7th Presentation - Commercial Management - Feb 2021

Commercial Management in Construction Projects
Commercial Management in Construction projects and role of

QS/PM professionals
www.aimsintlqs.com info@Aimsintlqs.com - Ramesh Palikila BTech, FIS, FAIQS, FRICS

Founder I CEO I Chief Mentor - AIMS
Commercial management (of construction works)
This competency covers the commercial management of construction works, including commercial competitiveness balances
against profitability. They must have a thorough understanding of the financial processes used to achieve profitability and
how these integrate with the overall delivery of the project.
Level 1 Level 2 Level 3

Demonstrate knowledge and understanding of the Apply your knowledge to the financial management Monitor, report and advise on project cashflows
principles of the management of construction of construction projects, including regular and profitability. Evaluate and advise on the
projects. monitoring and reporting on cashflow and financial implications and appropriate
profitability. management actions.
Examples of knowledge comprised within this level Examples of knowledge comprised within this level Examples of activities and knowledge comprised
are: are: within this level are:
• Identifying and understanding the components • Collecting of data for reports • Monitoring, analysing, reporting and advising at
that make up the cost of the project to the • Carrying out cost to completion exercises a senior level on project cashflows and
contractor • Preparing cashflows profitability for internal use
• The effect that the design and construction • Preparing reports such as liability statements, • Evaluating and advising on financial implications
processes have on the cost cost to complete and costvalue reconciliations and appropriate management actions.
• The techniques used to reconcile the cost against • Applying value engineeringprocesses
income • Preparing and submitting cost data for in-
• The techniques to financially manage sub- house and/ or external use in relation to areas
contractors and suppliers such as cost of preliminaries, comparative cost
• Understanding the use of cashflows. of different construction techniques and
taxation allowances.
Agenda
Introduction of effective Cost Value Reconciliation and

Need of cost control processes
commercial management in practical considerations in
to achieve profitability
construction projects preparation of reports
Overview of Earned Value

Conclusion
Analysis and its importance
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1.Introduction of effective commercial management in

construction projects
As per RICS
“The main objective of Commercial Management is to
see how
commercial competitiveness balances against
profitability (Pre-Contract Stage) with through
understanding of
the financial processes used to achieve profitability
(Post Contract Stage) and how these
can integrate with the overall delivery of the project
(QS& PM).”
Objectives of Commercial Management in Construction

Commercial Management is defined as:.
5
Role of Commercial Manager
6
Special Skills of Commercial Manager

( Cost , Time , IT, Communications, Management , Leadership)
Why Commercial Management?
• Need for Effective Cost Control System

• Identifying Past Trends and Forecasting Future
• Identifying Deviations from Budget
• Risk Management
• Avoid Cost Over Run
• Manage Contractual issues
(Suspension/Termination)
• Successful commercial closeout
Role of Commercial Manager with
Project
Employer/ Manager/ Contractor
Developer Engineer/
Consultants
Suppliers Specialists
Sub-Contractor
9
Role of Commercial Manager with

With Contractor
Review and Verification of Estimates, Preparation of / Response to Tenders / Commercial Proposals, Drafting
Contractual / Commercial Correspondence, Identification & Management of Commercial Risks, Linking with
Procurement Team, Contract Administration & Negotiation of Changes, Analyzing Costs & Profit for Project /
Business, Cost Control, etc.
With Consultant
Estimating, Cost Planning, Budget Preparation, Risk Management, Value Management, Value Engineering,
Benchmarking, Life Cycle Costing, Procurement, Tender Evaluation, Change Control, Assessment of Variations /
Claims, Preparing Financial Statements, Cash Flow Forecasts, Cost Control, Reconciliations, Interim Valuations, Final
Account, etc.
With Client
Managing Budgets, Change Control, Preparation and Management of Tender / Procurement Process, Identification
and Management of Commercial Risks, Contract Administration, Cash Flow Forecasts, Payment Certification, Final
Account, etc.
COMMERCIAL MANAGEMENT IN CONTRACTOR’S ORGANISATION
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Estimating and Establishing Budgets
12
Contractor’s Cost Elements

Estimates of regular items are common in

our practice.
Let us see
Estimation of Preliminaries
• Factors to be considered in Estimation

of Preliminaries / General
Requirements
• Documents to refer while preparation of
preliminaries
• Model Item : Elements to consider to
estimate the cost of running a Site office .
15
2.Need of cost control processes to achieve

profitability
COST CONTROL Cost in the
amount of
money spent for
obtaining goods
or services.
Cost Management is Budget is money

the overall process of allocated for
effectively managing - spending over a
estimates, budgets,
cost plans, cost control period of time or on
and cash flow of a a specific item /
project. activity.
Cost Plan reflects the

budget allocated for
Cost Control is the different elements of a
process of controlling project, it evolves
the cost associated with during the life of the
a process or activity. project i.e. from
feasibility to detailed
design.

Objective of Cost Control
To ensure adherence to the allocated budget related to:
(a) Material (b) Labor, (c) Subcontract (d) Plant & Machinery (e) Design Fee and (f) Other
Expenses.
Avoid Wastage, Overspending and Ensure Good Value for Money.
Achieve suitably balanced cost through all parts of the building.
Detect the Cost Variance if any.
Record and Identify the cause for Cost Variance.
Take corrective action to ensure alignment of budget and actual cost.

Pre-Contract Cost Control
• Pre-Contract Cost Control is required to ensure that Contract Sum is within Client’s approved
Budget.
• Cost Plan is revised at each of the following stages:

• Inception: Approximate Overall Project cost for Development Decision
• Feasibility: Workout effectiveness of Building Cost for Feasibility
• Scheme Design: Cost Estimate to Identify Significant Items
• Detail Design: Detailed Cost Estimates for comparing the tenders.
• Pretender cost analysis enables effective decision making at Design Stage.

• Substitution between Capital and Running Cost to secure minimum total cost.
• Explore different design options to lower the cost / better facility in the same cost.

Cost Management Cost Control Principles
• Cost management is • Cost control procedures are put

concerned with the process to insure that your project costs
of planning and controlling no more than intended.
the budget of a project or
business. • Construction cost control
procedures help avoid
• It includes activities such as construction project cost
planning, estimating, overruns and scheduling lapses
budgeting, financing, by ensuring the progress of the
funding, managing, and job matches time estimates and
controlling costs so that forecasts of material, labor and
the project can be overhead expenditures..
completed within the
approved budget.

21
Cost Report – Contents
Contract Reference
Package name and reference
Budget associated with each contract / package
Contract Price
Instructed variations (agreed / not agreed)
Anticipated variations (forecast)
Claims / EOT
Forecast Out-turn Cost or Cost At Completion

Expenditure summary
Financial Status -Cumulative and for this month
Project Financial Control and Reporting
What does a financial report look like?
Post-Contract Cost Control
Employer’s Quantity Surveyor’s should ensure that Final

Account should not exceed the Contract Sum.
Contractor’s Quantity Surveyor should ensure that Actual

Cost should not exceed the Budget.
Cost Control Techniques:
• Budget Monitoring System

• Cost Coding System
• CVR
• EVA

Reporting Financial Progress

• Techniques to Reconcile Cost against Income
• Collecting of Data for Reports
• Preparing Reports
❖ Cost to Complete (CC)
❖ Cost Value Reconciliations (CVR)
❖ Contract Variance
❖ Earned Value Analysis (EVA)
• Monitoring, Analysing, Reporting and Advising on Profitability
• Financial Implications and Appropriate Management Actions
Why is it important to have financial reporting and control

procedures?
▪ To monitor actual costs against budget
▪ Assist in commercial administration of contract
▪ Formal record of financial control procedures
3. Cost Value Reconciliation and practical

considerations in preparation of reports
In Building and Civil Engineering Works, the preparation of

Construction Contractor’s Cost – Value Reconciliation (CVR)’ is an
important tool in tracking the ‘financial health’ of construction
projects and early identification of potential commercial
problems.
AFTER SUBMISSION OF MONTHLY VALUATION … WHAT NEXT ????

PROJECT IN PROFIT … PROJECT IN LOSS !!!!!!

CVR (Cost Value Reconciliation)
• CVR is comparison of expenditure against income at regular interval generally on

monthly basis to arrive at project profitability.
• A CVR Report basically comprises of the following details in different sections:

Contract Value Variations
Provisional sum adjustment Employer’s Claim
EOT / Prolongation Cost Payment Certified
Adjustment for Advance Payment Adjustment for Materials on/off Site
Adjustment for under /over Valuation Cost Statement
Subcontract Liability Cost to Complete
• Based on the above project profitability is calculated.

CVR (Cost Value Reconciliation)

4. Overview of Earned Value Analysis

and its importance
EVA (Earned Value Analysis)
• Earned Value measures project progress in objective manner combing scope, cost and time.
• It compares planned progress and cost during a particular duration to that with actual progress and
cost incurred in the same duration.
• Generally monitored on weekly basis, based on Man-hours / Man-days.
• It gives a good indication of the project progress as compared to the planned enabling proper forecast
of eventual cost and time.
EV = Budget at Completion X Actual Progress
CV (Cost Variance) = EV (Earned Value) – AC (Actual Cost)
E.g. If a projects time for completion is 6 months and budget is AED 100,000/- and after 3 months its 50 % complete with
actual cost AED 60,000/- then EV is AED 50,000/- and CV is AED –(10,000/-).

EARNED VALUE
Earned Value Management (EVM) :

•Is a project management methodology used to track project performance as well as forecast future
performance. EVM integrates the scope baseline, schedule baseline and cost to provide performance
measurements. Results can be expressed in dollars and/or percentage. EVM can be used to report
current/past project performance, and predict future project performance based on current/past performance.
Variance Analysis Forecasting Current/Past Performance Future Performance
EARNED VALUE PARAMETERS
Earned Value Analysis (EVA)
EARNED VALUE FORMULAS
CV SV CPI SPI
Schedule
Cost Performance
Cost Variance Schedule Variance Performance
Index
Index
EV – PV EV / PV
EV – AC EV / AC
Where: Where:
Where: Where:
EV = Earned Value EV = Earned Value
EV = Earned Value EV = Earned Value
PV = Planned PV = Planned
AC = Actual Cost AC = Actual Cost
Value Value
• EV – AC
CV (Cost Variance)
• The difference between Earned

EV – AC Value and Actual Cost
• Cost Overrun or over budget

Negative
• Under Budget
Positive
• On Budget
Zero
SV - Schedule • EV – PV
Variance
• The difference between Earned

EV – AC
Value and Planned Value
• Project performance behind

Negative
schedule
• Project performance ahead

Positive
schedule
• Project Performance on
Zero
schedule
SPI - Cost • EV /PV

Performance Index
• The ratio of Earned Value to

EV/PV
Planned Value
• Cost over budget

Value < 1
• Cost below budget

Value > 1
• On Budget
Value= 1
CPI - Cost • EV /AC

Performance Index
• The ratio of Earned Value to

EV/AC
Actual Cost
• Project performance behind

Value < 1
schedule
• Project performance ahead

Value > 1
schedule
• Project Performance on
Value= 1
schedule
What is meant by “Value for money “ ?
44
BROAD
PERSEPECTIVE
MARKET LATERAL
ANALYST THINKING
Special
abilities of
BEST
COMMUNI
Commercial ANALYSE
RISKS
-CATOR Manager
SELECTION OF
GOOD RIGHT
NEGOTIATOR PROCUREMENT
STRATEGIES
Alternative forms of construction procurement and payment mechanisms: Payment mechanism: The way
(mechanism) in which the contractor or subcontractor is paid for the work they undertake. These include the
following mechanisms:
•Target sum contracts: where a target sum (subject to contractual variations) is tendered
lump sum
and agreed for a contracting organisation to deliver a project. The target will usually be
built up in a similar way to the calculation of a fixed price in a lump sum contract. The final
target (including contractual variations) will then be compared with the actual costs
bill of
incurred by the contracting organisation. The difference (both overspend and savings,
quantities,
guaranteed usually known as ‘pain and gain’) will be split between the client and contracting
with or
maximum organisation, using calculations and proportions agreed in the contract.
without
price.
remeasureme
nt •Guaranteed maximum price (GMP) contracts: these are sometimes very similar to target
sum contracts, but with a contractual guaranteed maximum price agreed in the contract.
However, GMP can also exist as a variant to a lump sum arrangement, with limited
opportunities for the lump sum to be increased for change. The contractor will not be
entitled to any additional money should the GMP be exceeded, unless this is due to a
contractual variation, the opportunities for which will often be much lower than for any of
cost the alternatives above.
reimbursemen target sum
t
•Cost reimbursable contracts: where the contracting organisation is paid the actual costs
incurred in delivering the contract, plus an agreed (usually tendered) profit fee.
Commercial management of contracts
Commercial Candidates should have knowledge of all the main components as they represent the most common procedures used in the Knowing
management of industry.
contracts Level 1
Commercial Candidates should have experienced as many of the above components as possible, in relation to the contract(s) they have Doing
management of been involved with. Where they have not experienced a component they should have a strong theoretical knowledge of
contracts Level 2 the practical procedures involved.
For example:
A candidate might have carried out cost value reconciliation for part of their project but not all of it.
They will need to investigate how the remainder of the project is dealt with so that they have a thorough understanding of
this component.
They might only have experienced financial management of the supply chain, but they should still be aware of how cost
value reconciliation is carried out and its use in preparing monthly accounts at either project or business level.
Commercial Ideally candidates should have given advice on suitable commercial management procedures. They should be able to Advising
management of compare and contrast different techniques and their relevance to a given project.
contracts Level 3 If they have not had an opportunity to do this they should be able to demonstrate a depth of understanding of the
components listed above, sufficient to be able to give advice on a specific project.

Commercial management of contracts
Commercial management This covers the commercial management of contracts where the surveyor is working on the • Commercial
of contracts contracting or sub-contracting side of the profession, or where they are involved in fee management (of
construction
based contracting such as construction management or management contracting.
works)
It includes: • Contract practice
• Handover of estimate and setting up of the construction budget
• Cash flow forecasting
• Financial management of supply chain, including: procurement, interim payments,
valuation of change, ascertainment of loss and expense, agreement of final accounts
• Administration of sub-contract and supplier agreements
• Cost evaluation of alternative design and construction processes including value engineering
• Reconciliation of value and cost
• Cost to completion forecasting and reporting
• Managing risk allowances
• Alternative profit recognition conventions (current / final margin basis)
• Preparation of information for internal/ external audit
• Internal and external cost repo ting
• Forecasted final account projections.
Quantity Surveying and 4

Construction 8

Core Competencies – Study Check list
Commercial management (of construction works)

Level 3
• Estimating
• Tendering
• Profitability
• competitiveness
• Establishing budgets
• Cash flows
• Reporting financial progress against budget
• Procurement of labour
• Procurement of plant and materials
• Procurement of sub-contracts
• Financial management of supply chain
• Financial management of multiple projects
• Earned Value management
• Cost Value Reconciliation (CVR)

5. Conclusion
51
52
53
Commercial & Contracts Manager – Job Description

Reports to Regional Director / Area General Manager THINK BIG
ABOUT
Job Scope & Purpose
QS
Manages, coordinates and directs an administrative support team in order to PROFESSION
ensure that the field operational team can maintain focus on flawless
execution and profitability. Drive implementation and standardization of
central admin process. Responsible for contract renewal process,
&
productivity & cost efficiency in planning & scheduling of front line delivery
team, valuations & collection as well as operational productivity analysis &
reporting in support of business reviews & forecasting. Serve as an active
member of the area leadership team. HOW
YOU
Manages a team of administrative support functions, such as CAN ADD
Service/Contract/Billing & Collection Coordinators, etc. VALUE
TO
Scope : Systems - Geographical scope : Region / Area YOUR
EMPLOYER ?
Commercial & Contracts Manager

– Key accountabilities
• Manages for a defined area all contract related administration, including the
Soft
contract renewal process. Skills
• Reviews, document preparation, compliance checks on contractual terms &
conditions, pro-actively & timely,
+
Attitute
•Transfers any potential renewal risk to field operations team.
+
•Consultation and close collaboration with the Field Ops Team Leader,
Technical
•Manages the billing & collection process for a defined area, including review of
work in progress status versus billing, days to invoice and actively strive for Skills
collecting all outstanding invoices.
+
•Supports the business review & forecasting process though providing data
analysis & reporting
Aptitude
•Recruit, hire and retain admin support teams to maintain proper staffing levels.
+
Leadership
•Prepare and deliver clear performance expectations & reviews, coaching and
development plans for all supporting team members with continuous = Selected
improvement culture in work execution.
POSITION REQUIREMENTS SOFT SKILLS

•Communication Skills
•Business / Financial/Engineering Degree •Listening Skills
•Proven track record of at least 5 years in •Positive Writing skills
management of an administrative support team
•Business acumen •Leadership Skills
•Experience in financial reporting & •Emotional Intelligence
forecasting. •Multitask Management
•Good influencing skills
•Good leadership & communication skills. SELF MANAGEMENT SKILLS
• Build and maintain effective relationship.
•Promotes team spirit •Self Confidence
•Analytical, result driven and accurate •Self Respect
•Excellent knowledge of operational systems, •Stress Management
processes and tools is an asset •Ego Control
•Balance of health
•Time Management
• Oganising skills
PROJECT TEAM MEMBERS – OFFICE ENVIRONMENT

Thank you
Q
&
A
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Commercial Management in Construction Projects

Commercial Management in Construction projects and role of

www.aimsintlqs.com info@Aimsintlqs.com - Ramesh Palikila BTech, FIS, FAIQS, FRICS

Level 1 Level 2 Level 3

Introduction of effective Cost Value Reconciliation and

Overview of Earned Value

1.Introduction of effective commercial management in

Objectives of Commercial Management in Construction

Role of Commercial Manager

Special Skills of Commercial Manager

Why Commercial Management?

• Need for Effective Cost Control System

Role of Commercial Manager with

Role of Commercial Manager with

www.aimsintlqs.com © All Rights Reserved

Estimating and Establishing Budgets

Contractor’s Cost Elements

Estimates of regular items are common in

• Factors to be considered in Estimation

2.Need of cost control processes to achieve

Cost Management is Budget is money

Cost Plan reflects the

www.aimsintlqs.com © All Rights Reserved

Achieve suitably balanced cost through all parts of the building.

Detect the Cost Variance if any.

Record and Identify the cause for Cost Variance.

Take corrective action to ensure alignment of budget and actual cost.

www.aimsintlqs.com © All Rights Reserved

• Cost Plan is revised at each of the following stages:

• Pretender cost analysis enables effective decision making at Design Stage.

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• Cost management is • Cost control procedures are put

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Forecast Out-turn Cost or Cost At Completion

Employer’s Quantity Surveyor’s should ensure that Final

Contractor’s Quantity Surveyor should ensure that Actual

Cost Control Techniques:

• Budget Monitoring System

www.aimsintlqs.com © All Rights Reserved

Reporting Financial Progress

Why is it important to have financial reporting and control

▪ To monitor actual costs against budget

▪ Assist in commercial administration of contract

▪ Formal record of financial control procedures

3. Cost Value Reconciliation and practical

In Building and Civil Engineering Works, the preparation of

AFTER SUBMISSION OF MONTHLY VALUATION … WHAT NEXT ????

PROJECT IN PROFIT … PROJECT IN LOSS !!!!!!

• CVR is comparison of expenditure against income at regular interval generally on

• A CVR Report basically comprises of the following details in different sections:

• Based on the above project profitability is calculated.

www.aimsintlqs.com © All Rights Reserved

www.aimsintlqs.com © All Rights Reserved

4. Overview of Earned Value Analysis

• Generally monitored on weekly basis, based on Man-hours / Man-days.

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Earned Value Management (EVM) :

• The difference between Earned

• Cost Overrun or over budget

• The difference between Earned

• Project performance behind

• Project performance ahead

SPI - Cost • EV /PV