CIMA T4_Preseen_MarMay2011 | Public–Private Partnership | Balance Sheet

T4 –Part B Case Study Examination

For examinations on Tuesday 1 March 2011 and on Thursday 26 May 2011
PRE-SEEN MATERIAL, PROVIDED IN ADVANCE FOR PREPARATION AND STUDY FOR THE EXAMINATIONS IN MARCH AND MAY 2011. INSTRUCTIONS FOR POTENTIAL CANDIDATES This booklet contains the pre-seen case material for the above examinations. It will provide you with the contextual information that will help you prepare yourself for the examinations. The Case Study Assessment Criteria, which your script will be marked against, is included on page 13. You may not take this copy of the pre-seen material into the examination hall. A fresh copy will be provided on the examination day. Unseen material will be provided on the examination day; this will comprise further context and the examination question. The examination will last for three hours. You will be allowed 20 minutes reading time before the examination begins during which you should read the question paper and, if you wish, make annotations on the question paper. However, you will not be allowed, under any circumstances, to either begin writing or using your computer to produce your answer or to use your calculator during the reading time. You will be required to answer ONE question which may contain more than one element. PC examination only: Your computer will contain two blank files – one Word and an Excel file. Please ensure that you check that the file names for these two documents correspond with your candidate number. Contents of this booklet: Pre-seen material –BZCS construction case Pre-Seen Appendices 1 - 4 Case Study Assessment Criteria Page 2 9 13

© The Chartered Institute of Management Accountants 2011

T4 Test of Professional Competence - Part B Case Study Examination

PFI projects also involve the private sector construction company taking on responsibility for providing an on-going service. Many large construction projects are financed using Private Finance Initiatives (PFI). roads or schools. Many European construction companies are involved in a large range of projects in many countries worldwide. The process for private construction companies to win a new contract for a large construction project is summarised in the following steps: 1. 3. hospitals. typically 20+ years. institutional investors and pension funds. 5. it is forecasted that the volume of construction work will not increase until the start of 2011. PFI projects involve the private construction company as a partner in the project and this has generated favourable outcomes in respect of the percentage of projects completed on time and completed to the agreed budget. such as construction of office buildings. 6. In the construction industry there are 3 main types of contract. Furthermore.Part B Case Study 2 March & May 2011 . PFI projects generate revenue streams for the construction company for the initial construction project as well as for long-term maintenance and management of the asset. which are: 1.BeeZed Construction Services (BZCS) case Construction industry background Due to the current economic climate. Most construction companies have established a range of expertise in specific types of project. PFI is defined as private finance being used to fund public infrastructure work. 2. the demand for building work in Europe has fallen overall by over 10% from 2008 levels. airports. 3. Long-term PFI projects – this is where the revenue for the private construction company will include the contracted construction revenue as well as revenues for on-going maintenance and property management for a long-term project. Work commences T4 . Examples of public infrastructure works are road building and construction of new schools. as well as for materials 7. 2. and win. 4. This expertise allows the construction companies to use their skills and reputation to bid for. further projects in Europe and in other countries around the world. The Private Finance Initiative (PFI) is a way of creating Public Private Partnerships (PPP). A company or government body will invite tenders The construction company will tender for the contract by preparing a detailed bid A company or government body will select its “preferred contractor” The bid price and the contract details will be negotiated and agreed Contracts are then signed Selection and appointment by the construction company of suppliers for manpower resources (sub-contractors). Therefore. Fixed price contracts – this is where the revenue for the private construction company is fixed at the contract stage. “Cost plus” contracts – this is where the revenue for the private construction company will comprise all of the actual costs of the project plus an agreed profit element. Private finance is defined as finance provided mainly by banks. subject to changes in specifications agreed during construction. Many companies in the construction industry have suffered falls in profits as a direct result of the slowdown in new contracts being awarded. This typically includes maintaining and managing the project over the life of the building or for a fixed term of 20 years or longer. PPP is defined as agreements between public bodies or central governments and private construction companies to deliver the agreed projects. Few large construction companies (except some house building companies) operate only within their national boundaries.

BZCS BZCS has many construction projects around the world. BeeZed. 5. Sports Facilities Division – includes the construction of large sports stadiums as well as the construction of small regional sports facilities. However. including the construction of container terminals and marinas. will sign the overall contract for the project. BZCS has 6 divisions. construction of public sector buildings. BeeZed. as well as speculative construction of office buildings in city centres or on business park complexes. Environmental Projects Division – includes the construction of water treatment facilities. BeeZed has 3 wholly owned subsidiary companies which are: • • • BeeZed Construction Services (BZCS) – concerned with a wide range of construction projects BeeZed Professional Services (BZPS) – concerned with offering consultancy services BeeZed Building Support Services (BZBSS) – concerned with property management and maintenance services. the parent company. only the revenue related to the construction project is allocated to BZCS. including hospitals. Some of the construction projects that BeeZed is involved with are financed by PFI. These changes usually affect costs and manpower. This case study is concerned ONLY with BeeZed Construction Services (BZCS). BeeZed BeeZed is a construction and property management company listed on a European stock exchange. In respect of PFI projects. the parent company. 6. there are often many requests for changes to the original contract specifications or design which are submitted to the construction company. schools and university buildings to commercial contracts for office buildings. These are all critical success factors for keeping its existing customers content and for providing a basis for winning future business. When a PFI contract is signed.It should be noted that during construction work. Infrastructure Projects Division – includes road building and airport construction. 3. March and May 2011 3 T4 – Part B Case Study . Community Projects Division – includes the construction of hospitals and smaller healthcare facilities as well as schools and university facilities. ranging from road building. Office Buildings Division – includes building bespoke office buildings for specific company orders. 4. Energy Projects Division – includes the construction of gas storage facilities and power stations. BZCS has a good reputation in this industry for quality and safety as well as its ability to deliver projects on time. will agree on how the revenues will be split between BZCS and BZBSS. BZCS will be involved only with the construction work and BZBSS will manage the ongoing maintenance and property management work. All of these change requests have to be negotiated and additional revenues agreed before the changes can be made. 2. The revenue relating to the ongoing maintenance and property management work is allocated to BZBSS and is not included in this case study. which are: 1. the construction of sophisticated waste management facilities and marine projects.

the Middle East and in some other countries. In the year ended 30 September 2010. BZCS’s cash flow statement for the year ended 30 September 2010 is shown in Appendix 3 on page 11. All of the non-current liabilities represent inter-company long-term loans from its parent company. is shown in Appendix 1 on page 9. Geographical analysis of revenues BZCS currently has construction projects operational throughout Europe. BeeZed has a range of non-current liabilities with several external bodies including bank loans.267 million and operating profit of €34.Each of these 6 divisions is headed by a Commercial Director who is responsible for all of the projects undertaken by that division. BeeZed. The geographical analysis of the total construction services revenue of €1.Part B Case Study 4 March & May 2011 . BZCS generated total revenues of €1. effective from 1 January 2011. the USA. A summary of the organisational structure for BZCS. An extract from the accounts for BZCS is shown in Appendix 2 on page 10. mainly in Asia.267 million for the year ended 30 September 2010 was as follows: Europe USA €690 m €369 m Middle East €110 m Rest of World €98 m Analysis of revenues and operating profit by division The revenues and operating profit for each of BZCS’s 6 divisions for the year ended 30 September 2010 are shown in a table on the next page: T4 .7 million. BZCS is a wholly owned subsidiary of BeeZed.

2 213. the Project Manager will be expected to travel to BZCS’s Head Office to present the information to the BZCS Board.0 34.Revenue € million Office buildings Sports facilities Environmental projects Infrastructure projects Community projects Energy projects 220.400 million. Order book At 30 September 2010 BZCS had an order book valued at over €2. These presentations are to senior management groups chaired by the Commercial Director for the relevant division of BZCS. including safety issues. If there is a significant problem.7 Financials The operating profit margins achieved by BZCS are low. The monthly management accounts show the following information for all on-going operational construction projects: • • • • Contract revenues and costs Approved change requests to contracts and amended revenues and costs Cumulative costs to date for the project (spanning current and past financial years) Forecast of costs for the remainder of the project (which are split between costs to be incurred in the current financial year and costs to be incurred in future financial years) BZCS uses a project management system called BZPM.8 1.4 4. The order book represents the value of contracts signed which have either not yet been commenced or are currently in progress. These presentations cover all aspects of the project.5 3.1 365. All non-project based overhead costs are allocated to projects using activity based costing techniques based on appropriate cost drivers.267. However.3 0. the Project Manager conducts his monthly presentation by video conferencing.2 16. as is the norm for this industry. including salary and associated costs for all of BZCS’s employees working on each project as well as sub-contractor costs. Each Project Manager is responsible for all direct costs incurred on the project for which he / she is responsible. earns additional revenues for a further 10 to 30 years for the ongoing maintenance and property management of the PFI projects. This is 30% higher than the level of BZCS’s order book at the 30 September 2009. forecasts for the delivery of the project against plan and any significant operational problems or successes. All direct costs are allocated to the respective project. for some of BZCS’s PFI construction projects. all of the accounting for each construction project is accounted for on a project basis. March and May 2011 5 T4 – Part B Case Study .0 145. which is part of the BeeZed group.5 Total 1. Whilst BZCS prepares annual financial accounts. Each Project Manager is responsible for presenting the projects’ financial and operational issues that have occurred for each project on a monthly basis.9 Operating profit € million 8. Where there are no operational or financial concerns.2 193.6 129. BZBSS.

called BZPM. The contract details and agreed key stages are set up in BZPM when the contract is signed for each new construction project. The Project Manager and his team. project planning and managing contract change requests.Project Management BZCS uses a project management system to plan each project. to ensure that its employees. like all construction companies. The Project Manager is also responsible for control and reporting of costs against the original contract and the updated budget for the project. The BZCS Board is committed to safety on all projects and also to the reduction of waste from sites and the reduction of carbon emissions. assisted by the Finance Department. This is the lowest accident rate ever achieved by BZCS and is amongst the lowest of the top construction companies globally. A Project Manager is appointed for each project. including forecast timings for all activities and costs. BZPM is able to generate reports on all aspects of each project. BZCS’s annual accident frequency rate has fallen over the last 7 years and is currently 0. Recently some suppliers’ contracts were not renewed as they did not meet the criteria set by BZCS for Health and Safety standards. It tries to ensure that best practice is promoted and that a positive safety culture is created. Environmental issues BZCS is committed to complying with a European Union (EU) wide programme to reduce the volume of waste that goes to landfill sites. BZCS provides Health and Safety awareness training to its key suppliers to ensure that they meet BZCS’s challenging Health and Safety requirements. from construction work at building sites to transportation of materials and disposal of waste. BZCS continues to enhance its culture of safety throughout the company and its supply chain. He or she is responsible for controlling all stages of the project using BZPM. BZCS has a range of waste management contractors which manage the safe disposal of site waste. This training covers all aspects of health and safety. BZCS also conducts audits of its suppliers. both BZCS employees and outsourced sub-contractors. BZCS recognises that it is also important that its supply chain is fundamental to the safe delivery of all construction projects and it works closely with the companies in its supply chain. packaging or materials which can be recycled) and is recycled or disposed of in a safe way. Where possible waste from construction sites is sorted by category of material (such as earth. sub-contractors and the public are safe. by the end of day 3 after each month end. BZCS also ensures that environmental safety is adhered to. prepare monthly accruals based on activities undertaken in the month. 20.000 work hours. BZCS continues to measure its performance against a range of key Health and Safety indicators. BZCS’s commitment to health and safety and environmental issues is shown below.000 person days of Health and Safety training has been provided by BZCS during the last financial year ended 30 September 2010. The finance system interfaces directly with BZPM allowing data on payments for materials and sub-contractors. This includes control of resources. which have not been invoiced. It is also very aware of environmental concerns and works closely with the communities in which it operates. They have demonstrated their T4 . It trains all of its employees to ensure their competency and full understanding of what and why safety is so important in all aspects of the company.16 accidents per 100. Corporate Social Responsibility BZCS takes its Corporate Social Responsibility (CSR) very seriously. Health and Safety Health and safety is a top priority for BZCS.Part B Case Study 6 March & May 2011 . timings for each stage of the project. BZCS. adheres to all Health and Safety legislation and BZCS goes beyond what is required by law. so as to try to ensure that the communities in which it operates are not damaged or polluted. payroll costs and revenues to be directly allocated to each stage of the relevant project.

When a bid has been won and a contract signed. This on-going investigation has involved the OFT accessing paperwork for over 100 contracts from 20 construction companies. on a particularly complicated project. or recycled. each of the 6 divisions is usually involved in the bid preparation and the bidding process for several other proposed projects. the initial Bid Manager will become the Project Manager. the Office of Fair Trading (OFT) has been undertaking investigations of “bid-rigging” in the construction industry. The bid value of a contract varies greatly. BZCS uses the latest technology on its construction projects so that new buildings are able to operate in an environmentally responsible way and utilise efficient electrical fittings. BZCS also undertakes a wide range of different types of construction project. The OFT has established that there is widespread evidence of construction companies which have been involved in manipulating the bidding process. It will also impact on the ways that construction companies. BZCS’s target was to dispose of. BZCS has secured some construction projects for the London 2012 Olympic Games. like many other construction companies. of which 10 are due for completion during 2011 and the remaining 4 are due to be completed in 2012. 60% of site waste that would otherwise have ended up in landfill sites. then a Project Manager is appointed to manage the project. Contract duration often spans more than 2 years. the Government’s regulator. Contracts BZCS is continuously working on bids for possible new contracts. with bid preparations taking place for a further 10 or more projects. Furthermore. ended 30 September 2010. Last year. BZCS is committed to reducing its carbon footprint and to minimising its impact on the environment. Whilst BZCS has been the preferred supplier for some European government departments in the past for infrastructure projects and community projects. These include government and private sector customers. bid for new projects in the future. ranging from €5 million to over €800 million for individual contracts. At any point in time BZCS usually has between 12 and 20 projects in progress. It has specialised teams headed up by Bid Managers in each of BZCS’s 6 divisions. BZCS. use renewable energy sources and BZCS works closely with the architects to ensure that the buildings will help to deliver planned reductions in carbon emissions. BZCS has 14 projects currently operational. or recycle. including BZCS. As at the end of December 2010. In order to be treated leniently. March and May 2011 7 T4 – Part B Case Study . The project is proceeding on time and it is forecast that it will not over-run the agreed fixed price budget. Bid tendering process In the UK. Therefore. Each of BZCS’s 6 divisions usually has between 1 and 5 projects in progress at any point in time. is not successful in winning all of the projects for which it bids for.abilities to divert waste from landfill sites. these large customers are now imposing increasingly strict criteria for suppliers to meet. BZCS’s Mission Statement and CSR initiatives are shown in Appendix 4 on page 12. BZCS exceeded this target and disposed of. BZCS tries to win contracts from a wide selection of organisations. Sometimes. In order to balance the risk of relying on specific construction sectors and a relatively small customer base. This has allowed specific companies to win Government awarded construction projects at higher prices than could be achieved through a fair competitive bidding process. such as schools and hospitals. Many of the buildings contracted by European government departments. 62% of its waste from its construction sites. BZCS has advised the OFT that it did have discussions with some other construction companies concerning the level of its bid for a UK hospital construction project that it won the contract for in 2008. Bids need to be competitive in the current challenging economic climate.

The employees who worked in the procurement departments within each of BZCS’s 6 divisions have been brought together in one centralised Procurement Department. T4 . The Finance Department is working closely with the Procurement Director in the selection and appointment of new and existing suppliers. At the end of September 2010. customers. BZCS reduced the number of its employees by 1.800 within 1 year. This is under the direct control of an experienced Procurement Director. who reports directly to BZCS’s Managing Director. Additionally there is a Post Completion Manager responsible for all projects that have ongoing problems or require minor rectification work after the project has been completed. BZCS had 10. based in Europe. which are BZCS’s sub-contractors. BZCS underwent a re-structuring process to enable it to become more competitive following the downturn in construction projects due to the current economic environment. Following a Board decision in March 2009. in the accounts for the current financial year ending 30 September 2011. BZCS has also focused on winning a wider range of private construction projects as many European governments have cut the budgets on public sector projects and bidding is more competitive than ever. The new centralised Procurement Department is in the process of selecting “preferred suppliers” within each country in which it operates. The new centralised Procurement Department will help meet BZCS’s target for Head Office cost savings. They will be given limited authority to purchase goods locally where no global contract is in place for particular materials. Many of BZCS’s ex-employees have joined some of BZCS’s supply chain companies. Within each division. for a possible fine. Effective from 1 January 2011. The Board of BZCS recognised the need to become more flexible and to sub-contract a greater volume of its core construction work. The re-structuring of BZCS’s Procurement Department has resulted in an overall reduction in headcount in procurement employees. Re-structuring of BZCS During 2009 and the early part of 2010. A summary of the organisational structure for BZCS. The new Procurement Director was recruited from a rival construction company and joined BZCS in October 2010. there is a new central Procurement Department for the whole of BZCS. is shown in Appendix 1 on page 9. effective from 1 January 2011. BZCS has included a provision for a contingent liability. the preferred supplier will be another large international company that can provide materials to BZCS in many of the countries in which BZCS has on-going construction projects. each division was responsible for the procurement for each of the projects under its control. the Commercial Director has responsibility for each of the Project Managers who are each responsible for one operational project. especially for some raw materials.100 employees.BZCS is waiting to hear the outcome of the OFT’s investigation into this specific contract. Projects that are operational are defined as a project in which the contracts have been signed but construction is not complete. and liaising with. Therefore some of these people work on the same project as previously but now are employed by sub-contractors or have become short-term freelance contractors to BZCS. Re-structuring of the Procurement Department Before the re-structuring of BZCS.Part B Case Study 8 March & May 2011 . all of BZCS’s Project Managers at construction sites in each country will now make all purchases through the new centralised Procurement Department. On an operational level. This should help to facilitate better control over purchases and achieve higher bulk discounts. Where possible. Each division also has Bid Managers responsible for preparing bids or tenders for new projects and Sales and Marketing Managers for selling to.

Appendix 1 BZCS’s new organisational structure – effective from 1 January 2011 BZCS – Managing Director Office Buildings Division – Commercial Director Sports Facilities Division – Commercial Director Environmental Projects Division – Commercial Director Infrastructure Projects Division – Commercial Director Community Projects Division – Commercial Director Energy Projects Division – Commercial Director BZCS Finance Director BZCS Procurement Director BZCS Public Relations and Marketing Director BZCS Human Resources Director Within each Division Project Managers – for each project Bid Managers – for each new proposed project Post Completion Manager Sales & Marketing Managers – for each project. BZCS IT Manager March and May 2011 9 T4 Part B Case Study .

0 23.00 each at 30 September 2010 which are 100% owned by parent company BeeZed Statement of Changes in Equity Share Capital € million Balance at 30 September 2009 Profit Dividends paid Balance at 30 September 2010 10.2 7.0 186.1 125.4 5.0 T4 .3 436.267.7 0.0 10.4 436.Appendix 2 Extracts from BZCS’s Statement of Comprehensive Income.5 27.3 56.0 118.210.280.2 202.4 Note: Paid in share capital represents 10 million shares of €1.7 26.1 167.2 0.9 5.0 176.0 5.4 193.0 Total € million 164.4 10.0 10.5 21.8 5.0 58.4 As at 30 September 2009 € million € million 234.8 35.4 127.7 22.0 1.8 31.5 123.1 21.0 Statement of Financial Position 3.5 3.9 186.0 145.5 434.1 164. Statement of Financial Position and Statement of Changes in Equity Statement of Comprehensive Income Year ended 30 September 2010 € million Sales revenue Cost of sales Gross profit Administrative expenses Operating profit Finance income Finance expense Profit before tax Tax expense (effective tax rate is 20%) Profit for the period 1.0 Share premium € million Retained earnings € million 154.3 8.0 154.9 As at 30 September 2010 € million Non-current assets (net) Current assets Inventory Trade receivables Cash and cash equivalents Total assets Equity and liabilities Equity Share capital Retained earnings Non-current liabilities Inter-company loan (provided by parent company BeeZed) Current liabilities Trade payables Tax payables Total equity and liabilities € million 241.5 434.5 121.4 167.0 Year ended 30 September 2009 € million 1.222.Part B Case Study 10 March & May 2011 .4 21.9 176.1 21.0 1.0 22.0 34.

8) 31.8) 119.7) Cash generated from operating activities Cash flows from investing activities: Purchase of non-current assets Cash used in investing activities Cash flows from financing activities: Repayment of inter-company loans Cash flows from financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at 30 September 2009 107.0) (20.0 7.9) (2.9 (95.0) (95.4) (12.0) (7.Appendix 3 Cash Flow Statement Year ended 30 September 2010 € million Cash flows from operating activities: Profit before taxation (after Finance costs (net)) Adjustments: Depreciation Finance costs (net) (Increase) / decrease in inventories (Increase) / decrease in trade receivables Increase / (decrease) in trade payables (excluding taxation) Cash generated from operations Finance costs (net) paid Tax paid (7.2 Cash and cash equivalents at 30 September 2010 23.3) (5.3 95.8 (3.2 27.4 € million 88.0) (20.3 0.4 March and May 2011 11 T4 – Part B Case Study .3 0.

T4 .Appendix 4 BZCS’s Mission Statement and CSR initiatives BZCS’s mission statement is: “To be the preferred supplier for quality construction projects and to strive to implement a long-term relationship with our customers based on safety. quality and a timely service” BZCS has the following CSR initiatives: Prudent use of natural resources: • Reducing waste • Improving design • Improving the use of resources • Improving its supply chain • Increasing the use of locally sourced resources Environmental issues: • Reducing water pollution • Reducing emissions into the atmosphere • Reducing waste going to landfill sites Social issues: • Improving Health and Safety for our employees and sub-contractors • Supporting our employees • Giving due consideration to the communities in which we work • Developing the skills of our employees Economic growth • Investing in the communities in which we operate • Rewarding our shareholders • Satisfying our customers • Managing our risks End of pre-seen material Your script will be marked against the T4 Part B Case Study Assessment Criteria shown on the next page.Part B Case Study 12 March & May 2011 .

Assessment Criteria Criterion Maximum marks available 5 15 5 5 5 20 5 30 5 5 100 Analysis of issues (25 marks) Technical Application Diversity Strategic choices (35 marks) Focus Prioritisation Judgement Ethics Recommendations (40 marks) Logic Integration Ethics Total March and May 2011 13 T4 – Part B Case Study .

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