Financial Management in Construction Contracting / Edition 1 available in Paperback
Financial Management in Construction Contracting / Edition 1
- ISBN-10:
- 1405125063
- ISBN-13:
- 9781405125062
- Pub. Date:
- 01/29/2013
- Publisher:
- Wiley
Financial Management in Construction Contracting / Edition 1
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$79.75Overview
Andrew Ross & Peter Williams
This authoritative text provides a detailed insight into how construction companies manage their finances at both corporate and project level. It guides students and practitioners through the complexities of the financial reporting of construction projects within the constraints of accepted accounting practice. The book is written for non-accountants and from a contractor’s perspective and is equally relevant to subcontractors and main contractors.
The authors examine the relationship between the external annual accounts and the internal cost-value reconciliation process. CVR is covered in depth and the authors consider issues such as interim payments, subcontract accounts, contractual claims, final accounts, cash flow management and the reporting of the physical and financial progress of contracts.
A broad perspective of all the financial aspects of contracting is taken along with related legal issues and the authors explain how things operate in the ‘real world’. They describe good practice in financial control while at the same time being honest about some of the more questionable practices that can - and do - happen. The approach taken is unique as the financial management of construction projects is considered from the perspective of the contractor’s quantity surveyor. The book deals with the real issues that surveyors have to address when using their judgment to report turnover, profitability, cash flow, and work in progress on projects and the financial problems faced by subcontractors are frankly and pragmatically explored.
The payment and notice requirements of the Construction Act are explained in detail and relevant provisions of JCT2011, NEC3, ICC, DOM/1 and other standard contracts and subcontracts are also covered.
Financial Management in Construction Contracting addresses the wide variety of external factors that influence how construction companies operate, including government policy, banking covenants and the financial aspects of supply chain management. Cost reporting systems are described and real-life examples are used to illustrate cost reports, accrual systems and how computerised systems can be employed to provide the QS with information that can be audited.
This is the ideal core text for final year degree and post-graduate students and provides an invaluable reference source for all engaged in the financial management of construction projects.
This book’s companion website is at www.wiley.com/go/rossfinancialmanagement and offers invaluable resources for both students and lecturers:
- PowerPoint slides for lectures on each chapter
- Excel worksheets to practice what you learn
- Sample valuations and cashflows
Product Details
| ISBN-13: | 9781405125062 |
|---|---|
| Publisher: | Wiley |
| Publication date: | 01/29/2013 |
| Pages: | 456 |
| Product dimensions: | 6.80(w) x 9.50(h) x 0.90(d) |
About the Author
Andrew Ross, BSc(Hons) MSc PhD MRICS MCIOB, Head of postgraduate programmes, School of the Built environment, Liverpool John Moores University. Andrew is a chartered quantity surveyor and chartered builder, after graduation he worked as a commercial manager for Balfour Beatty Building and financially managed projects ranging from refurbishment, adaptation of industrial facilities, health care and new build industrial building. He joined Liverpool John Moores University and has an MSc in Information Technology and a PhD in Construction Economics. He has published over 100 journal and conference papers on construction economics and procurement and is the joint author of three text books, Building Design Cost Management, Construction UK and Financial Management for Construction contracting. His current position at LJMU is head of post graduate programmes and he teaches construction project financial management to undergraduate and post graduate students. He has successfully supervised many PhD students and has been an external examiner to numerous UK and overseas Universities for undergraduate, postgraduate and research degree courses.
Peter Williams is a Consultant and Lecturer with extensive practical experience in building, civil engineering and surveying. Formerly a chartered builder, chartered quantity surveyor and principal lecturer, he is now a writer, researcher, lecturer and consultant with particular interests in contracts and finance, delay analysis and health and safety management.
Read an Excerpt
Table of Contents
About the Authors xviiPreface xviii
1 Finance in the construction industry 1
1.1 Introduction 1
1.2 The purpose of this book 2
1.3 Construction contracting 3
1.4 Work in progress 3
1.5 Reporting 4
1.6 Structure of the book 5
1.7 The construction industry 6
1.7.1 Industry reports 6
1.7.2 Industry reform: origins and responses 7
1.7.3 Housing Grants, Construction and Regeneration Act 1996 9
1.8 Industry output 12
1.9 Industry clients 15
1.9.1 Clients for small buildings 16
1.9.2 Major clients developing for their own occupation 16
1.9.3 Property developers 17
1.9.4 Private house buyers 17
1.10 Structure of the industry 17
1.10.1 Size and distribution of firms 17
1.10.2 Risk culture 19
1.10.3 Specialist contractors 20
1.10.4 Payment processes 21
References 22
2 Stakeholders and the regulatory environment 23
2.1 Accounting 24
2.1.1 Accounting reference period 24
2.1.2 Accounting reference date 24
2.1.3 Statutory compliance 24
2.1.4 Annual accounts 25
2.1.5 Audit procedures 26
2.2 The Companies Acts 26
2.3 Accounting standards 26
2.4 UK accounting standards 27
2.4.1 SSAP9 27
2.5 International accounting standards 28
2.6 Financial reporting 28
2.7 Financial reports 29
2.7.1 Management reports 30
2.7.2 Lenders and banking covenants 31
2.7.3 HMRC reports 33
2.7.4 VAT returns 33
2.7.5 Companies House 35
2.8 Annual accounts 35
2.8.1 Operating statement 36
2.8.2 Directors’ report 36
2.8.3 Profit and loss account 37
2.8.4 Balance sheet 37
2.8.5 Movement of funds statement 39
2.8.6 Auditors’ report 39
2.8.7 Notes to the accounts 41
2.8.8 Group accounts 41
References 41
3 Risk and uncertainty 42
3.1 Definitions 43
3.2 Risk and reward 45
3.2.1 Risk 46
3.2.2 Reward 47
3.3 Corporate governance 48
3.3.1 Definition 48
3.3.2 The Cadbury Report 48
3.3.3 The Financial Reporting Council 48
3.3.4 The Companies Acts 48
3.3.5 The Turnbull Report 49
3.4 Market risk 49
3.4.1 Definition 49
3.4.2 Market risk factors 49
3.4.3 Governance 50
3.5 Working capital 50
3.5.1 Sources of working capital 50
3.5.2 The annual accounts 51
3.5.3 Loan capital 51
3.5.4 Risk capital 54
3.5.5 Overdrafts 55
3.5.6 Trade credit 55
3.5.7 PAYE, NIC and VAT 55
3.5.8 Capital gearing 56
3.5.9 Working capital ratios 56
3.5.10 Liquidity 57
3.5.11 Cash flow 57
3.6 Competition 58
3.6.1 Definition 58
3.6.2 Procurement 58
3.6.3 Subcontractors 58
3.7 Profitability 59
3.7.1 Definitions 59
3.7.2 Income gearing 59
3.8 Work in progress 60
3.8.1 Payment in arrears 61
3.8.2 Valuations and payments 62
3.9 Insolvency risk 62
3.9.1 Industry structure 63
3.9.2 Sole traders 63
3.9.3 Limited liability 63
3.9.4 Large firms 64
3.10 Instability 64
3.10.1 Living with instability 65
3.10.2 Indicators of instability 66
3.10.3 Multiple discriminant analysis 66
3.11 Credit control 67
3.11.1 Debtor days 68
3.11.2 Creditor days 68
References 68
4 Contracts and documentation 70
4.1 Types of contract 70
4.1.1 Form of tender 71
4.1.2 Lump sum contracts 71
4.1.3 Measure and value contracts 73
4.1.4 Cost reimbursement contracts 73
4.2 Financial implications of contracts 75
4.2.1 Lump sum contracts 75
4.2.2 Measure and value contracts 76
4.2.3 Cost reimbursement contracts 77
4.3 Project documentation 78
4.3.1 Definitions 78
4.3.2 Priority of documents 79
4.3.3 Drawings 79
4.3.4 Specification 80
4.3.5 Bills of quantities 82
4.3.6 Schedule of rates 84
4.3.7 Schedule of works 85
References 86
5 Payments in construction 88
5.1 Industry credit system 89
5.1.1 Labour and wages 89
5.1.2 Materials 90
5.1.3 Subcontractors 90
5.1.4 Plant hire 91
5.1.5 Credit terms 91
5.1.6 Discounts 92
5.2 Payment problems 93
5.2.1 Trust and money 94
5.2.2 The Construction Act 1996 95
5.2.3 The Construction Act – scope and application 95
5.3 The scheme for construction contracts 96
5.4 Payment under the Construction Act 96
5.4.1 Payment period 96
5.4.2 Periodic payments 97
5.5 Payment notification under the Construction Act 97
5.5.1 Contractual provisions 97
5.5.2 Payment notice 98
5.5.3 Default payment notice 98
5.5.4 Withholding (or pay-less) notice 98
5.6 Conditional payments 99
5.6.1 Pay-when-paid 99
5.6.2 Pay-when-certified 100
5.6.3 Pay-when-notified 100
5.7 Late payments 100
5.7.1 Legislation 100
5.7.2 Interest 101
5.8 Suspension of performance 101
5.9 Adjudication 102
5.10 Value Added Tax 103
5.10.1 VAT in construction 103
5.10.2 How VAT works 103
References 104
6 Managing the supply chain 105
6.1 Supply chain management 106
6.1.1 Definitions 106
6.1.2 Integrated supply chains 106
6.1.3 Managing cost and profit 107
6.1.4 Practical applications 107
6.1.5 Context 108
6.2 Subcontractors 108
6.2.1 The growth of subcontracting 108
6.2.2 Types of subcontractors 109
6.2.3 Construction Industry Scheme 110
6.2.4 Trade and other references 111
6.2.5 Bonds 111
6.3 Subcontract tenders 112
6.3.1 The decision to sublet 112
6.3.2 Tender enquiries/send outs 112
6.3.3 Scoping of work packages 113
6.3.4 Subcontractor selection 114
6.3.5 Pre-subcontract stage 114
6.4 Subcontract stage 115
6.4.1 Placing the subcontract 115
6.4.2 ‘Battle of the forms’ 116
6.4.3 The discount ‘spiral’ 116
6.4.4 Partnering 117
6.5 Payment 118
6.5.1 Terms of payment 118
6.5.2 Retention and defects correction 118
6.5.3 Valuations and applications for payment 119
6.5.4 Liabilities, claims and accruals 120
References 121
7 Getting work 122
7.1 Business development 122
7.2 Decision to tender 124
7.3 Competitive tendering 129
7.4 Tender lists 130
7.4.1 Open competition 131
7.4.2 Frameworks and approved lists 131
7.4.3
Ad hoc
list 132
7.5 E-bidding and reverse auctions 134
7.5.1 Auctions 134
7.5.2 Online and reverse auctions 134
7.5.3 The process 135
7.5.4 Advantages 135
7.5.5 Disadvantages 135
References 135
8 Corporate governance and management 136
8.1 Definitions 137
8.1.1 Corporate Governance 137
8.1.2 Management 137
8.1.3 Directors 137
8.2 The UK Corporate Governance Code 138
8.2.1 Application 138
8.2.2 Principles 139
8.2.3 Other approaches to governance 139
8.2.4 Corporate governance and contracts 140
8.3 Turnover 140
8.3.1 Definition 140
8.3.2 Calculating turnover 140
8.3.3 Work in progress 141
8.3.4 Cost of turnover 142
8.4 Profit 142
8.4.1 Definition 142
8.4.2 Corporate profit 143
8.4.3 Project profit 144
8.4.4 Profit distribution 144
8.5 Long-term contracts 145
8.6 Management accounts 145
8.6.1 Control 145
8.6.2 Cost value reconciliation 146
8.7 Accounting for contracts 147
8.7.1 The role of directors 147
8.7.2 Work in progress 148
8.7.3 Short-term contracts 149
8.7.4 Long-term contracts 149
8.7.5 Worked examples 150
Reference 152
9 Company structure 153
9.1 Management functions 153
9.1.1 Principles 154
9.1.2 Estimating and tendering 155
9.1.3 Purchasing 156
9.1.4 Production 157
9.1.5 Quantity surveying 157
9.1.6 Supply chain management 158
9.1.7 Accounting 159
9.2 Organisation structures 159
9.2.1 Structure 160
9.2.2 SMEs 163
9.2.3 Large firms 163
9.2.4 Very large firms 163
10 Service departments 165
10.1 Estimating and tendering 166
10.1.1 Preparing the estimate 168
10.1.2 Tender enquires 169
10.1.3 Preliminaries 171
10.1.4 Employer’s requirements 172
10.1.5 Contractor’s requirements 172
10.1.6 Measured items 175
10.1.7 Attendances and profit associated with domestic
subcontract works 175
10.2 Tender submission 176
10.2.1 Tender margin 176
10.2.2 Design risks 177
10.2.3 Construction risks/opportunities 177
10.2.4 Tender committee 177
10.2.5 Final adjustments 178
10.2.6 Qualification 178
10.2.7 Production of allowance bill 178
10.3 Planning 179
10.4 Buying 179
10.5 Accounting, costs and information 179
10.5.1 Definitions of costs 180
10.5.2 Timing of cost information flows and reporting 181
10.6 Company management accounting systems 181
10.6.1 Company information systems 181
10.6.2 Contract operational ledger 184
10.7 Contract cost reports 190
10.7.1 Principle of cost cut off 190
10.7.2 Direct costs and accruals 190
10.7.3 Cumulative and period reporting 194
10.7.4 Cost provisions 194
10.7.5 Individuals involved 196
10.8 Project audits and site processes 196
References 197
11 Financial management 198
11.1 Budgetary control 198
11.2 Definitions 200
11.2.1 Cost 200
11.2.2 Value 200
11.3 Cash flow 201
11.3.1 Movement of funds 201
11.3.2 Cash flow forecasting 202
11.3.3 Client and contractor 202
11.3.4 Cash flow forecast limitations 203
11.3.5 Simple forecasting models 204
11.3.6 Credit terms 208
11.3.7 Minimum and maximum cash requirements 209
11.3.8 Capital lock up 211
11.3.9 Expediting receipts 211
11.3.10 Delaying payment to suppliers 211
11.3.11 Project cash flow 214
11.3.12 Organisational cash flow 217
11.4 Working capital 218
11.4.1 Current assets 218
11.4.2 Current liabilities 221
11.4.3 Profitability ratio 221
References 221
12 Project governance 222
12.1 Introduction 223
12.2 Procurement methods 224
12.2.1 Traditional 224
12.2.2 Design and build 226
12.2.3 Management contracts 227
12.2.4 ‘Pain and gain’ systems 228
12.2.5 Partnering 229
12.3 Conditions of contract 229
12.3.1 Payment mechanisms 229
12.3.2 Payment procedures 230
12.3.3 JCT Standard Building Contract with Quantities 2011 (SBC/Q) 231
12.3.4 Infrastructure Conditions of Contract (ICC) – Measurement Version 231
12.3.5 NEC Engineering and Construction Contract 3rd Edition 232
12.3.6 Other standard forms of contract 232
12.3.7 Conditions of subcontract 232
12.4 Method of measurement 237
12.4.1 Standard methods of measurement 237
12.4.2 Basis of quantities 237
12.4.3 Classification systems 238
12.4.4 SMM rules 239
12.4.5 Waste 239
12.4.6 Working space 241
12.4.7 Temporary works 243
12.5 Bills of quantities 244
12.5.1 The use of bills of quantities 244
12.5.2 Structure and layout 244
12.5.3 Preliminaries 245
12.5.4 Measured work 247
12.5.5 Prime cost sums 250
12.5.6 Provisional sums 251
12.5.7 Daywork 252
12.5.8 Contingencies 253
12.5.9 Final summary 254
12.5.10 Adjustment item 254
References 254
13 Budgets 255
13.1 Developing and monitoring budgets 256
13.2 Types of budget 256
13.2.1 Strategic budgets 256
13.2.2 Turnover budget 256
13.2.3 Overhead budget 257
13.3 Project level budgets 259
13.3.1 Project turnover budgets 259
13.3.2 Project cash budgets 259
13.3.3 Production budgets 260
13.3.4 Procurement budgets 260
13.4 Activity level budgets 262
13.5 De-scoping bills of quantities 263
13.6 Budget development 264
13.6.1 Labour 264
13.6.2 Materials 267
13.6.3 Plant 268
13.6.4 Preliminaries 269
13.7 Variance analysis 270
13.7.1 Productivity assessment: an example 270
13.8 Control procedures 272
13.9 Earned value analysis 272
13.9.1 Definition of EVA 273
13.9.2 The components of EVA 274
13.9.3 EVA in practice 275
13.9.4 Work breakdown structures 276
13.9.5 Establishment of an EVA management system 276
13.9.6 Benchmarking project performance using EVA 277
13.9.7 Predicting performance 277
13.9.8 EVA in action: an example 278
13.9.9 Making predictions based on the derived metrics 281
13.9.10 Benefits of EVMS 282
References 282
14 Resource procurement 284
14.1 Introduction 284
14.2 The resource budget 285
14.3 Resource procurement programme: subcontractors 285
14.4 Tender assessment 286
14.5 Tender negotiation 287
14.6 Buying gains and losses 287
14.7 Newer approaches to subcontract procurement 287
14.7.1 Reverse e-auction 288
14.7.2 Pre-auction stage 288
14.7.3 The auction stage 289
14.7.4 Post-auction stage 289
14.7.5 Live e-auction results 290
14.7.6 Reflections 291
14.8 Materials procurement 291
14.9 Plant procurement 292
14.10 Labour procurement 292
14.11 Labour-only subcontractors 293
15 Project risk and control 294
15.1 Introduction 294
15.2 Tender risk 295
15.2.1 Programme and method 295
15.2.2 Ground conditions 296
15.2.3 Subcontractors 299
15.2.4 Suppliers and materials 300
15.2.5 Commercial opportunity 304
15.3 Contract risk 307
15.3.1 Delay and disruption 307
15.3.2 Delay analysis 308
15.4 Claims 311
15.4.1 Extensions of time 311
15.4.2 Loss and expense 312
15.4.3 Evaluating prolongation expenses 314
15.5 Insolvency risk 315
15.5.1 Risk rating 315
15.5.2 Definitions 315
15.5.3 Legislation 316
15.5.4 Termination of main contracts and subcontracts 317
15.5.5 The effect of termination 317
15.5.6 Subcontractor’s insolvency 318
15.5.7 Employer’s insolvency 323
15.5.8 Contractor’s insolvency 324
References 328
16 Programme and progress 329
16.1 Contractor’s obligations 329
16.2 Programme 330
16.2.1 The tender stage 331
16.2.2 The pre-contract stage 333
16.2.3 The contract or master programme 334
16.2.4 Contractor’s method 337
16.2.5 Shortened programmes 337
16.2.6 The contract stage 338
16.3 Progress 338
16.3.1 Contractor’s obligations 338
16.3.2 The baseline programme 339
16.3.3 Extensions of time 339
16.3.4 Mitigation of loss 343
16.3.5 Measuring progress 343
16.4 S-curves 344
16.4.1 Principles 344
16.4.2 Measuring physical progress 344
16.4.3 Measuring financial progress 345
16.5 Project acceleration 349
References 351
17 Valuations and payments 352
17.1 Valuations and interim certificates 353
17.1.1 The purpose of valuations 353
17.1.2 The timing of valuations 354
17.1.3 The timing of interim certificates 354
17.1.4 The status of interim certificates 355
17.2 Interim payment 355
17.2.1 Contractual provisions 355
17.2.2 Methods of payment 355
17.2.3 Payment notification 356
17.2.4 Retention 356
17.2.5 Alternatives to retention 357
17.3 Principles and procedures 358
17.3.1 Valuation principles 358
17.3.2 Valuation procedures 359
17.3.3 Types of valuation 360
17.4 Valuation techniques 362
17.4.1 Inspection 362
17.4.2 Measurement 362
17.4.3 Ogive curve 363
17.4.4 Gantt chart 363
17.4.5 Adjustment and judgement 363
17.5 Materials on site 364
17.5.1 Valuing materials on site 364
17.5.2 Retention of title 365
17.6 Basic valuation procedure 366
17.7.1 Contract provisions 370
17.7.2 Components of an interim valuation 370
17.8 Preparing the external valuation 371
17.8.1 Measured work 372
17.8.2 Variations 372
17.8.3 Daywork 373
17.8.4 Prime cost sums 375
17.8.5 Provisional sums 377
17.8.6 Preliminaries 377
17.8.7 Progress 378
17.9 Internal valuation 378
17.9.1 Purpose 378
17.9.2 Link to the external valuation 379
17.9.3 Link to the estimate 384
17.10 Subcontract valuation 384
17.11 Final accounts 386
17.11.1 Purpose 386
17.11.2 Timing 387
17.11.3 Preparation 387
17.11.4 The final certificate 389
17.11.5 Contractual significance of final certificate 389
References 389
18 Cost value reconciliation 391
18.1 Introduction 392
18.1.1 Accounting standards 392
18.2 Guiding principles 393
18.2.1 Costs 393
18.2.2 Site cost information 395
18.2.3 Labour 395
18.2.4 Materials 397
18.2.5 Plant costs 398
18.2.6 Subcontract costs 399
18.3 Cost reporting 401
18.3.1 Timing 401
18.3.2 Overheads 403
18.4 Net sales value (NSV) 405
18.4.1 Calculation of net value 406
18.4.2 Calculation of profit 407
18.5 Losses 407
18.5.1 Foreseeable losses 407
18.6 Claims and variations 408
18.7 Valuation: application and internal valuation 409
18.7.1 Adjustments: overmeasure 411
18.7.2 Adjustments: undermeasure 412
18.8 Development of the internal valuation: an example 412
18.9 Reconciliation 414
18.9.1 On-costs in advance 414
18.10 Explaining variances 419
18.11 Summary 421
References 421
Glossary 422
Index 429