontract is for Clients who wish to enter into a single contract with anumber of participants in order to deliver a project or programme of work.The focus of the contract will be on collaborative working encouraging allparties to work together in achieving Client objectives, and share in therisks and benefits of doing so. The ALC will be different from othercontracts in the NEC suite as it will be a multi-party contract.www.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: InternalReview and Acceptance of DefinedCost – CHANGE 2New clauses have been introduced to allow Contractors in cost basedcontracts (Main Options C, D, E and F) to request a review and acceptanceof its Defined Cost during the project and not wait until the end. TheContractor notifies the Project Manager who then has thirteen weeks toreview acceptance or advise of any errors. If the Project Manager fails to dothis, then the Contractor’s Defined Costs and Disallowed Costs will betreated as accepted. The checking of Defined Cost is usually carried out atthe end of the project when Contractors and/or Subcontractors’ staff havemoved on, which makes answering of queries etc. much more difficult andleads to long drawn out arguments. This new provision encourageschecking and agreement of Defined Cost and Disallowed Cost as the workprogresses. This provision also gives Contractors and Subcontractors thechance to apply pressure to finalise Defined Cost and Disallowed Costissues. It is a sensible change and will be welcomed by many in theconstruction industry.www.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: InternalSubcontractor Costs included in Schedulesof Cost Components (SCC) – CHANGE 3Subcontractor costs have been included in the SCC andpayment is consistent across all options. The Defined Costwill be the cost paid to the Subcontractor.A major issue for Main Contractors under NEC3 has beentrying to get Subcontractors to provide information inaccordance with the NEC3 Rules. This usually proved to bevirtually impossible as Subcontractors did not wish tobreakdown their costs in accordance with the schedulesand many did not understand the NEC3 mechanisms. TheNEC has listened to its users and appears to have removedone of the major headaches associated with NEC3.www.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: InternalFee Percentages – CHANGE 4Working Area Overheads and People Overheads have beenremoved. The relevant items are now paid as actual DefinedCost. Design Overheads have been removed.There is now simply only one fee with no separate fee forsubcontracted works. The application of the fee is nowconsistent in all the main options.NEC3, with its numerous percentage additions, was oftenseen as overly complex with some users of NEC3 not fullyunderstanding how the percentages worked. It is not unusualfor Contractors to have fifty or more Subcontractors workingon projects and, to ensure that their percentages providedadequate recovery, complex calculations were often required.The removal of these percentages should, in theory at least,simplify the whole process.www.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: InternalProgramme Changes – CHANGE 5New provisions for “Treated Acceptance” of the Contractor’sprogramme have been introduced. There is a baselineprogramme for assessment of compensation events in allcases. This will remove the arguments with regard to what isthe starting point, which is occasionally a contentious issuewith NEC3 related disputes.NEC3 relied on the programme being accepted. NEC havealso addressed the potential misunderstanding surroundingimplemented and non-implemented compensation events.www.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: InternalFINANCE• Financial Control– Control of £ changing hands– Central vehicle is normally a Bill of Quantities• Control D Forecast• Predict behaviourwww.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: InternalThe purpose of planning& control of finances• define purpose of organisational existence:source of motivation and commitment• give direction – guide actions and decisions• co-ordinate effort – minimise waste• reduce uncertainty – anticipate change and theimpact of change• establish standards – define criteria for assessingperformance• facilitate control – identify and correct undesirabledeviation from desired outcomewww.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: InternalESSENTIAL FEATURESTIME QUALITYSCOPE COSTPROJECTwww.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: InternalTHE FUTURE• Ever changing• Increase turnover• Repeat business• Negotiated work• Control overheadFINANCIAL FORECASTINGwww.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: InternalTHE COMMERCIAL CHALLENGECOST IS A FACTPRICE IS AN OPINIONCASH = PROFITwww.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: InternalWhy is a well – managed constructionbusiness always cash positive?• Positive cash flow: This occurs when the cash funneling into yourbusiness from sales, accounts receivable, etc. is more than theamount of the cash leaving your businesses through accountspayable, monthly expenses, salaries, etc.• Negative cash flow: This occurs when your outflow of cash isgreater than your incoming cash. This generally spells trouble for abusiness.Do you agree with the starting proposition?www.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: InternalKeeping with the cash positivetheme!• “With the launch of the new Supply Chain PaymentCharter, the construction media is harking back to afamiliar theme: how main contractors are the “baddies”of the industry because they hold on to subcontractorand supplier cash. However, recent analysis frombroker and analyst Liberum, which demonstrates thatthe UK’s six biggest contractors experienced a cashoutflow of £400m over the last year, shows that cashflow management is a key issue for maincontractors as well”.• Source: Staffan Engstrom BSc CEng FICE, strategic developmentconsultant 6th May 2014www.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: InternalWhen turnover slows down therecan be an issue with cash flow.Why?To understand the reason for this, it helps to appreciate how maincontractors generate positive cash flow. Their methods include:• Front loading rates, milestone payments, and site set-up costs.• Getting paid quickly by clients and taking a longer time to paysuppliers.• Billing for work that has not yet been actually done or which thesuppliers have not yet billed for.• Holding back greater retentions and claims against suppliers forlonger than those held back by the client.www.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: Internal• So when turnover is reducing, there are however asurplus of projects that need to be finished at a timewhen the above strategies have already been usedto maximise cash flow.• This leaves many more payments to be made thanreceipts to be taken, at the same time as when thefinal settlements for additional works/claims havestill to be agreed.www.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: InternalCOSTING ELEMENTS• Costs in Period & Costs to Date– Labour– Materials– Plant– Sub Contractors– Other Charges £££www.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: InternalMeasurement is a fact?Valuation is an Art?What can we measure?•% completion of activity•Quantities and Volumesof materials used•Materials on Site•Are variations going to be authorisedfor extra payment?www.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: InternalVALUATION ELEMENTS• Valuation– Preliminaries– Specialist “set-up’s”– Work executed bymilestones– Materials on site orpurchased– Other approvedcharges– Variations approved/not approved– Claims approved/ notapprovedwww.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: InternalPLANNING ISSUES• NO PLAN– CONTENT OF WORKCANNOT BE PREDICTED• IF WORK CANNOT BEPLANNED– COSTS CAN BERECORDED BUT NOTCONTROLLEDwww.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: InternalThe six ‘M’ s’ of Planning– Men.– Materials.– Machines.– Methods.– Money and;– Management.www.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: Internal“The good thing aboutnot planning is thatwhen failure occurs, asit inevitably will, itcomes as a completesurprise!”www.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: InternalBUDGETS FOR ALL STAGES• ADVERTISING The Official Journal of theEuropean Union (OJEC)• PRE – QUALIFICATION• PRE – TENDER• TENDERING & ESTIMATING• TENDER REVIEW• SUB CONTRACTOR SELECTION• STRATEGIC PLANNING• MOBILISATIONwww.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: InternalFACTORS AFFECTING DURATIONand COST OF A PROJECT• Size and complexity of work• Working environment – crowded work area, poorlighting, proximity to rail, road, water, schools etc.• Availability of supporting facilities• Continuity of production• Weather extremes and exposure• Quality, experience, morale & efficiency of labour• Degree of standardisation of work or learningcurve• Length and incidence of holiday periodswww.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: InternalEffective budget planning must bebased upon:-Realistic standards.-Realistic utilisation of all resources.-Evenly balanced resources.-Flexibility (to meet changing circumstances).-Satisfactory relationship between time and cost.www.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: Internal“Close control over project cost,company provisions and overheads andvalue earned are vital to the success of aconstruction company and the Cost ValueReconciliation (CVR) provides suchcontrol the most accurately.”Stephenson & Hill (2003)www.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: InternalCost Value Reconciliation Definition• Most work is tendered or estimated on the basisof a “contribution” or “gross profit”• We need to monitor financial performance• The CVR process is there in order to effectivelymonitor and manage profitability• Income or payments should be greater than costsat most times to maintain cashflow• A prediction of costs over time is an essentialelement to allow comparison with actual vs. planwww.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: InternalMilestone Analysis• How much have we spent to date?• What should we have spent to date?• What have we achieved so far?• What should we have achieved by this time?• What are the final cost and delivery prospects forthe project if our performance continues atpresent level?www.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: InternalCost Value Reconciliation (CVR)Concept– Cost Value Reconciliation (CVR) is the practice ofdetermining and reporting profitability of a constructionproject on a regular basis.– By comparing the costs with revenue at a certain date, itis possible to see the difference between the cumulativeprofit or the loss on the project.– Reconciliation is defined as getting two things to correspond: We dothis on a personal basis when we check that our bank statementhas recorded all the cheques that we have written and the moneywe have paid in.www.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: InternalCVR Shows:• Profit/Loss on each individual contract on amonthly basis• Profit/Loss for the current accounting period• Current cash position of the company• Details of overhead recovery on individualcontractsThis will enable the company to:• Identify any actions and reduce cost liabilities on amonthly basis• Plan company expenditurewww.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: InternalCVR Meetings• Who attends?– Project Manager– Project QS and Finance Support– Site Managers– Directors & HQ finance and commercial• What information is needed?– Financial Accounts– Billing or Income statements (+ debtors!)– Project progress reports including “unplanned events”– Action plans and proposals– Sub contractor and supplier reportswww.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: InternalWhat can we do if costs are exceedingincome?• Check accuracy and recording/allocation• Obtain a report from site• Review elemental charges and unit rates• Check variations and amendments• Reduce costs– Overtime– Increase productivity– Renegotiate Materials or Supplier charges– Reduce waste– Defer work• Prepare claimswww.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: InternalPANIC!!!!!!!!!!!!!!!!!!!!• ACCUSE THE ACCOUNTANTS• BLAME SOMEONE ELSE• RING UP AND FIND A NEW JOB• OR– ADMIT IT– RECOVER– MOVE ON– LEARNwww.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: InternalCOST EFFECTIVEPLANNING &DELIVERY OFPROJECTS IS AGLOBALLYIMPORTANT ISSUEFOR OUR WORLDwww.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: InternalREFERENCES• Cooke, B., Williams, P (2009) Construction PlanningProgramming and Control; Palgrave• Adriaanse, J. (2007) Construction Contract Law; Palgrave• Lock, D (2003) Project Management 8th edition Gower• Barrett, F.R. (1992) Cost value Reconciliation (2nd edition),Berkshire, CIOB• Pilcher, R. (1994) Project cost control in Construction (2ndedition) Oxford Blackwell• Hillebrandt, P (2000) Economic Theory and the ConstructionIndustry; Palgravewww.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: InternalREFERENCES• Office of Government Commerce (2005) Engineering andConstruction Contract; Thomas Telford Ltd.• Office of Government Commerce (2005) nec3 guidancenotes; Thomas Telford Ltd.• Kwakye, A (1994) Understanding Tendering and Estimating;Gower• Franks, J (1994) Building Contract Administration andprocedure; Batsfordwww.derby.ac.ukSCIENCE & ENGINEERINGSensitivity: InternalSee you Later for Tutorial 7Bwww.derby.ac.uk/technology

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