1. COST PLAN
Cost planning (ehow.com) is a key due diligence step in preparing for a construction project. Cost planning tells a property owner how much a proposed project will cost. Additionally, cost planning will tell when the expected expenses will most likely occur. This information is critical for obtaining project financing and for determining whether a project can be profitable. Without cost planning, property owners would enter blindly into construction projects and possibly into insolvency.
Cost planning typically involves two features. The first is an overall budget for the project. This is the total amount that the project is expected to cost. This amount is based on the current project scope and design and can be determined through various types of estimates. The second feature of cost planning is the allocation of costs over time. This involves predicting when along the project schedule costs will actually be incurred and paid.
Furthermore, cost plan (construction contract, huges; page 92) explains cost plan as a reaction to what is being produced by the designer i.e. the architect, services engineer, and structural engineer and so on. This are usually based on client needs and briefs, whatever the designer produces has a cost attached to it, so in these early stage cost planning can be said to be reactive.
Conclusively, according to (guidance notes on cost management in engineering construction projects) it briefly defined it as a cost model or plan of a proposed or anticipated expenditure phased over scheduled time periods.
2. CASH FLOW
Cash flow (guidance notes on cost management in engineering construction projects) stated it as projected cash balanced over a stated time period based in the net flow of actual or anticipated payments and receipts.
CASH FLOW (http://bivashsarker.hubpages.com/hub/Project-Management-Practices)deals with cash inflow by which money comes into the project and cash outflow by which money goes out of the project. Cash inflows are possible from 3 main areas.
• Receipts from client as per contract and works executed.
• Receipts from sale of good (mainly scrap).
• Funds raised in form of loans from financial institutions or other approved sources as working capital. Target shall be to keep funds raised in form of loans at minimum. Let us find out factors which contribute to a cash inflows and cash outflows in a project so that all persons concerned can at least attempt to keep the target. at any point of time, a project should have following condition to consider it as ‘project with healthy cashflow’.funds arranged as loans ≥ (cash out flows - receipts from client). Receipt from sale of goods has not been considered as its contribution towards cash inflow is meagre with respect to receipts from client. To keep 'fund arranged as loan' to minimum, 'receipts from client' should be on higher side and 'cash outflows' shall be on lower side at all times.
3. Financial Statements
Definition: Financial statements are a collection of reports about a project financial results and condition. They are useful for the following reasons:
• To determine the ability of a project to generate cash, and the sources and uses of that cash.
• To determine whether a project has the capability to pay back its debts.
• To track financial results on a trend line to spot any looming profitability issues.
• To derive financial ratios from the statements that can indicate the condition of the project.
• To investigate the details of certain business transactions, as outlined in the disclosures that accompany the statements.
The standard contents of a set of financial statements are:
• Balance sheet. Shows the entity's assets, liabilities, and stockholders' equity as of the report date.
• Income statement. Shows the results of the entity's operations and financial activities for the reporting period.
• Statement of cash flows. Shows changes in the entity's cash flows during the reporting period.
• Supplementary notes. Includes explanations of various activities, additional detail on some accounts,
4. Amortization
Amortization is payments of debt in equal instalments of principal and interest, rather than interest only payments. The deduction of capital expenses over a specific period of time (usually over the asset's life). More specifically, this method measures the consumption of the value of intangible assets, such as a patent or a copyright.
5. Repayment
The act of paying back money previously borrowed from a lender. Repayment usually takes the form of periodic payments that normally include part principal plus interest in each payment. The other common method of repayment is a lump sum with interest at maturity. Failure to keep up with repayments of debt can force you to declare bankruptcy and severely affect your credit rating. Before declaring bankruptcy, most people should explore every alternative such as earning additional income, refinancing and negotiating with creditors.
6. Fluctuations
It entails change in price of goods, materials and personnel variation during the contract period. Price guides are provided which take many month to prepare, published ahead of the year. So in periods of high inflation they can be very quickly out of date. So there is chance for price changes even at normal condition.
Price fluctuation
Time taken for award of contract
Delay in awarding contract causes many problems in the implementation stage in the following matter. Price fluctuation becomes very high creating lot of uncertainty, as the base index is generally calculated 28 days before the bid submission when there is a delay in awarding the contract on the first month after commencements of the work there is a fluctuation of price accounted.
Material
When there is sudden change in obtaining the materials; the cost of the project goes up.
Labour
Availability of skill trained Labour is a problem for the construction industry in Sri Lanka ,hence the contractor had to mobilize skill labour from faraway places & pay high salaries provide other facilities like lodging, food … etc which increase the Labour rate.
7. Preliminary
This is work deemed to be done before any building construction can proceed. They are items that facilitate progress of work on site. Construction projects are priced using a bill of quantities--a detailed description of the items needed to finish the product and their costs. The preliminaries of a bill of quantities are the section that provides a description of the project, the contractor's general obligations, general facilities, and setup and running costs. In the United States, the term "site overheads" is used instead of "preliminaries." In a bill of quantities, the preliminary costs are generally divided among initial cots, recurring cost and final costs. Initial and final costs are one-off expenses, while recurring costs continue throughout the life of the project. If work is disrupted for reasons out of the contractor's control, recurring costs are often used to calculate compensation for the extension on the contract period.
8. Contingencies
Contingency allowance is provided in construction contracts to allow for miscellaneous unforeseen costs which cannot be classified under any other head, but is necessary for successful completion of the project. In construction contracts usually 3 to 5 percent of contract value is provided as contingency allowance. An example of such unforeseen cost is price escalation. If there is a saving in the contingency allowance, then this amount can be used for execution of extra items of work. That means when variation claims are raised, it is common that the employer will cancel the contingency allowance against variation claims, and pay the contractor.
9. Provisional sum
According to section 10.3 of the standard method of measurement 3(BESMM3) it explains provisional sum for defined work as the a sum provided for work which is not completely designed but for which the following information shall be provided
a) The nature and construction of work
b) A statement of how and where the work is fixed to the building and what other work is fixed thereto
c) A quantity or quantities which indicate the scope and extent of the work
d) Any specific limitation and the identified in section A35.
Prior to the above explanation the contractor will be deemed to make any allowance in programming, planning and pricing preliminaries
While for undefined work the listed information are not provided and no allowance is deemed to be provided by the contractor
Furthermore, they are used when work has not been finalized or for cost which is unknown, at the time the bills are prepared they may be simply be contingency sums.
10. Prime cost
Prime cost (PC) sums are used for work under the building contract which is carried out under the direction of the main contractor by certain other persons, namely, norminated sub-contractor, nominated suppliers and statutory authorities.
Prime cost generally is an allowance for articles to be provided by the contractor, of which price cannot be fixed at the time of tender. It refers only to the supply of materials and not to the carrying out of works. A specific amount will be earmarked in the BOQ for execution of such items. Examples are fixtures and finishing works like ceramic tiles, sanitary fittings, water supply fittings etc. that can be decided only at the time of execution. Contractor is not entitled for any profit on prime cost items, but sometimes the cost of carriage will be provided if specified in contract. The FIDIC Conditions of Contract do not mention about prime cost.
Definition of Prime cost by ICE (Institution of Civil Engineers, Great Britain)
"Prime Cost (PC) Item" means an item in the Contract which contains (either wholly or in part) a sum referred to as Prime Cost (PC) which will be used for the execution of work or the supply of goods materials or services for the Works.
11.Nominated sub-contractor
(JCT) he is a trader, specialist appointed by the client; therefore there is only agreement between the parties as regard to payments and other conditions. In theory, at least, the appointment of a domestic contractor is default by the client or her consultants.
Conclusively, a Nominated subcontractor is chosen by the architect, client or engineer to carry out certain aspects of the work. They are appointed on the expenditure of a provisional sum or prime cost sum included in the contract bills. The nominated subcontractor enters into a contract with the main contractor but there may be a collateral warranty between the nominated subcontractor and the client. The main contractor has no responsibility to carry our work that is intended to be carried out by a nominated subcontractor. Nomination is not possible under the JCT 2005 Standard Building Contracts or the Engineering and Construction Contract. The main contractor is required to provide the general attendances for the subcontractor; any special attendances are the subcontractors’ responsibility. The main contractor will provide a profit margin for such attendance. A nominated sub-contractor is one that is selected by the client to carry out an element of the works. Nominated sub-contractors are imposed upon the main contractor after the main contractor has been appointed. The mechanism for nominating is an instruction in relation to a prime cost sum to which a main contractor is entitled to add its mark up and attendance costs. It allows the client to have direct separate negotiations with major suppliers of goods or services and feed their appointment and design input into the contract after works by the main contractor have commenced.
"Nominated Sub-contractor" means any merchant tradesman specialist or other person firm or company nominated in accordance with the Contract to be employed by the Contractor for the execution of work or supply of goods materials or services for which a Prime Cost has been inserted in the Contract or ordered by the Engineer to be employed by the Contractor to execute work or supply goods materials or services under a Provisional Sum.(ICE Conditions of Contract Definition)
12.Domestic sub-contractor
A Domestic Sub-contractor is selected and engaged directly by the main contractor to carry out a particular trade; this will mainly include standard trades such as bricklayers, roofers, ground workers, plumbers, electrical and plasterers. They may be labour only or supply and fix. In all cases they must be approved by the architect under JCT 2005 Standard Building Contracts. The architect has the full authority to reject any subcontractor requested by the contractor. The contract does not recognise the main contractors own subcontractors, any work carried out by these is taken as if it were carried out by the main contractor.
In the word there is a bond between him and the main contractor as regard to payment and other conditions. A domestic sub-contractor is any sub-contractor, other than a nominated-sub contractor, that the main contractor sub-contracts to carry out part of the works. The work of the sub-contractor is the responsibility of the main contractor as far as the contract between the main contractor and the client is concerned.
A sub-contractor can be considered domestic if:
• They were freely selected by the contractor.
13. Variations
JCT80; the basic definition includes any ‘alteration or modification of the design, quality or quantity of the work as shown on the contract drawings and described by or referred to in the contract bills.; the clauses clarifies this further by stating that such alteration or modification includes additions, omission or substitution i.e. variation to completed work item. These also go to the material and goods used for work.
ICE 6;it is the addition ,omission ,substitution ,alteration ,changes in quality, form, character, kind, position, dimension, level or line, and changes in any specific sequence, method or timing of construction .this list, which contain a number of synonyms, means in effect the engineer may issue variation about almost anything. The clause also makes it clear also that a variation order need not be issued merely foe the purposes of altering quantities in the bills, this is because the bills are not intended as a full description of the work, but only as a mechanism for selecting the contractor.
Variations to the scope of construction works are necessary because no project is impeccable and changes are required to meet unforeseen circumstances or changed requirements. Thus, variation can be in the form of additions, omissions or substitutions.
14. Suppliers
Suppliers are responsible in providing construction companies with the needed materials to establish their projects. Suppliers usually serve as middleman. These professionals act as liaison between the builders and the manufacturers. Like any other construction jobs, it is important that you will supply the suppliers on the right time. Most of the construction projects available out there should be done in a specific period of time. Any delay in the delivery of the supplies might cause problems between the project owner and the other construction professionals.
15.Preliminary
Day work. Day work is the working hours of trader, workers, and labours in a day. This is the work range achieved in a day by a particular worker. It is used to arrive at a prime cost day work rate. The latter are a guide for employers showing them how to work out the real cost of employment so that it can be factored into quotes for work.
They show the workings out for these calculations based on application of the current working rule agreement and pay rates. However, they do not cover other costs such as workers travel or accommodation, and do not cover any of the non employment costs that employers need to factor into quotes for work such as administration, supervision, materials etc.
Time related work. It is work done for a particular item of work of which it is to be considered as proportional to the length of time taken to execute the work.
Value related work.It is the work as related to the intended method of executing the works, the costs of which are not to be considered as proportional to the quantities of the other items and for which he has not allowed in the rates and price for the other items
Builders work. Builder's Work is usually an ancillary item connected with other work, for providing MINOR building work; for example a description "builder's work in connection with window installation" might include forming an opening in a wall, fixing a lintel, and making good the wall faces after installation of the window unit.
In respect of service building example, if a building is required I would expect it to be within the performance specification for the design and build project. If a building is not specified, the D&B bidder/contractor might offer entirely weather proof equipment.
Also in mechanical/electrical services builder works may include chiselling the wall, making good of the surface and all element in the m section of the BESMM3.
Programme of work; Programmes of work which show the sequence of activities are common in the construction industry, and their importance is growing rapidly. Managers, engineers, quantity surveyors and site managers now need to be able to read and interpret programmes as much as construction drawings. But the role of programmes is still unclear.
16. Value added tax
VAT is a tax on consumer spending. It is collected by VAT-registered traders on their supplies of goods and services affected within the State, for consideration, to their customers.
17. Withholding tax
It is a tax that is withheld from income payments for building and construction activities and consulting services. The person required to withhold may be the service recipient in some cases and in other cases it will be the service provider. The status of the service recipient determines who is responsible for withholding the tax. The service recipient is the party who pays and the service provider is the party who receives payment for the building and construction activities or consulting services.
18.Materials on site.
These include all type of appropriate and deemed supplied goods or services that are pending for use on an incumbent construction process within the hoarded site vicinity. Clause 4.16.1.2 of the JCT Form requires the inclusion in the amount of an interim certificate of materials and goods delivered to the site for incorporation in the Works. In order to value them, the surveyor will need to be satisfied that the materials and goods are actually on the site and to ascertain approximately how much of each material or good there is. It is not necessary to know the exact quantities because by the time the next valuation is done, most or all of the materials will have been incorporated into finished work which will then be valued as such.
19.Material offsite
The JCT Form includes a provision in clauses 4.16.1.3 and 4.17for the value of materials and goods intended for the Works but not yet delivered to the site to be included where certain criteria have been met. These include all type of appropriate and deemed supplied goods or services that are pending for use on an incumbent construction process outside the hoarded site vicinity. This is at the discretion of the main contractor. The architect and the client are also aware of the location.
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