Financial Management in Construction Contracting

About the Authors xvii Preface 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 1.8 Industry output 12 1.9 Industry clients 15 1.10 Structure of the industry 17 References 22 2 Stakeholders and the regulatory environment 23 2.1 Accounting 24 2.2 The Companies Acts 26 2.3 Accounting standards 26 2.4 UK accounting standards 27 2.5 International accounting standards 28 2.6 Financial reporting 28 2.7 Financial reports 29 2.8 Annual accounts 35 References 41 3 Risk and uncertainty 42 3.1 Definitions 43 3.2 Risk and reward 45 3.3 Corporate governance 48 3.4 Market risk 49 3.5 Working capital 50 3.6 Competition 58 3.7 Profitability 59 3.8 Work in progress 60 3.9 Insolvency risk 62 3.10 Instability 64 3.11 Credit control 67 References 68 4 Contracts and documentation 70 4.1 Types of contract 70 4.2 Financial implications of contracts 75 4.3 Project documentation 78 References 86 5 Payments in construction 88 5.1 Industry credit system 89 5.2 Payment problems 93 5.3 The scheme for construction contracts 96 5.4 Payment under the Construction Act 96 5.5 Payment notification under the Construction Act 97 5.6 Conditional payments 99 5.7 Late payments 100 5.8 Suspension of performance 101 5.9 Adjudication 102 5.10 Value Added Tax 103 References 104 6 Managing the supply chain 105 6.1 Supply chain management 106 6.2 Subcontractors 108 6.3 Subcontract tenders 112 6.4 Subcontract stage 115 6.5 Payment 118 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 Ad hoc list 132 7.5 E-bidding and reverse auctions 134 References 135 8 Corporate governance and management 136 8.1 Definitions 137 8.2 The UK Corporate Governance Code 138 8.3 Turnover 140 8.4 Profit 142 8.5 Long-term contracts 145 8.6 Management accounts 145 8.7 Accounting for contracts 147 Reference 152 9 Company structure 153 9.1 Management functions 153 9.2 Organisation structures 159 10 Service departments 165 10.1 Estimating and tendering 166 subcontract works 175 10.2 Tender submission 176 10.3 Planning 179 10.4 Buying 179 10.5 Accounting, costs and information 179 10.6 Company management accounting systems 181 10.7 Contract cost reports 190 10.8 Project audits and site processes 196 References 197 11 Financial management 198 11.1 Budgetary control 198 11.2 Definitions 200 11.3 Cash flow 201 11.4 Working capital 218 References 221 12 Project governance 222 12.1 Introduction 223 12.2 Procurement methods 224 12.3 Conditions of contract 229 12.4 Method of measurement 237 12.5 Bills of quantities 244 References 254 13 Budgets 255 13.1 Developing and monitoring budgets 256 13.2 Types of budget 256 13.3 Project level budgets 259 13.4 Activity level budgets 262 13.5 De-scoping bills of quantities 263 13.6 Budget development 264 13.7 Variance analysis 270 13.8 Control procedures 272 13.9 Earned value analysis 272 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 14.8 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 15.3 Contract risk 307 15.4 Claims 311 15.5 Insolvency risk 315 References 328 16 Programme and progress 329 16.1 Contractor's obligations 329 16.2 Programme 330 16.3 Progress 338 16.4 S-curves 344 16.5 Project acceleration 349 References 351 17 Valuations and payments 352 17.1 Valuations and interim certificates 353 17.2 Interim payment 355 17.3 Principles and procedures 358 17.4 Valuation techniques 362 17.5 Materials on site 364 17.6 Basic valuation procedure 366 17.8 Preparing the external valuation 371 17.9 Internal valuation 378 17.10 Subcontract valuation 384 17.11 Final accounts 386 References 389 18 Cost value reconciliation 391 18.1 Introduction 392 18.2 Guiding principles 393 18.3 Cost reporting 401 18.4 Net sales value (NSV) 405 18.5 Losses 407 18.6 Claims and variations 408 18.7 Valuation: application and internal valuation 409 18.8 Development of the internal valuation: an example 412 18.9 Reconciliation 414 18.10 Explaining variances 419 18.11 Summary 421 References 421 Glossary 422 Index 429