Commercial Awareness
Preparing Budgets
2
Introduction
WHAT … is financial control?
WHY … do we need it?
HOW … do we do it?
WHEN.,do we do it?
WHO … is involved?
3
WHAT is financial control?
A definition
The regular process of ascertaining
– actual earnings
– actual costs
comparing them against
– planned earnings
– planned costs
and projecting any trends to the end of the
project
4
Successful financial
control
To do this successfully both earnings and
costs must be
– identified
– classified
– allocated
– recorded
5
The Control Cycle
Control - a simple diagram
Action
Plan
Monitor
Measure
6
WHAT is financial control?
‘PLAN THE SPEND’
– SET the financial targets we want to achieve
MEASURE
– the actual results as we go (regularly)
MONITOR
– these against our targets (and project what will
happen)
ACT - if necessary
7
HOW do we do it? - a
simple diagram
RE
SU
LT
S
ST
AN
DA
RD
S
VALUE
COSTS
TOTAL VALUE
TOTAL COSTS
ACTUAL PROJECTED TOTAL
COSTS COSTS
ACTUAL PROJECTED TOTAL
PROJECTED
ACTUAL
PROFITSVALUE VALUE
PROFITS
PLANNED
indicates
a projection
indicates a
comparison
8
WHO is involved?
Estimator sets cost/price in the first place
Commercial managers produce budgets
and codes
Production staff generate the data
Project commercial team measure/monitor
Production staff implement actions
In other words -just about everyone!
9
Producing the Budget
where do we start?
The Tender
– Tender Analysis
– Price,cost,margin
– The elements of cost
– some possible complications
10
Recasting the Tender as
Project Budget
What are the problems in using the Tender?
– Late adjustments
– Commercial adjustments
– Gross pricing
– mistakes!
Outputs and methods used in the Tender
may require review
11
The budget - what level of
detail?
Too little detail = not enough control
Too much detail =
– too much time taken to prepare
– cost of preparation
– information comes too late
– difficult to focus action
Commercial Awareness
Financial control using budgets
13
Capturing actual results
From an earlier definition - financial control is
The regular process of ascertaining
– actual earnings
– actual costs
comparing them against what was planned
and projecting trends to the end of the
project
14
Project earnings
what do we get paid for?
– Measured work,paid at tender rates
– Variations,paid at tenderor negotiated rates
– Dayworks
– GE’s (Preliminaries) paid as tendered
– Nominated S/cs & Suppliers
– Cost escalation,if applicable
– Claims
15
Earnings - what are the
problems in recording?
Downpayments
overmeasure
undermeasure
materials on site
rate of progress
variations
16
Earnings - what records
are used?
Interim valuations
surveyor’s monthly return
income analysis
17
Project costs
what costs us money?
– Labour costs
– material costs (temporary & permanent)
– Plant (including operating costs)
– Site overheads (GE’s)
– Subcontractors accounts
– Proportion of Head Office Overhead cost
18
Costs - what are the
problems in recording?
Incurred liabilities (accruals)
rework and remedials
rate of progress
variations
19
Costs - what records are
used?
labour cost records
materials cost records
mechanical plant cost records
subcontractor cost records
General Expenses cost records
CONTRACT COST SUMMARY
20
Project Reporting
Operating statements
Cost value reconciliations
Variance statements
PROJECT COST / VALUE REPORTS (CVR’s)
21
Action on Variances
Project financial reports will highlight
variances between what was planned and
what is actually happening.
What can the site team do about it?
22
Controlling earnings
Where there is an adverse variance in
project income,this could be due to
– failure to achieve the planned level of progress
– failure to achieve timely payment of
entitlements
23
Entitlement to payment
what do we get paid for?
– Measured work,paid at tender rates
– Variations,paid at tender or negotiated rates
– Dayworks
– GE’s (Preliminaries) paid as tendered
– Nominated S/cs & Suppliers
– Cost escalation,if applicable
– Claims
24
When do we get paid
We get paid according to the conditions of
the contract
– advance payments
– interim / progress payments
– retention
– set-off
25
Entitlement to payment,
how do we control it?
Ensure applications are made at proper
times and in correct way
Ensure VOs are recorded,valued and
agreed as soon as possible
Identify,notify and agree any claims as
soon as possible
26
What is it we’re trying to
control?
Labour
Materials
Mechanical plant
Subcontractors
General expenses
27
Labour control
hourly cost of the worker
access to the work
work methods and sequence
availability of tools,equipment,materials
communication of instructions
motivation
28
Materials control
pricing of materials at tender stage
procurement,take-offs
delivery
storage
usage - wastage,losses,extras
materials on site
29
Plant control
selection of right plant / equipment
availability of right equipment
availability of skilled operators
only kept on site when needed
when on site - UTILIZATION
maintenance/breakdowns
rent or buy?
30
Subcontractor control
progress
– not enough labour / materials / equipment
– access to their work
– co-ordination with other subcontractors
quality,workmanship,procedures
safety,actual and procedures
payment,dayworks control,attendances
communications,timing & quality of info
Preparing Budgets
2
Introduction
WHAT … is financial control?
WHY … do we need it?
HOW … do we do it?
WHEN.,do we do it?
WHO … is involved?
3
WHAT is financial control?
A definition
The regular process of ascertaining
– actual earnings
– actual costs
comparing them against
– planned earnings
– planned costs
and projecting any trends to the end of the
project
4
Successful financial
control
To do this successfully both earnings and
costs must be
– identified
– classified
– allocated
– recorded
5
The Control Cycle
Control - a simple diagram
Action
Plan
Monitor
Measure
6
WHAT is financial control?
‘PLAN THE SPEND’
– SET the financial targets we want to achieve
MEASURE
– the actual results as we go (regularly)
MONITOR
– these against our targets (and project what will
happen)
ACT - if necessary
7
HOW do we do it? - a
simple diagram
RE
SU
LT
S
ST
AN
DA
RD
S
VALUE
COSTS
TOTAL VALUE
TOTAL COSTS
ACTUAL PROJECTED TOTAL
COSTS COSTS
ACTUAL PROJECTED TOTAL
PROJECTED
ACTUAL
PROFITSVALUE VALUE
PROFITS
PLANNED
indicates
a projection
indicates a
comparison
8
WHO is involved?
Estimator sets cost/price in the first place
Commercial managers produce budgets
and codes
Production staff generate the data
Project commercial team measure/monitor
Production staff implement actions
In other words -just about everyone!
9
Producing the Budget
where do we start?
The Tender
– Tender Analysis
– Price,cost,margin
– The elements of cost
– some possible complications
10
Recasting the Tender as
Project Budget
What are the problems in using the Tender?
– Late adjustments
– Commercial adjustments
– Gross pricing
– mistakes!
Outputs and methods used in the Tender
may require review
11
The budget - what level of
detail?
Too little detail = not enough control
Too much detail =
– too much time taken to prepare
– cost of preparation
– information comes too late
– difficult to focus action
Commercial Awareness
Financial control using budgets
13
Capturing actual results
From an earlier definition - financial control is
The regular process of ascertaining
– actual earnings
– actual costs
comparing them against what was planned
and projecting trends to the end of the
project
14
Project earnings
what do we get paid for?
– Measured work,paid at tender rates
– Variations,paid at tenderor negotiated rates
– Dayworks
– GE’s (Preliminaries) paid as tendered
– Nominated S/cs & Suppliers
– Cost escalation,if applicable
– Claims
15
Earnings - what are the
problems in recording?
Downpayments
overmeasure
undermeasure
materials on site
rate of progress
variations
16
Earnings - what records
are used?
Interim valuations
surveyor’s monthly return
income analysis
17
Project costs
what costs us money?
– Labour costs
– material costs (temporary & permanent)
– Plant (including operating costs)
– Site overheads (GE’s)
– Subcontractors accounts
– Proportion of Head Office Overhead cost
18
Costs - what are the
problems in recording?
Incurred liabilities (accruals)
rework and remedials
rate of progress
variations
19
Costs - what records are
used?
labour cost records
materials cost records
mechanical plant cost records
subcontractor cost records
General Expenses cost records
CONTRACT COST SUMMARY
20
Project Reporting
Operating statements
Cost value reconciliations
Variance statements
PROJECT COST / VALUE REPORTS (CVR’s)
21
Action on Variances
Project financial reports will highlight
variances between what was planned and
what is actually happening.
What can the site team do about it?
22
Controlling earnings
Where there is an adverse variance in
project income,this could be due to
– failure to achieve the planned level of progress
– failure to achieve timely payment of
entitlements
23
Entitlement to payment
what do we get paid for?
– Measured work,paid at tender rates
– Variations,paid at tender or negotiated rates
– Dayworks
– GE’s (Preliminaries) paid as tendered
– Nominated S/cs & Suppliers
– Cost escalation,if applicable
– Claims
24
When do we get paid
We get paid according to the conditions of
the contract
– advance payments
– interim / progress payments
– retention
– set-off
25
Entitlement to payment,
how do we control it?
Ensure applications are made at proper
times and in correct way
Ensure VOs are recorded,valued and
agreed as soon as possible
Identify,notify and agree any claims as
soon as possible
26
What is it we’re trying to
control?
Labour
Materials
Mechanical plant
Subcontractors
General expenses
27
Labour control
hourly cost of the worker
access to the work
work methods and sequence
availability of tools,equipment,materials
communication of instructions
motivation
28
Materials control
pricing of materials at tender stage
procurement,take-offs
delivery
storage
usage - wastage,losses,extras
materials on site
29
Plant control
selection of right plant / equipment
availability of right equipment
availability of skilled operators
only kept on site when needed
when on site - UTILIZATION
maintenance/breakdowns
rent or buy?
30
Subcontractor control
progress
– not enough labour / materials / equipment
– access to their work
– co-ordination with other subcontractors
quality,workmanship,procedures
safety,actual and procedures
payment,dayworks control,attendances
communications,timing & quality of info
