Financial Management in Construction Contracting
1. Edition January 2013
456 Pages, Softcover
Wiley & Sons Ltd
This authoritative text provides a detailed insight into how construction companies manage their finances at both corporate and project level. It will guide 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.
Examples drawn from practice demonstrate how work-in-progress (WIP) is reported in contracting. Cost value reconciliation reports are featured and the book demonstrates how adjustments are made for overmeasure, undermeasure, subcontract liabilities and WIP as well as explaining the processes that contractors use when analysing external valuations.
This is the ideal core text for final year degree and post-graduate level modules on Quantity Surveying, Commercial Management, Construction Management and Project Management courses and will provide an invaluable source of reference for quantity surveyors and others who may be engaged in the financial management of construction projects.
The book's companion website at www.wiley.com/go/rossfinancialmanagement offers invaluable resources for students and lecturers as well as for practising construction managers:
* end-of-chapter exercises + outline answers
* PowerPoint slides for each chapter
* ideas for discussion topics
* links to useful websites
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
From an understated promise to "explain how the financial position on construction contracts is reported" the book expands into every conceivable avenue the authors could explore in their quest to open up, explain, walk through and map, the processes that guide the industry and control the business operation of a construction company, from finance to bidding, managing risk to delivery, and every stop in between.
If you are a student, the early chapters on finance, accounting, contracts and procurement, will set out the basics of the industry in straightforward language, lots of good worked examples and clearly labelled diagrams. The later chapters address the subtleties of cash management, budget control, risk and opportunity management, progress monitoring, valuations and cost/value reconciliations, in far deeper detail and with contemporary work sheets to guide you through and explain the complexities of reporting cost and value in equal proportion.
The authors have extensive practical experience of the industry, both having risen from the shop floor to the lecture theatre, are suitably qualified to add insight to knowledge and have managed to capture in many ways the essence of the industry, its conflicts, collaborations, power plays and team working. And if you are of the social networking generation there is even a website on which to hone your new found skills. Fully interactive, it provides detailed worksheets and schedules to further explain the lessons contained in the printed version.
--David Monaghan
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.
