© The College of Estate Management 2008

Paper 1748V1-0

Post-contract cost control

Contents
Aim

Learning outcomes
1. Requirements of a cost control system
2. Cash flow forecasting
3. Financial reports
4. Final accounts
4.1 Variations
4.2 Adjustment of prime cost sums
4.3 Provisional sums and quantities
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Aim
The paper explains the different techniques required to ensure cost control of a
project once work has started on site, either for the client or for the contractor.

Learning outcomes
After studying this paper you should be able to:

z Identify the basic requirements of a cost control system.

z Understand the need for and method of producing a cost report and cash flow
forecast.

z Discuss the procedures to be followed in preparing the final account.

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1 Requirements of a cost control system

Cost prediction and control must, of course, form a major part of the pre-contract
process, and the balancing of design, cost and quality criteria will be a crucial element
in the process. The quantity surveyor will play a major role in ensuring that the
approved design meets the client’s requirements in respect of budget design through
the use of traditional cost planning and cost monitoring techniques. These may also
be supplemented through the use of formal value management processes. Indeed it is
sometimes said, not entirely accurately, that one check on how well the client’s
adviser has been able to control the cost of the design is given by how close the
tender figure is to the last pre-tender estimate!

This paper principally concerns post-contract cost control, and any cost control
system needs to encompass the basic principles of budgetary control:

z planning
z publishing
z measuring
z comparing
z reporting
z correcting.

The plan is the detailed cost plan or the priced bill of quantities. It is published or
circulated to all the design team at the start of work on the project. Measuring and
comparing goes on during the contract to ensure that the quantities used on site are
as anticipated, and that any changes required are identified. Reporting on the changes
ensures that the client is informed of any variations. If they are likely to increase the
costs, then correcting action can be taken.

With traditional construction projects:

z A post-contract cost control system should allow control and not be merely a
cost reporting process. Cost is likely to increase whenever the client changes
his mind or when an architect or engineer changes a drawing after the contract
sum has been agreed. This increase needs to be controlled.
z All participants in the project should appreciate how the system works and
what is required of them in order for it to function correctly.
z All changes above a certain sum that will affect the final account figure should
be agreed by the client or his representative. The sum will increase with the
value of the project.
z The system should be capable of forecasting the final account figure.
z Standard forms should be used for approvals. These can be time-saving in
themselves.

A key point here is that the client should be aware if he has restricted the architect’s
ability to issue drawings and instructions, so curbing a potential increase in costs. It is
essential to put a financial limit on substantial instructions. The architect will then be
more likely to ask the quantity surveyor to value an instruction before its issue, and
they can discuss alternatives if the budget is likely to be exceeded.
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The main thing is that advice is sought and acted on before the instruction is issued to
the contractor. Cost control is only achieved if savings can be identified and
suggested during the construction period to counteract the additions that occur. This
requires the quantity surveyor to lead discussions with the contractor and architect on
appropriate action to be taken. A fax or email from the architect on site to the QS in
his office can quickly be priced and advice given. Lack of time should no longer be
an excuse for not obtaining financial advice before issuing an instruction.

It is also useful if the system can identify possible claims from the contractor, either
for additional time or for money. On many projects the quantity surveyor’s
relationship with the contractor’s surveyor is fundamental in extracting this
information early enough and comprehensively enough for control to be exercised.
Being aware of the circumstances that can give rise to the claims, and avoiding them,
is likely to be more beneficial for controlling costs.

Similar cost control systems can be employed on design and build and management
contracts, although there will be variations depending on who has the design
responsibility and on the composition of the consultancy team.

2 Cash flow forecasting

A prerequisite of the cost control system is the preparation of a cash flow forecast
which can then be used as the yardstick against which actual costs can be compared.
Many quantity surveying firms use a computer program to produce a cash flow
forecast for a project. The formula for the traditional ‘S’ curve is used to generate the
monthly anticipated payments, or customised curves can be used.

The minimum information required for this type of software is:

z the contract sum

z the contract period
z the amount of retention
z an estimated percentage completion at practical completion (say 97%)
z the length of the defects period.

From this information the software will produce a tabulated printout, showing
estimated payments that the client should expect to make and a graphical
representation of the figures.

During the contract the quantity surveyor can input actual expenditure (the amount of
the interim certificate), and the software will identify the difference between this and
the estimated cash flow. Future payments can be adjusted to accommodate actual
payments, and any revisions to the length of the contract period can be made.

Example 1 shows a typical example. The revised expenditure curve was established
the previous month and this month we see the latest expenditure curve, identifying
both a cost overrun and a time overrun. There is sufficient time left within the
programme of works to accommodate revisions to the design and for discussions on
acceleration to bring the cost and time back to within budget. Analysis of the
variation between the original cash flow forecast and the revised forecast is important
for the client, along with recommendations on a suitable course of action to take.
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EXAMPLE 1 Project cost variance analysis

For refurbishment or phased projects, the ‘S’ curve is not appropriate as it does not
closely approximate to the planned expenditure. Here there should be a bar chart of
the anticipated programme produced, with the resources priced, to give a more
accurate cash flow forecast.
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EXAMPLE 2 Priced programme, figures in £’000s

Activities Months
1 2 3 4 5 6 7
A 500 100
B 300 150 70
C 330 190 70 50
D 390 300 200
E 200 140
F 60 60
Totals 500 400 480 650 570 450 60

Cumulative
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3 Financial reports
A main component of the cost control system is the regular cost report to the client,
informing of changes approved or instructed and their likely effect on the final
account to be paid under the contract.

The importance of cost control services, both pre- and post-contract, has increased
greatly in recent years, owing partly to more stringent financial situations and partly
to clients’ demands to start projects quickly without adequate preparation. It is
generally accepted that, where time permits, a fully pre-planned contract with
accurate bills of quantities allows greatest control over expenditure. However, there is
little point in trying to produce what purports to be an accurate bill of quantities if the
design has not been fully completed at the time of tendering. In such cases an
approximate bill of quantities would be more appropriate and would more truly
reflect the position.

The essence of control is frequent and regular reporting of the financial state of the
contract to the employer. Although the quantity surveyor has no direct control over
the ordering of variations, he can predict their cost consequences and thus make the
employer aware of his prospective financial commitment before the work is put in
hand. This demands a close working relationship between the architect and the
quantity surveyor and is really a continuation of the initial cost planning process.

The quantity surveyor should:

z Arrange for the architect and other consultants to provide him with information
on proposed instructions and other matters that affect the contract financially
as soon as it is available – preferably before instructions are issued to the
contractor.
z Keep in touch with the contractor so that he may have early warning of any
changes that originate from that quarter. It is often prudent for instructions
anticipated over a certain sum (say £1,000) to be approved by the client before
being issued.
z Produce financial statements in the form of a running total of the estimated
final cost, taking into account predicted variations, fluctuations and possible
claims for extra loss and expense.
z Send the financial statement to the architect for comment before forwarding to
the client, accompanied if necessary by a covering letter explaining any items
that are in doubt, such as the amount of future claims from the contractor.

The employer and architect can then be given an up to date picture of the financial
state of the contract at any time. Many of the disputes which arise on building
contracts could be avoided by better communication and formalised procedures for
regular reporting on the physical and financial state of the work.

Usually the report follows the format of the final account so that the client is familiar
with the headings and readily understands the final account. A typical outline report is
included in Example 3.
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EXAMPLE 3 Financial statement

No.................................................................. as...........................................................

For................................................................................................................................

Contract period.......................................... weeks. Extension.......................weeks.

Date for completion.....................................................................................................

Authorised commitment
1. Contract sum
2. Client’s revised requirements
3. Fluctuations

Variations and adjustments

4. Omission of provisional sums for contingencies and daywork
5. Adjustment of PC sums
6. Adjustment of provisional quantities and provisional sums
7. Other architect’s instructions
8. Instructions confirmed by contractor but for which architect’s instructions have
not been issued
9. Anticipated variations in cost for which no formal instructions have been
issued
10. Amount of ‘direct loss and/or expense’ resulting from disturbance to the
regular progress of the works

ESTIMATED FINAL COST £

Net under/overspend £

Liquidated damages
Following the issue by the architect of his certificate under Clause xx of the
Conditions of Contract, the employer may elect to claim liquidated and ascertained
damages amounting to £….............. unless further extensions of time are granted,
assuming completion by .........................

Claims
Claims logged but not included above £.................

Quantity surveyor

Reports are generally monthly and might include:

z estimated cost and time effects of each variation issued;

z effect of architect’s instructions relating to provisional and prime cost sums;
z accepted quotations with any adjustments agreed by the architect/contract
administrator, together with adjustments for profit and attendance;
z adjustment of time-related preliminary items in the event of an increase in the
contract period.
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Once work ordered in a variation has been completed and measured, the actual agreed
cost and time allowance, if any, can replace the estimated figures in the statements.

The statement should end by giving the client as accurate a picture as possible of:

z the final cost of the project;

z the estimated completion date;
z the payments, clearly certified;
z the expected outstanding sum.

In this way the client will be able to make necessary arrangements for additional
finance well in advance and also plan his own takeover of the building more
efficiently.

In most contracts a contingency sum is included in the bills of quantities for work
that was not foreseen during the design stage. As the project proceeds, it might be
assumed that there will be less chance of unforeseen work arising, and that this
should be reflected in the cost adviser’s monthly statements. The statements near the
beginning of the contract might include almost the full contingency figure, whereas
those near the end of the project period might only include a small percentage.

There are two main bases on which this reduction may be made:

z The period of contract unexpired. In the case of a 12-month contract, the

contingency allowance might be reduced by 1/12 each month.
z The percentage of the contract value uncompleted. For example, if
certificates for £500,000 have been issued on a £2,500,000 contract, the value
of contingency allowance in the monthly statement would be 80% of the
original contingency figure.

In a few cases the architect/contract administrator may issue an instruction for work
which is to be set against the contingency sum. This could be treated in the statement
in the same way as other variations, but it would be more appropriate to make some
adjustment against contingencies in the monthly cost statement.

Once the work has been completed, no further control is possible and it is then left to
the cost adviser or consultant to agree the total sum to be paid by the client to the
contractor.
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EXAMPLE 4
A project has a contract sum of £1,850,000 which includes a contingency sum of
£50,000. The contract period is 15 months. During the first six months of the contract
the values of the work certified are as follows:

Month Total value of work

certified as completed
£
1 45,000
2 100,000
3 220,000
4 300,000
5 500,000
6 750,000

During Month 3 the architect/contract administrator issues an instruction covering

additional foundation work estimated at £15,000 which was unforeseen at the time the
contract was signed. He has asked for this to be set against the contingency sum. An
instruction covering further work estimated at £1,000 is issued in Month 5 and this
also is to be set against contingencies.

Show how the contingency sum would be dealt with in the monthly cost control
reports using:

1. the percentage of contract time unexpired method;

2. the percentage of contract value method.

1 Method of adjusting contingencies using unexpired contract time

Month 1 Original contract sum £1,850,000
Less Contingency sum £50,000
Add 14/15 of contingencies for
unexpired contract period £46,667
£1,846,667
Followed by adjustments for
variations, fluctuations etc.

Month 2 Original contract sum £1,850,000

Less Contingency sum £50,000
£1,800,000
Add 13/16 of contingencies £43,333
£1,843,333
Adjustments for variations etc.

Month 3 In this month an instruction

setting estimated costs of
£15,000 against contingencies
has been issued
Original contract sum £1,850,000
Less Contingency sum £50,000
£1,800,000
Add instruction for additional
foundation work set against
contingencies
(Instruction No. ...) £15,000
Add 12/15 of original
contingencies for future
unforeseen items £40,000 £55,000
£1,855,000
Adjustments for other variations etc.

(Continued)
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At this stage the amount set against contingencies is higher than in the original bill.

Month 4 Original contract sum £1,850,000

Less Contingency sum £50,000
£1,800,000
Add additional foundation
(Instruction No. ...) £15,000

Add 11/15 of original

contingencies £36,667 £51,667
£1,851,667
Adjustment for other
variations etc.

Month 5 Original contract sum £1,850,000

Less Contingency sum £50,000
£1,800,000
Add additional foundation
(Instruction No. ...) £15,000
Add extra work
(Instruction No. ...) £1,000
£16,000

Add 10/15 of original

contingencies £33,333 £49,333
£1,849,333
Adjustment for other variations etc.

Month 6 Original contract sum £1,850,000

Less Contingency sum £50,000
£1,800,000
Add additional works as last
statement (Instruction No. ...) £16,000

Add 9/15 of original contingencies £30,000 £46,000

£1,846,000
Adjustment for other variations etc.
Note:
If the contract period is extended owing to variations, the proportion of contingencies
included may be adjusted in accordance with the revised contract time rather than the
original contract time.
(Continued)
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2 Method using contract value

Month 1 Original contract sum £1,850,000
Less Contingency sum £50,000
£1,800,000
1,850,000 - 45,000
Add ×
1,850,000

Contingency sum = £48,784

£1,848,784
Adjustment for variations etc.

Month 2 Original contract sum £1,850,000

Less Contingency sum £50,000
£1,800,000
18,500 - 100,000
Add ×
1,850,000

Contingency sum = £47,297

£1,847,297
Adjustment for variations etc.

Month 3 This is the month when the

extra foundations
instruction is issued
Original contract sum £1,850,000
Less Contingency sum £50,000
£1,800,000
Add
(Instruction No. ...) £15,000

18,500 - 220,000
Add ×
1,850,000

Contingency sum = £44,054 £59,054

£1,859,054
Adjustment for variations etc.

A similar procedure would be used for other months. If the cost of the project
increased considerably the adjustment for contingencies might be made on the revised
cost rather than on the original contract figure.
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4 Final accounts
Following completion of the work, a final account showing the final financial state of
the contract must be prepared. Contracts vary somewhat in their specific
requirements, but there will generally be a time period stated in the contract within
which this must be completed. When preparing the final account, the provisions of
the contract should be strictly observed. That is, the contract sum should not be
adjusted or altered in any way whatsoever, other than in accordance with the express
provisions of the contract.

Before beginning the measurement and valuation, it is necessary to collect and cross-
reference all the source documents. In addition to those mentioned earlier for interim
valuations, these will include:

z architect’s instructions
z copies of minutes of site meetings
z daywork sheets
z wages sheets
z materials invoices for conventional fluctuations
z nominated subcontractors’ and suppliers’ accounts.

It is also helpful to establish the final format of the account and so provide a
framework within which to organise the measurements. Example 5 is a simplified
version of a common form of presentation.

EXAMPLE 5 Final account

Office block
Main summary
Omissions Additions
£ £
Contract sum 200,000
Less Contingencies 5,000
195,000
Variations on contractor’s work 15,000 20,000
Adjustment of prime cost sums 65,000 70,000
Adjustment of provisional sums 5,000 3,000
Adjustment of provisional quantities 10,000 12,000
Dayworks 1,000
Fluctuations (contractor) 4,500
Fluctuations (nominated subcontractors) 500
95,000 306,000
Less Omissions 95,000
211,000
Less Amounts stated as due in interim certificates 1–18 200,000
Balance outstanding £ 11,000

Deductions

z All prime cost sums and all amounts in respect of named subcontractors including
contractor’s profit.
z Amounts due to the employer in respect of insurance on default of contractor
defects in nominated subcontract work.
z Provisional sums and quantities.
(Continued)
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z Variations – omissions.
z Fluctuations – amounts allowable to employer.
z Any other amount which is required by the contract to be deducted from the
contract sum, e.g. direct payments to nominated subcontractors.

Additions

z Nominated subcontract sums as finally adjusted.

z PC sum work carried out by contractor.
z Nominated suppliers’ accounts.
z Contractor’s profit on the above items.
z Amounts payable to the contractor in respect of:
{ Fees and charges
{ Setting out
{ Inspections and tests
{ Royalties
{ Defects, etc.
{ Insurance.
z Variations – additions.
z Value of work executed in respect of provisional sums and quantities.
z Loss and expense payments.
z Fluctuations.
z Any other amount which is required by this contract to be added to the contract
sum.

The main elements of the final account are dealt with as follows.

4.1 Variations
Variations may be the subject of a quotation or alternatively will need to be measured
and valued. Again contracts vary in their specific terms, but all contracts will set out a
mechanism through which this must be done. In general most standard forms of
contract attempt to protect the client by arranging for variations to be priced,
wherever possible, at rates compatible with those in the contractor’s original tender.

Before valuing variations, the quantity surveyor should make sure that there is a
written instruction for the work, or that oral instructions have been followed. The
only exceptions would be:

z changes which under the form of contract are ‘deemed to be variations’, e.g.
errors in the original bills of quantities;
z work arising under the insurance clauses in reinstating damaged work.
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These do not require any authorising instruction, although the contractor may be
under an obligation to give notice before proceeding with the work. So if changes are
necessary in order to comply with any regulation or bye-law, the contractor must give
notice of the change to the architect. Only if the architect fails to issue an instruction
within seven days may the contractor proceed with the work and recover any
additional cost as a ‘deemed variation’.

Difficulties sometimes arise where an overenthusiastic clerk of works exceeds his

authority and orders changes that involve additional cost to the contractor. Such
disputes can be avoided quite easily at the initial site meeting by drawing the
contractor’s attention to the provisions of the contract. The architect may, of course,
‘sanction in writing any variation made by the contractor otherwise than pursuant to
an instruction of the architect’. But this power is entirely discretional and usually
restricted to such cases as emergency work undertaken by the contractor on his own
initiative in the interests of safety.

The quantity surveyor should keep a file of variation orders, together with related
correspondence and site notes and measurements of work that will be hidden when
complete. In this respect it is helpful to enlist the assistance of the clerk of works,
although measuring the work is not strictly part of his duties. In some cases varied
work can be pre-measured from drawings; in other cases it must be measured
physically on site once the work has been completed. The frequency of site visits for
this purpose will depend upon the size and complexity of the works and the need to
take vital measurements before the work is covered up.

Variations should be measured as soon as possible after execution so that there is an

up to date picture of the financial state of the contract. It is generally advantageous to
group related variations – especially where there are variations on variations. Each
variation order or group of orders should be taken in turn, omitting the work
contained in the contract bills and adding back the measurements for the new work.

It is best to start the dimensions for each variation or group of variations on a fresh
page under a heading giving the order number, date issued, date measured and a brief
description for identification purposes. To avoid any possibility of confusion, some
surveyors use red ink for omissions and black ink for additions. Where the whole of a
bill item is omitted, only the bill reference need be stated, otherwise the
measurements for the part omitted may be obtained from the original taking off.

The method of valuing variations depends upon the form of contract. As an example,
the rules of the JCT Standard Building Contract (JCT SBC) are set out in Figure 1.
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FIGURE 1 Valuation of variations

Measured valuations

Character Conditions Quantity Method

Similar Similar Similar Measure

× Bill rates

Similar Different and/or Different Measure

× Bill rates

+ Fair allowance

Different N/A N/A Measure

× Fair rates

In the case of daywork (defined as work which cannot be measured), the JCT SBC
provides that:

z The contractor is to be allowed the ‘prime cost’, calculated in accordance with

the ‘definition of prime cost of daywork carried out under a building contract’
issued by the RICS and the BEC, together with percentage additions to each
section, i.e. labour, materials and plant, at the rates set out by the contractor in
the contract bills.
z The contractor is required to submit vouchers specifying the workmen’s
names, the time spent daily on the work, and the plant and materials used for
verification by the architect or clerk of works, not later than the end of the
week following that in which the work was carried out.

An alternative method which is sometimes adopted is to ask the contractor to quote

all-in wage rates for craftsmen and labourers instead of a percentage addition to the
basic rate.

When checking daywork accounts, the following factors should be considered:

z Ensure that the work cannot in fact be properly measured and that there is no
overlap with work covered in measured items. The mere submission of
vouchers by the contractor is no guarantee that the work will eventually be
charged on that basis.
z Check that the operative times claimed tally with the voucher signed by the
clerk of works and that the wage rates were those current at the time the work
was carried out. The hours worked should be deducted from those on which
fluctuations are calculated for the period in question.
 Post-contract cost control Paper 1748 Page 17

z Check that the quantities of materials are reasonable in relation to the work
carried out. Trade discounts should be deducted and the price adjusted, if
necessary, to reflect the permitted cash discount. Where materials were
supplied from the contractor’s stock, the price should be the market price at the
date of supply.
z Check that plant was used solely for the daywork during the period claimed
and that the hire charges are as agreed.

4.2 Adjustment of prime cost sums

The contract should be checked to see if provision is made for nominations. Where
these do occur, the following would be the normal procedure. The amounts paid or
payable by the contractor to nominated subcontractors and suppliers are set against
the prime cost (PC) sums included in the bill, and the contractor’s profit adjusted pro
rata.

Where sums have been paid direct to nominated subcontractors, the main contractor
is still entitled to a pro rata adjustment of his profit but not, of course, cash discount.

Attendance by the main contractor or nominated subcontractors should be adjusted

only if there has been some change in the amount or type of attendance required. So if
the amount payable is more than the PC sum solely because of better quality materials
and no additional attendance is called for, there would be no grounds for adjustment.
For this reason, the amount given in the bill for attendance should be expressed as a
lump sum and not a percentage on the PC sum.

The invoices should be checked to ensure that any trade discounts have been
deducted.

4.3 Provisional sums and quantities

These sums are included for work which cannot be entirely foreseen at the time of
tendering.

The architect is required to issue instructions regarding the expenditure of provisional

sums. Where the work is carried out by the contractor, it is valued in accordance with
the contract.