Project Forecasting Procedure For Cost Revenue Risk & Opportunities

1.0 Purpose

This procedure provides the requirement for cost forecasting, revenue forecasting and risk & opportunities forecasting to facilitate the accurate forecasting of the final position of projects at completion.

2.0 Scope

This procedure is applicable for any kind of the project.

3.0 Other References

Cost Codes and Budget Management

Cost and Revenue Control

Project Reporting Pack

Subcontractor and Major Supplier Management

Monthly Materials Wastage Report

Prelims Forecast Sheets

Weekly Concrete Control Register

Weekly Reinforcement Control Register

Subcontractor Major Supplier Liability Assessment

Risk and Opportunities Assessment

Main Contract Variation Schedule

Main Contract Contractual Claims Schedule

Labor Productivity Report

Applications and Payments Summary

Subcontractor / Major Supplier Procurement Summary

Subcontractor Liability Summary Report

4.0 Definitions and Abbreviations

Budget: The amount of money (or hours) that has been allowed in the estimate to complete a certain package of works in order that the original margin will be achieved.

Budget Transfer: An amount of money authorized to be transferred from one cost code to another due to a change in logic from the intent reflected in the original estimate split.

Client Variation: A change to the original scope of works under the Main Contract which may result in a formal adjustment (+/-) of the contract value and thereby the anticipated revenue.

Cost Code: four-digit number that identifies an individual cost package on the project.

Contractor Monthly Statement/Application (Progress Claim): The regular claim for payment from the Client under the Main Contract for work done on the basis of gross value of work to date less the value of works previously paid for.

Escalation: (also known as Contract Price Adjustment or “Rise & Fall‟) – The amount by which the cost and/or revenue of a project may be adjusted to accommodate fluctuations in prices.

Forecast: A calculation used to assess the quantity and cost of the remaining works within the project and, thereby, the final position of the project at completion.

Margin: The contribution to overheads and profit to be earned by any project or variation to that project.

Preliminaries: (also known as “Indirects‟) Project costs which are not directly a part of construction or incorporated in the physical structure of the works, for example office expenses, staff costs, etc.

Productivity: (also referred to as “Earned Value”) a measure of the achieved rate of production per unit of effort (e.g. m2 per man-hour) as compared with that allowed in the budget/tender.

Purchase Order: An official written document issued to a vendor/supplier for the provision of goods or services.

Reporting Period: The period of time the report relates to, usually one month.

Schedule of Rates: A form of remuneration in which the final quantities of work are not known at the time of tender, but rates have been agreed for completing the types of work anticipated.

Site Instruction: A written instruction issued on the Project, usually to a subcontractor, confirming details and/or requesting action to be taken by the subcontractor in relation to their scope or works.

Subcontractor: A company engaged to undertake a part of the main contract works on company’s behalf and involving an on-site labor component.

Supplier: An external party providing goods or services to the project, without any on-site labor component (i.e. not a subcontractor).

5.0 Responsibilities

The following personnel have responsibilities mentioned in this procedure:

– Project Director (PD)

– Commercial Manager (CM)

– Managing Director (MD) / Deputy Managing Director (DMD)

– General Manager (GM)

– Chief Operations Officer (COO)

6.0 Procedure of Project Forecasting

6.1 Forecasting

6.1.1 General

a) Each project is required to undertake a financial forecast as part of the Project Monthly Reporting requirements in accordance with Project Reporting procedure.

b) Prime responsibility for production of a timely, accurate and detailed forecast rests with the Project Director (PD) in conjunction with the Commercial Manager (CM).

c) The objective of preparing a project forecast is to assess the final financial outcomes for the project, comprising:

i. Forecast Final Revenue (FFR) amount;

ii. Forecast Final Cost (FFC); and, most importantly iii. Forecast Final Margin (FFM).

Thus, in simple terms, (FFR – FFC) = FFM

d) The final margin is made up of the sum of the forecast final variances for every cost code plus the original start margin

e) The accuracy of the project forecast is dependent on:

i. the level of understanding and the composition of the cost code structure and the project budget prepared in accordance with procedure of Cost Codes & Budget Management;

ii. the prompt and accurate recording of all costs within the Management and forecasting system;

iii. having an accurate and realistic appreciation of the current project status; and

iv. the effort and diligence associated with the assessment of costs to complete

f) On larger projects it is recommended that the CM publish a timetable to enable those persons involved in forecasting to be available at the designated times. This timetable should be derived by working back from the dates upon which the Project Monthly Report is due to be submitted to senior management

g) Supervisors, Engineers, Foremen, Quantity Surveyors, Administrator’s should be clear as to which areas of the project they are responsible for and should be actively involved in forecasting for those areas.

h) It is good practice to have input from as many people as practicable to ensure that no current or perceived future liabilities and/or risks or opportunities are overlooked when forecasting.

6.1.2 Preparation for Forecasting

a) The basic stages in the preparation for forecasting are:

b) Establish an effective “cutoff date” for processing data in the management and forecasting system based upon the time required for detailed forecasting and reporting (perhaps 2 to 4 days) and the date of submission of the report to management.

c) Ensure all Purchase Orders, Subcontract Awards and other commitments are entered/ updated within the management and forecasting system before close off.

d) Ensure all invoices, subcontract payments and labor costs are processed to go into the management and forecasting system before close off.

e) Ensure any Project Accruals are assessed, included in the „cost to date‟ figures and advised to divisional or central Accounts as appropriate.

f) Ensure Accounts have entered all journals/internal charges for previous month into the Management and forecasting system and obtain hard copy backup of all centrally generated costs and charges for reconciliation.

g) Ensure that the following schedules are updated:

i. Main Contract Variation Schedule

ii. Main Contract Contractual Claims Schedule

iii. Subcontractor/Major Supplier Liability Assessment Form for each subcontractor/supplier

iv. Labor Productivity Report

v. Applications and Payments Summary

vi. Subcontractor / Major Supplier Procurement Summary

h) Print off the management and forecasting system reports and distribute to staff responsible for forecasting.

i) Undertake cost code forecasting and capture the details and assumptions upon which the forecast is based for future review/comparison.

j) Print off the Forecast at Completion Report and check logic of forecast final variances for each cost code – reconcile as necessary (+/- movement in the month).

k) Carry out a Risk and Opportunities Assessment on the basis of the assumptions inherent in the above forecasts.

l) Incorporate Forecast, Risk and Opportunities Assessment and updated Schedules as part of standard Project Monthly Report and submit to GM as appropriate.

6.2 Procedure of Cost Forecasting

6.2.1 Preliminaries/Indirect Costs

a) These costs are often time related and not directly linked to the amount of work carried out, for example, staff salaries and vehicles, office rent, office equipment hire etc.

b) The program position and likely project completion date are therefore critical to forecasting such costs and cost increases and trends must be identified promptly.

c) Many of the areas of Prelim costs are not the subject of major one-off commitments but are purchased or incurred on a regular basis, consequently, forecasting will involve:

i. Understanding what costs are included in the historical costs, and to what point in time.

ii. Assessing the historical value of purchases/incurred costs on a monthly basis and using similar trends (“burn rate”) for the remainder of the project.

iii. Making sure that the volume of work as per the construction program complements the monthly forecast costs for each item.

iv. Checking the most recent program to ensure that any time extensions, delays, and disruptions are accounted for in the assessment of costs to complete.

d) The principle tool in forecasting Prelims cost codes is the Prelims Forecast Sheets required under Cost and Revenue Control procedure to be established at the project outset.

e) This standard format facilitates the initial spread of the budget allowance over time for the detailed components making up the cost code budget, the comparison with actual costs incurred and thereby the forecasting of likely final cost for each cost cod This format is useful for major Prelims components such as Staff Salaries and Plant as well as other time- related Prelims cost codes.

f) “Cost to date‟ should be used to establish the trend or “burn rates” for time-related Prelims codes (average cost per month) as a useful tool to assist forecasting.

g) Other key factors include:

i. the likelihood of the current „burn rate‟ increasing or decreasing over time (for example, due to gearing up or trailing off of general site activity as per program)

ii. the impact of significant „one-off‟ items of expenditure either to date or in future (for example, due to a major initial or top-up purchase of safety equipment)

iii. the impact of delays to the program and/or approved acceleration measures on Prelims forecasts etc.

h) The involvement of key operational/field staff in Prelims forecasting (as well as forecasting generally) is essential and specific dates and times should be set up by the CM each month to obtain that necessary input as “standard operating procedure‟ for preparation of the Project Monthly Report

6.2.2 Labor Productivity

Where labor productivity (or “earned value”) reporting is being undertaken consider the following:

i. Work Still to be Done

For each cost code, a determination of the quantity of work still to be done must be undertaken. This should be done from the Labor Productivity Report prepared in accordance with Project Reporting Pack however, the results must be reviewed and if doubt arises, a separate quantity take-off should be done.

The calculated result should be scrutinized to ensure it reflects what was expected.

ii. Productivity Performance

For each item of work still to be done, a forecast must be made of the productivity performance expected. Starting points for this are the original estimate and the performance to date where available.

Due account must be taken of all relevant factors, for example:

how accurate have the original estimate figures been;
is the work still to be done truly comparable with work which is in progress;
is an operation which is in progress likely to affect the quantity of some other item which has not yet been started (e.g. excessive over-break in excavation will require more concrete to be placed).

From the above it will be possible to calculate the forecast hours to complete for each cost code.

Calculate a forecast hourly rate using the current reports. This is then added to the incurred cost to date to give the forecast final cost for each cost code.

Other points to consider when forecasting hours to complete include:

Assess the productivity rate to complete any item by reviewing the average productivity rate for the cost code item for the last period compared to the productivity rate for the past 2 – 3 periods and also the average rate to date. Consideration should be given to any factor that may influence production in the future (productivity curves are sometimes useful here).
Clean up tasks on completion if not allowed in other cost codes.
Any time extensions that may affect the duration of the cost code item.
Any other contingency items for unscheduled circumstances, such as inclement weather or other disruption to the works.

iii. Labor Forecasting

Forecasting is done on a code basis in conjunction with the forecasting of hours.

The actual hourly rate as produced in the Labor Productivity Report should be used as a guide to selecting an appropriate rate for forecasting the cost of future work.

Special consideration should be given to any increases in rates during the life of the project.

It is prudent to take an average rate over a 3 or 4-week period to nullify any anomalies that may have taken place such as excessive overtime etc.

iv. Guidelines for Development of Corrective and Preventive Action Plans

Generally, in the area of labor, project staff is able to apply prompt corrective action. Starting with the critical item which is showing the worst variance, the situation must be

analyzed as follows:

Has the cost coding of Daily Manpower Allocation Sheets or invoices been correctly carried out?
Is the actual construction method being used exactly the same method upon which the budget was based?
When work-study techniques are applied, can any unnecessary work, idle time, inefficient techniques, etc. be eliminated or reduced?
Is the responsible foreman motivating his crew as well as possible?
Is access and working space adequate and safe?
Are material supplies adequate?
Are plant breakdowns causing too much lost time?
Are any other site-factors adversely affecting productivity?

All corrective and preventive action plans must be quickly and effectively communicated.

6.2.3 Subcontractors and Materials Suppliers

a) Assessment of final costs in these areas requires:

i. A review of costs committed to date; and

ii. An assessment of costs yet to commit.

b) These should be considered, not only in respect to the original budget allowances, but having regard to factors/variables applicable, such as:

i. performance rates achieved;

ii. site conditions that may affect future production;

iii. variations to the scope of work;

iv. contractual claims (for and against);

v. impact of seasonal change;

vi. program delays;

vii. wastage trends; etc.

c) Where material and/or subcontract orders are still to be placed, a review of the budget allowances should be undertaken taking account of the latest information regarding:

i. Design configuration;

ii. Quantity take offs;

iii. Quotations received; and

iv. Current market environment for those goods and services.

d) Where material orders/subcontracts have been let but not yet fulfilled, the relevant prices are obviously known, however, care must be taken that the scope of works under the relevant commitments is the same as that required under the Main Contract as represented by the associated budget allocation.

e) An important area here is exposure to subcontract variations. It is vital to:

i. Ensure the subcontract terms and conditions and scope of works are “back to back or better” with those of the Main Contract and the corresponding budget allowance; and

ii. Track all potential exposure to additional costs by:

tight administration of the subcontract in accordance with Subcontract Management
recording and tracking of all possible costs (variations, claims, contra-charges etc) for each Subcontractor/Major supplier using Subcontractor /Major Supplier Liability Assessment Form.

f) Utilizing the above schedules in forecasting the final cost of subcontract/supplier packages including assessing liability for unapproved variations claims on a “most likely‟ basis (refer to Subcontractor Liability Summary Report)

g) In respect of major material purchases it is essential to monitor and reconcile material deliveries, usage and payments on a regular basis as part of cost control and as preparation for forecasting.

h) Cost and Revenue Control, provides and/or references a number of material control registers/reconciliation sheets for the major material components including:

i. Weekly Concrete Control Register

ii. Weekly Reinforcement Control Register

iii. Monthly Materials Wastage Report (typically used for blockwork, plasterboard, tiling etc.)

i) These Registers/Reports must be maintained and used as an essential support tool in forecasting all major materials cost codes.

6.2.4 Cost Escalation Process

a) Regardless of whether the contract is fixed price or subject to rise and fall, escalation must be taken into account when assessing the final cost.

b) In a fixed price contract, all prices submitted in the contract bid are deemed to have a component of escalation in them. This amount is calculated by the estimator who attempts to assess any increase in prices for the duration of the project.

c) Notwithstanding this, some elements of the project scope, particularly major materials and components that are required to be procured from overseas, may be impacted by price escalation during the life of the Project and the CM must be aware of these potential or published price movements (which may be positive or negative) and factor them in to the forecast.

d) Quantities still to procure, likely or known escalation factors (%) and prospective timing of procurement are obvious factors in making such assessments for inclusion in the forecast.

6.2.5 Treatment of Specific Categories of Cost

6.2.5.1 Project Contingencies

a) A specific project contingency (or contingencies) may be determined in the signed off original budget allocation in accordance with Cost Codes and Budget Management.

b) Control of these contingencies shall rest with the relevant GM and/or the COO who may in turn delegate control (in whole or in part) to the PD.

c) Utilization or discharge of any contingency provision not delegated to the PD shall require the prior approval of the GM and/or the COO. Where requested by the MD / GM, such approvals shall be provided in consultation with any nominee.

d) Different categories of contingency should be assigned to separate cost codes.

e) Contingency allowances should NOT be transferred to other cost codes to offset overruns.

f) Adjustments should be made in the “forecast final cost” (FFC) of the contingency item itself in order to release all or part of the contingency into the forecast when authorized to do so.

g) For example, based on a single contingency budget allowance of USD 10m;

i. No use of contingency: Forecast Final Cost (FFC) for the contingency cost code = USD 10m;

ii. Agreement to use USD 2.5m of contingency: FFC for contingency cost code = (USD 10.0 m – 2.5m) = 7.5m.

iii. Agreement to use all of contingency: FFC for contingency cost code = Nil.

6.2.5.2 Schedule of Rates Contracts

a) With Schedule of Rates contracts, it is necessary to forecast both the revenue and the cost for each cost cod Utmost care should be exercised to avoid the potential disastrous situation of showing revenues with no forecast costs when it is known that the Employer no longer requires these items.

b) Caution is also required in forecasting Schedule of Rates works in that recovery of site Preliminary costs and overheads is likely to have been estimated on the basis of the original quantities at Tender. Accordingly, continuous review of “Construction Drawings”, take offs and site quantities is required to be undertaken and the works continually re valued as appropriate.

6.2.5.3 Liquidated damages

a) Liquidated Damages are not regarded as a cost until such time as a legal liability is enforceable.

b) Potential liquidated damages must, however, be noted in the Risk and Opportunities Assessment and details of the exposure included in the written narrative section of the Project Monthly Report.

6.2.5.4 Provisional Sums

Costs associated with provisional sums under the Main Contract should not be incurred on the project until formal authorization confirming utilization of the provisional sum, or part thereof, has been provided by the Employer.

6.3 Revenue Forecasting Procedure

6.3.1 General

Assessment of final revenue requires consideration of:

i. original contract sum

ii. client controlled provisional sums/contingencies

iii. contractual entitlements

iv. variations

v. insurance claim recoveries

vi. miscellaneous third party sales

6.3.2 Variations/Claims

a) The assessment of unapproved Main Contract variations and claims is often the most critical issue in revenue forecasting.

b) The general policy approach is to exclude unapproved variations and claims from revenue assessments.

c) However, where costs have been incurred in respect of Main Contract variations/contractual claims, an assessment must be made of the associated revenue.

d) The standard Project Monthly Report in accordance with Project Reporting Pack requires the CM to highlight the Project forecast’s “reliance” on unapproved variations and claims and to assess the anticipated revenue in respect of each variation/claim on the Main Contract Variation and Contractual Claims Registers.

e) As with costs, these assessments should be done on a “most likely” basis.

f) Any sensitivity in respect of the reported revenue figures should be included in the Risk and Opportunity Assessment section of the report.

6.3.3 Provisional Sums

a) Revenue associated with a provisional sum under the Main Contract shall be highlighted and retained at the original values in the revenue forecast until formal authorization confirming utilization of the provisional sum, or part thereof, has been provided by the Employer/Engineer.

b) No corresponding costs should have been incurred in respect of provisional sums prior to the receipt of such authorization.

6.3.4 Insurance Claims

a) Potential insurance claim recoveries should be monitored and only included within Risk and Opportunities Assessment until formal approval from the Insurers is received.

b) Recoveries from Insurance claims must be treated as “sundry income” not as “negative cost‟.

6.3.5 Escalation

a) Escalation (also known as Contract Price Adjustment or “Rise & Fall‟) is used in a contract as a means of compensating/adjusting revenue due to both the Contractor and potentially subcontractors for increases or decreases in the cost of labor, plant or materials to be included in the project.

c) In some cases, specific components such as cement, reinforcing steel, structural steel, diesel etc may be agreed to be subject to rise and fall and these will need to be monitored and presented to enable progressive adjustments of applicable revenue to be made in accordance with contract conditions as the project proceeds and for the purposes of forecasting likely final revenue.

d) Officially recognized and gazette Escalation/ Rise & Fall Indices such as those published by the Australian Bureau of Statistics (ABS) and its‟ UK equivalent are not present in our current geographical area of operation.

e) Notwithstanding this, the basic approach used in these indices provides a useful mechanism for the calculation and presentation of revenue adjustments where escalation is applicable to a contract.

The simple formula is: –

INDICES FOR CURRENT PERIOD / BASE INDICES

f) In the absence of published indices, this would become:

COST PER UNIT IN CURRENT PERIOD / COST PER UNIT AT BASE DATE (TENDER/CONTRACT AWARD)

g) This generates the factor by which the progress claim (or the applicable components thereof) is to be multiplied to give the adjusted total current claim value, inclusive of escalation.

h) This figure is a factor, not the percentage e.g. 108.3/106.1 = factor of 1.0207.

i) To calculate the escalation rate as a percentage, simply deduct 1 and multiply by 100 i. (1.0207 – 1) x 100 = percentage rate of 2.07%.

6.4 Risk and Opportunity Forecasting Method

a) The Forecast Final Margin (FFM) is reported as a single figure which should be assessed on the basis of “the most likely” outcome.

b) Having done the forecast on this basis, it is highly probable that there will still be:

i. items that have been included in the cost forecast at a certain assessed value but which may be subject to relatively significant volatility or change (+/-) in future, and

ii. issues that are not included in the cost forecast but which have been identified and which may nevertheless have a significant effect (+/-) on the final project margin.

c) The CM is required to give consideration to such factors and assess their possible financial impact. project forecasting cost cash flow and revenue

d) In doing so, the totals for “risk” and “opportunity” can then be expressed as a possible range of outcomes (+/-) either side of the reported “most likely” Forecast Final Margin.

e) This provides a “sensitivity analysis‟ of the reported final margin and identifies and prioritizes issues for management attention generally and, more particularly, over the next Reporting Period.

f) Project Reporting Pack, provides a basic format for the capture and reporting of risk and opportunity issues.

g) Consideration should generally be given to the following „prompt list‟ of possible factors that may impact the project and, thereby, the forecast final margin, either negatively (“risks‟) or positively (“opportunities‟):

i. Main Contract Variations – submitted not approved

ii. Main Contract Variations – not yet submitted

iii. Contractual Claims – submitted not approve/not yet submitted

iv. Provisional Sums – Overheads and Profit

v. Liquidated Damages

vi. Insurance Claims

vii. Contingency (opportunity not to be spent)

viii. Subcontractor liquidated damages (against subcontractor)

ix. Subcontractor damages claims (against subcontractor)

x. Residual value of plant and equipment

xi. Redesign/design „creep‟

xii. Value Engineering

xiii. Program Delays

xiv. Subcontractor Performance

xv. Subcontractor Insolvency

xvi. Unlet Subcontract/Supply Packages

xvii. Subcontractor contractual claims

xviii. Commissioning

xix. Defect rectification

h) This assessment of Risks and Opportunities should be done in conjunction with or immediately following the monthly forecast to also identify and quantify any risks and opportunities inherent in the „most likely‟ assumptions used to arrive at the individual cost code forecasts.

6.5 Project Forecast Reporting Procedure

6.5.1 General

a) A full assessment of the project as a whole should be undertaken on a monthly basis.

b) The CM is responsible for the project forecast and should critique the forecast prior to its submission as part of the Project Monthly Report.

c) The forecast must not be accepted just because the cost is below budget or the margin is acceptable – it may be wrong.

6.5.2 Critique of the Draft Forecast

The following represent some of the common issues to be reviewed and questions to be asked in relation to the draft forecast prior to submission:

i. Start by reviewing variances/movements in the month.

ii. Concentrate on the “critical few” rather than the trivial many.

iii. Be sure that like is compared with like

iv. Use “rule of thumb” estimates to check costs and seek explanations.

v. Have any Employer contingencies/provisional amounts been included in the current budget?

vi. Do the variations allow for future known costs for Employer provisional sums and provisional amounts? If not, the final contract value will be underestimated particularly since such provisional sums often occur towards the end of the contract.

vii. Have there been significant changes in any of the totals since the last report?

viii. Has the actual commitment to date changed since the last period? If it has not, either no orders have been placed or the commitment records are incorrect.

ix. Has the forecast final cost changed during the past period? If not, when did it last change? Is this because the forecast has not changed or is it because a proper forecast has not been done for some time?

x. Does the claim to date less the costs to date confirm the forecast final margin? At the start of the contract this is unlikely due to establishment costs, the effect of learning curves , or alternatively claims may be inflated due to claim items being front-end loaded. However, as the contract progresses, the claim less costs figure should start to confirm the forecast final margin.

xi. Is the percentage complete by time comparable to the percentage complete by claim? If the percentage complete by time is greater than the percentage complete by claim, it suggests that the project is behind schedule.

xii. Have time extension costs or acceleration costs been allowed in the forecasts?

xiii. Does the total current original budget equal the original contract value? If not, why not?

6.5.3 Corrective Action

a) Once investigated, any adverse findings indicating cost blowouts or worrying trends must be reported.

b) Early assistance and advice should be sought to reduce, eliminate or manage the negative financial impact.

c) The CM is encouraged to “think outside the square”, for example, by considering the use of additional resources/specialist skills – it may be better to spend an extra fifty cents to save a dollar.

d) Corrective Action strategies should be developed and implemented in conjunction with the GM and the COO where appropriate.

6.5.4 Project Monthly Report

a) The settled cost, revenue and margin forecasts are the central component of the Project Monthly Report.

b) These, together with the Risk and Opportunity Assessment, Program Status Summary, Cash Flow Summary, updated Project Summaries and associated narrative report comprising the mandatory minimum reporting requirements for each project shall be reported in accordance with Project Reporting Pack.