Commercial Management Scenarios

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DT117/4 Commercial Management Scenarios including answers

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Commercial Management Scenarios

  1. 1. COMMERCIAL MANAGEMENT SCENARIOS Lecture 2 Q: You are employed as a Commercial Manager with a large Main Contractor. You have full commercial responsibility for the construction of a new school in Trim, Co Meath. The estimator handed you the full tender documentation from when the job was at tender stage at an internal pre-start meeting. You have agreed with senior management that the profit budget on the contract is 6%. You are now four months into a 12 month project and your latest monthly CVR is showing a profit of 9%. The Surveying Director has called you in to update him on progress, and a full financial outlook for the contract has been requested. You know the following facts: 1. Although the contract is showing a profit of 9%, your current preliminaries budget has been exceeded by 5k to date and you estimate that the overall preliminaries budget will not cover your actual preliminaries at the end of the contract. 2. The quotation used at tender stage for the painting package was from a subcontractor who has now gone into liquidation. You had 15% mark up on this package in your profit budget. If you use the next quotation from tender stage you will have only 5% profit on this package. 3. The estimator made a mistake when pricing the carpet item on the BOQ and priced Ulster Carpet instead of Tretford and didn’t qualify the tender. Tretford costs €20/m2 more than Ulster and there is 500m2 of this item. You will be losing 10k on this package if this situation stands. You want to make the Commercial Director aware of these items, but you don’t want to come to the table without proactive advice on possible solutions to the three problems. Make a note of possible solutions to the three problems you are dealing with. Ans: 1) You will carry out an actual preliminaries v’s budget report and • Highlight the areas or prelims where over spend was occurring so action can be taken. • Advise the surveying director where savings can be made i.e. site supervision. • Meet with the contracts manager and discuss possible ways of cutting the programme. 2) Page 1
  2. 2. • You will approach the second sub-contractor and try and get him to reduce his rates. • You will seek further quotations for the same package. • You will check the BOQ for over-measure • Approach the architect on changing the specification 3) • Approach the architect/client and offer 50% of the savings to change to Ulster Carpet – make it worthwhile • Seek better quotations on Tretford – check abroad • Scan the BOQ for savings in other areas • Check the measure on the carpet Lecture 3 Q: You are employed as a Commercial Manager with a large Main Contractor. You have full commercial responsibility for the construction of a new multi million euro office development in Dublin City Centre. As part of your role, you are responsible for compiling interim valuations for the contract, chasing up QS recommendations and architects certificates, and forwarding this documentation to the financial department for invoicing. You are sending in your valuations on time every month, however the clients QS is taking three weeks to forward his recommendation to the architect. He claims that you are inflating the valuations with variations which are not agreed, and applying for work which is not completed. Your financial director has highlighted the fact that the company cashflow is suffering as a result of your contract. What do you think is the best course of action to resolve this situation? Ans: • Meet with the clients QS • Agree a set of valuation dates and point out that under the contract there is an agreed time span in relation to issuing of certificates • Arrange a system where you will make the clients QS aware of all upcoming variations if you are aware of them and try to agree costs before they occur • Try to arrange meetings on site before the valuations are submitted • Keep photographic record Lecture 4 Q: You are newly employed as a Commercial Manager with a medium sized Groundworks Subcontractor. Your Managing Director has called you in to attend a meeting relating to a €2m pipelaying project on which he wants your advice. He states that the contract originally contained 8000m of 400mm diameter pvc watermain and this has now increased to 8900m. He points out that the additional 900m of pipework is a variation and he wants to apply on a dayworks basis for this work. What is your advice? Page 2
  3. 3. Ans: • It is a variation • Valuing the work depends on the circumstances: location, obstacles or barriers, access etc • If possible, base it on BOQ rates • If not entirely identical, adjust bill rates to suit • May have to build up a new rate from scratch • Use dayworks only as a last resort Lecture 5 Q: You are employed as a Commercial Manager with a large Main Contractor. You have full commercial responsibility for the construction of a new office development in Clonee, Co Meath. The subcontractor who is carrying out the roofing and cladding package is causing problems on the contract. (1) Although he commenced work on his agreed commencement date, he is now 2 weeks beyond his completion date with 10% of his work package still to do. (2) You had no scaffold in place, and he has sent you in 4 weeks of daywork charges for having to use an aerial platform. (3) He has left packaging and boxes all over the site and will not tidy up. (4) There was an additional 60m2 of Kingspan cladding required where the BOQ was under measured, and he has sent in daywork sheets to cover this item, which is working out three times more expensive than if BOQ rates were used. The subcontractor is meeting you in the morning and wants to bring his account up to date. He has threatened that if there is not a cheque ready for him by the close of business tomorrow for the balance of all work done, he is going to start pulling cladding sheets off the building. What advice are you going to give him in that meeting? Ans: 1) Draw the subcontractors attention to the contract he signed - Pre-start meeting – the contract conditions were fully explained - No Letter for extension of time was sent in - Main contractor is responsible for his sub-contractors hence any delays will result in countercharges - Last resort- expel sub-contractor off site or bring in more resources and countercharge from subbies account Page 3
  4. 4. 2) Tell sub-contractor to check list of agreed attendances as these form part of the contract. Sub-contractor has a valid case if these items are not listed on his attendances sheet 3) Check pre-start minutes of contract to see who is responsible. Give subbie two days to clean up site unless very urgent. If he doesn’t clean site, get your own operatives to clean up and countercharge at market rates for labour and skips – unless nominated sub-contarctor. 4) Use rates in BOQ unless not similar conditions – dayworks are used as a last resort 5) Refer to payment terms in contract – advise that it is criminal damage – gardai ! Lecture 7 Q: You are employed as a Commercial Manager on a €40million multi purpose office and apartment development. You are 4 months into a 24 month project. This is a flagship project for your company and your reputation and future career are linked to this project having a successful outcome. The third interim certificate has been faxed to you from the Architects office, and your internal costing department has sent you their cost report for the project to date. You have quickly subtracted the costs figure from the value amount and to your horror is showing a loss of -25%. Your financial director is meeting you on site in three hours. He wants an update on the financial standing of the project as he is calculating the Christmas bonus payments for all on site staff the following morning. How are you going to spend the next three hours? Ans: 1) Don’t panic 2) Cost Value Reconciliation • Interim valuation may be under valued • Possible mistakes on QS recommendation • Costs may be up to a different date • Ensure comparing apples with apples If still negative: • Check if you undervalued the work • Check Prelims actual v’s budget • Check if you have over paid subbies or suppliers (bulk orders) Lecture 8 Q: You are newly employed as a commercial manager with a small civil engineering sub- contractor. You have financial responsibility for numerous contracts of varying value. The sub-contractor has no idea whether he is making money on these jobs or not! He has a vague idea from job to job, and only really knows at the end of the year whether the company is making a profit. You are the first commercial manager to be employed by his Page 4
  5. 5. company and he wants advice on how you can determine the profit on each individual contract as they progress. What is your advice? Ans: • Separate the contracts and allocate job numbers thus allocating costs to each contract as necessary • Prepare budgets for the profit on each contract (excel sheet – profit in each item) • Prepare a prelims budget • Prepare a cost value reconciliation on a monthly basis – prepare actual v’s budget for prelims – identify overspending – take action • Final CVR based on Final Account Lecture 9 Q: You are newly employed as a commercial manager with a small building main contractor. The managing director wants your advice on the following: (a) Implementing a quality assurance system for the company. He feels that it will cost his company a lot of money to set up and wants to know where he will see financial returns on this money (b) At present, he uses standard skips to dispose of waste, and he wants your opinion from a cost point of view on why he should segregate waste on site. What is your advice? Ans: (a) • Prequalification for new work - Credibility/Trustworthy/Reliability • Good Management procedures - Efficiency • Use of standard forms protects the company e.g. claims (b) • Standard skips are charged at the highest rate • Large reductions for specific skips – Steel 100% / Timber 50% / Gypsum ? • Re-use and recycle • A tidy site – better run – cost effective Lecture 10 Q: Build up a rate for blockwork from the following information: Blockwork; 100mm thick; in cement mortar (1:3) block size 440x215x100mm Constants Blocks 10nr/m2 of blockwork Mortar 0.007m3/m2 of blockwork Page 5
  6. 6. Blocklayer 0.4 hours/m2 of blockwork Labourer 0.2 hours/m2 of blockwork Costs Labourer €19 per hour Blocklayer €30 per hour Blocks €800 per thousand Mortar €95 per m3 Waste on Blocks 5% Waste on Mortar 15% Profit & Overheads 12% Ans: Materials Blocks 10nr/m2 €800/1000x10= €8.00 + 5% = € 8.40 Mortar €95 per m3 x 0.007= €0.67 + 15% = € 0.77 Labour Blocklayer 0.4hrs x €30 = €12.00 Labourer 0.2 hrs x €19 = € 3.80 Sub Total €24.99 + P & O @ 12% €2.996 TOTAL Rate per m2 of Blockwork €27.97 Lecture 10B Q: You are newly employed as a commercial manager with a medium sized Groundworks subcontractor. You have lined up 4 major contracts which will keep your company busy for the coming two years despite the current economic climate. All of these contracts are for the renewal of watermains in rural areas. The company does not own its own plant and the managing director has approached you, seeking your advice on whether the company should continue hiring plant or is it a good time to purchase plant? What is your advice? Ans: Advantages of hiring plant: • Low maintenance costs • Contractors money not tied up in expensive plant – cashflow! • Easy to return idle plant • Plant hire company will supply skilled operatives/drivers • Can hire for minimum period Disadvantages of hiring plant: • You don’t own the plant – money paid out Page 6
  7. 7. • Particular machines may not be available from the hire company • Possible problems with standing time • No tax benefits Conclusion: To purchase as you have continuous work for 2 years for the same type of plant Lecture 13 Q: You are employed as a site manager with a medium sized contractor. You are managing the construction of a new €2m primary school which happens to be in the area where you live. You are on first name terms with the school board of management. The chairman of that board has approached you on site and instructed you to change the skirtings in the school from MDF to red Deal. You have just started the second fix carpentry and the MDF is already on site! How do you proceed? Ans: 1) Firstly you advise the chairman from the Board of Management that you cannot proceed without an architect’s instruction. 2) You make contact with the architect and advise him of the request 3) You or the commercial manager compile a cost for the variation – include a restocking charge from the supplier for taking back unusable materials 4) Do not proceed without an architect’s instruction 5) Confirmation of verbal instruction in some cases Lecture 14a Q: You are employed as a Commercial Manager with a large Main Contractor. You have full commercial responsibility for the construction of a new Community Centre in Navan, Co. Meath. The estimator handed you the full tender documentation from when the job was at tender stage at an internal pre-start meeting. You have agreed with senior management that the profit budget on the contract is 8%. You are now four months into a 12 month project and your latest monthly CVR is showing a profit of 16%. The Surveying Director has called you in to update him on progress, and a full financial outlook for the contract has been requested. You know the following facts: 1. Although the contract is showing a profit of 16%, your current preliminaries budget has been exceeded by 15k to date and you estimate that the overall preliminaries budget will not cover your actual preliminaries at the end of the contract. 2. The quotation used at tender stage for the flooring package was from a subcontractor who has now gone into liquidation. You had 25% mark up on this package in your profit budget. If you use the next quotation from tender stage you will have only 1% profit on this package. Page 7
  8. 8. 3. The estimator made a mistake when pricing the paving works on the BOQ and priced 100mm tarmacadam instead of 200mm and didn’t qualify the tender. 200mm tarmacadam costs €14/m2 more than 100mm and there is 10,000m2 of this item. You will be losing 140k on this package if this situation stands. You want to make the Commercial Director aware of these items, but you don’t want to come to the table without proactive advice on possible solutions to the three problems. Make a note of possible solutions to the three problems you are dealing with. Ans: 1) Prepare actual preliminaries v’s budget report and • Highlight the areas or prelims where over spend was occurring so action can be taken. • Advise the surveying director where savings can be made i.e. site supervision. • Revise your prelims budget for rest of contract – taking agreed saving into account • Meet with the contracts manager and discuss possible ways of cutting the programme. 2) • Contact second place sub-contractor and try and get him to reduce his rates. • You will seek further quotations for the same package. • You will check the BOQ for over-measure • Approach the architect on changing the specification 3) • Approach the architect/client and offer 50% of the savings to change to Ulster Carpet – make it worthwhile • Seek better quotations for 200mm tarmacadam • Scan the BOQ for savings in other areas and off set against this item • Check the measure on the tarmacadam to see if it was over measured Lecture 14b Q: You are employed as a Commercial Manager with a large Main Contractor. You have full commercial responsibility for the construction of a new multi million euro office development in Dublin City Centre. As part of your role, you are responsible for compiling interim valuations for the contract, chasing up QS recommendations and architects certificates, and forwarding this documentation to the financial department for invoicing. You are sending in your valuations on time every month, however the clients QS is cutting every valuation by 50%. He claims that you are inflating the valuations with variations which are not agreed, and applying for work which is not completed. Page 8
  9. 9. Your financial director has highlighted the fact that the company cashflow is suffering as a result of your contract. What do you think is the best course of action to resolve this situation? Ans: • Meet with the clients QS • Firstly because there is such a difference (50%) - Compile evaluations with clients QS prior to submitting - Have the disputes sorted as they arise • Try to agree variations as they happen • Keep good photographic record • If you cannot agree after this, you can go to conciliation and then to arbitration of necessary Lecture 14c Q: You are newly employed as a Commercial Manager with a medium sized Groundworks Subcontractor. Your Managing Director has called you in to attend a meeting relating to a €2m pipelaying project on which he wants your advice. He states that the contract originally contained 8000m of 400mm diameter pvc watermain and this has now increased to 8900m. He points out that the additional 900m of pipework is in the public road while the other 8000m was through grass verge. There is 50m of this additional pipework in an alleyway with no access for an excavator. The clients QS insists that this work will be carried out at the same BOQ rate which applied to the original 8000m variation. What is your advice? Ans: • Firstly everyone is agreed that this is a variation • Advise clients QS that only a comparable BOQ rate can be used • A new rate must be compiled based on - traffic management - different backfilling - reinstatement - rate of production 50m – daywork – best option because it’s difficult to evaluate whats involved and build up a rate (unforeseen) Lecture 14d Q: You are employed as a Commercial Manager with a large Main Contractor. You have full commercial responsibility for the construction of a new office development in Clonee, Co Meath. The domestic subcontractor who is carrying out the glazing package is causing problems on the contract. 1) He didn’t commence work on his agreed commencement date, he is now 3 weeks beyond his completion date with 20% of his work package still to do. Page 9
  10. 10. 2) He has sent you in 6 weeks of daywork charges for having to use an aerial platform. 3) He has left packaging and boxes all over the site and will not tidy up. 4) There was an additional 5no. additional windows required which were missed in the BOQ, and he has sent in daywork sheets to cover these items, which is working out three times more expensive than if BOQ rates were used. The subcontractor is meeting you in the morning and wants to bring his account up to date. What advice are you going to give him in that meeting? Ans: 1) Draw the subcontractors attention to the contract he signed - Pre-start meeting – the contract conditions were fully explained - No Letter for extension of time was sent in - Main contractor is responsible for his sub-contractors hence any delays will result in countercharges - Last resort- expel sub-contractor off site or bring in more resources and countercharge from subbies account 2) Tell sub-contractor to check list of agreed attendances as these form part of the contract. Sub-contractor has a valid case if these items are not listed on his attendances sheet 3) Check pre-start minutes of contract to see who is responsible. Give subbie notice to clean up site. If he doesn’t clean site, get your own operatives to clean up and countercharge at market rates for labour and skips – unless nominated sub-contarctor. 4) If comparable rates in BOQ then use that rate unless different conditions (ie all other windows were on ground floor and new ones on 5th Floor) – in this case adjust existing rates and if no other option use Dayworks Lecture 14e Q: You are employed as a Commercial Manager on a €40million multi purpose office and apartment development. You are 4 months into a 24 month project. You have just completed the CVR for that month and its showing a loss of 20%. You know that you have achieved the budgeted profit on all the subcontractor packages to date, which were averaging 15% profit. Your financial director wants an update on the financial standing of the project. How will you source the necessary information? Page 10
  11. 11. Ans: • You have achieved the budgeted profit with sub-contractors so problem doesn’t lie here – look at possible problems from other areas • Check Preliminaries • Interim Valuation could have been under valued • QS/Architect could have undervalued • Incorrect cost allocation – check material delivery dockets • Subcontractor could have been overpaid • Check initial budget for errors Lecture 14f Q: You are newly employed as a Commercial Manager with a medium sized Groundworks Subcontractor. You have lined up 4 small contracts which will keep your company busy for the coming 6 months and there is no guarantee of work after that. All of these contracts are for the renewal of watermains in rural areas. The company does not own its own plant and the Managing Director has approached you, seeking your advice on what the advantages and disadvantages of hiring plant are, and what is the best option in his case? What is your advice? Ans: Advantages of hiring plant: • Low maintenance costs • Contractors money not tied up in expensive plant – cashflow! • Easy to return idle plant • Plant hire company will supply skilled operatives/drivers • Can hire for minimum period • No requirement for a depot or yard • Less insurance costs Disadvantages of hiring plant: • You don’t own the plant – money paid out – can be expensive over long term period • Particular machines may not be available from the hire company when needed • Possible problems with standing time • No tax benefits Conclusion: To purchase as you have continuous work for 2 years for the same type of plant Lecture 16 Q: You are employed as a Commercial Manager with a medium sized Main Contractor. You are in the process of agreeing a Final Account for a completed office block with the Page 11
  12. 12. clients QS. There is a major dispute between you and the clients QS over a large variation on the cladding package where the thickness of the panel had not been stated in the BOQ description. You had priced 60mm which was detailed in small print on the Architectural drawings while 80mm was required. The clients QS has stated that the 80mm thickness was shown on the engineers drawing, and as an experienced builder, you should have known that 80mm was needed! The form of contract used was the RIAI standard yellow form. Your Managing Director wants to take a court case against the client to get this issue resolved. What is your advice? Ans: Strong case as this is an architectural panel issue and not a structural panel issue therefore the architectural drawings would have preference giving the builder a strong case Suggest negotiation at senior level RIAI form of contract so conciliation must be entered into before other binding resolutions are considered If above fail Mini Trial Expert determination Then Arbitration Lecture 17 Q: You have started your own building company, tendering for projects ranging in size from €100k to €2m. A new client has approached you and is interested in constructing a Nursing Home on a site which he already owns. He has one schematic drawing showing the floor plan (one storey building) and wants an idea of what it will cost to construct. What advice will you give him? Ans: • You can prepare a basic cost plan on the limited information available • Cost plan will be provisional • Cost plan can be prepared in two ways: 1) cost per m2 (superficial) 2) Cost per Unit (per bed) • If client has a budget – work back from that • Pricing – normally previous work of a similar nature • New Builder – own experience/local PQS/Bruce Shaw handbook/Spons etc • Price depends on location/site/market conditions/specifications/time etc Page 12

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