Commercial Management of Projects, Procurement and Contracting - Assignment Example

Business Intelligence Name: Course: Tutor: Institution: City and State: Date: Financial Management Question 1 The costs featured in the projects accounts reflect the overall costs incurred in running the project from its conception to termination. Project costs include labour costs in form of wages and salaries, materials costs, overhead expenses, among other undertakings that consume the project’s finances (PMI 2008 p.407). In the case of Resortlife, the following are the major costs that require stating: Item Amount Assumption Labour costs Project manager Project team Engineer 130800 32700 8800 The project manager assigned a daily rate as a compensation scheme for a period of 109 days. The assumption here is that the project manager performs a standard job on these days and that he offers services for only the budgeted days. The assumption here is that the services of the manager are worth a standard value regardless of the amount of work performed on various days. Overtime payment adjustments assume a similar apportionment of wages as the standard hour rates. Materials and other costs Soil investigation Supply of PCC M25 Supply of Fe500 steel Supply of RCC 285000 286000 7268000 7551580 These include the costs of all the materials necessary for the execution of the projects. The assumption is that the delivery of all the units listed occurred and in good condition hence, no defects or returns made. Interest on bank loan 191562 This appears as a sum of the installments paid in regard to the bank loan. The assumption here is that the payments were made during the financial year and that none of the payments represented accruals or prepayments. The assumption in this case is that there is no change in the interest rate, which may necessitate the adjustment of the interest amounts upwards or downwards. Shuttering 81400 Delivered and paid during the financial year hence they indicate costs for the current financial year PVC conduit placing 57900 Completion of the paid work to be conducted by the end of the year and therefore the costs reflect project costs for the current year Curing 38000 Completion to be made by the end of the year Steering committee travel expenses 21000 Incurred during the year hence form part of the costs for the year Steering committee salary equivalent 16667 Incurred within the current financial year hence the inclusion Transport and accommodation 6400 We assume that Resortlife caters for the transport and accommodation costs incurred in the course of conducting official business. It therefore absorbs costs incurred by the entrepreneur after flying from Fiji. Shipping costs 3500 The project caters for the shipping of materials ordered from another country. The costs were incurred during the year hence they require inclusion in the current year’s accounts Custom-made glazed tiles 230000 The transaction is completed within the financial year so that the payment is not deemed an accrual but cost incurred during the financial year Architect fees 90000 The recorded figured includes the payments made within the year and if any amount remains unsettled, it appears on record as accruals that were paid during the following financial year Environmental study costs 207000 The study was for the benefit of the project execution hence the costs form part of the overall project costs. The payment was made during the current financial year hence the inclusion as part for the project costs Drainage costs 350000 The activity is necessary for the performance of the project hence the inclusion in the project’s overall costs. It is important to record the overall drainage costs to indicate the remaining work for completion within the following financial period. The balance of (350000-120000) is also indicated for further calculations Work completed 120000 This is the value of the portion of work completed at the end of the financial year which forms a proportion of the overall work hence the remaining work for the following year can be determined Question 2 Cash flow relates to the movement of cash and cash equivalents into and out of the business because of transactions that the firm undertakes. Cash inflows are the activities that generate income while cash outflows lead to the flow of cash from the account. These transactions affect the liquidity position of the business since they determine it capacity to meet its current liabilities (PMI 2008 pp.408). Liquidity problems may hinder the business from undertaking crucial activities for its execution such as acquisition of raw materials and payment of labour. The actual construction commenced on 8 April, which marks the beginning of the execution phase of the Resortlife project. In May, the project receives funds in form of loans and internal funds that increase the cash flow of the project (PMI 2008 p.407). The project makes a payment of an interest rate installment of 10521 in May and another in June of 72329. Payment of interest rates reduces the projects cash flow since it uses funds to make these payments. Payment of the earth moving contractors economically reduces the costs incurred during construction but reduce the cash flow (PMI 2008 p.410). The contractors offer reduced fees if payment is made within 29 days, which translates into discounts. Despite the attractive offer, making any payment to them within the stipulated period reduces the cash flow of the project. Making payments for the custom-made glazed tiles in advance has an implication on the cash flow by reducing it unnecessarily. The payment is made 6 months in advance for tiles only required in the future at the final stages of the construction project for the pool area. The prepayment hence makes unnecessary reduction in the cash flow, which is possible to avoid through credit payments (PMI 2008 p.407). Payment of the 3500 shipping costs for the tiles also reduces the cash flow. If project funds cater for the 6400 transport and accommodation costs incurred by the entrepreneur from Fiji on benchmarking agenda, it will reduce the cash flow of the project. The deposit of 90000 paid as part of the director’s fees reduced the cash flow too. However, the amount due does not affect the cash flow until the making of actual payments (PMI 2008 p.408). The payment made in august affect the cash flow at that period and the following months. Payment of salaries and wages takes place at the last working day of every month hence took place in the month of April, May, and June further reducing the liquidity position of the project account. Paying salaries reduces the balance of the cash and bank account maintained by the project (PMI 2008 p.409). There exists a system where overtime hours have a higher pay of 1.25 times. The more the overtime hours worked, the more the amount withdrawn from the account for the payment of wages. The amount of wages therefore varies with the number of hours worked as well as the number of workers and employees. Drainage costs expected amounted to 350000 for the 1.5 hectares of land for ensuring safety for the construction project. This is the overall cost of the drainage improvement but the disbursement of payments takes place during various times of the year. As at 30 June, a portion of the contracted company has completed a portion of the work valued at 120000. Making payment to this regard further lowers the liquidity position of the project by reducing its bank balance (PMI 2008 p.407). Procurement and Contracting Question 1 Work packaging involves the breakdown of a complex project into subset projects for easier project execution. Subcontractors specialize in various fields hence enable the execution of various work packages to the required standards (Walker & Hampson 2003 pp.15). The major work packages that may require subcontracting in a foreign country include: Civil engineering work package- this involves the design, construction, and maintenance of the physical and built environment. Subcontracting a civil engineer enables the access to professional services necessary for the design and implementation of the construction project. Their expertise in the area will facilitate the delivery of a high quality product and their knowledge of the local area is an added advantage in the assessment of the project as well as the surrounding built environment (Walker & Hampson 2003 pp.21). Metalwork and balustrades work package- this involves the acquisition of high quality metals and balustrades since the execution of a stadium construction project requires a lot of them. Local subcontractors are familiar with the quality and prices of materials available in the local area, which would reduce the costs associated with defects (Walker & Hampson 2003 pp.22). Mechanical and electrical installations work package- this involves the installation of electrical cables and other equipment necessary in the course of the project execution. The subcontractor has expertise on the mechanical and electrical installation required in a complex project like the construction of a stadium (Walker & Hampson 2003 pp.22). The project requires a very high level of expertise offered by subcontractors who specialize in various fields. Question 2 A traditional construction procurement route will enable the effective engagement of subcontractors in the project execution (Walker & Hampson 2003 pp.26). This strategy involves the detailed design of the project by consultants and the preparation of relevant tender documentation. The tender documents include work schedules, bills of quantities, and drawings that form the basis of a contractual relationship between the client, contractor, and subcontractors. The contractors receive invitation to tender on various requirements of the project. The client enters into a contract directly with the contractors who subsequently make invitations to tender to potential subcontractors. The award of tenders occurs on a competitive basis meaning the contractor and subcontractors with the most competitive prices acquire the tenders. The client takes up the responsibility of designing the project activities unless special circumstances exist. The design consultants therefore come up with the detailed design of the project and the contractors and subcontractors simply adopt the work assigned to them. Development of the design in detail before the tendering process assures the client of the quality and the cost of executing the project. Construction in the modern world has become immensely specialized hence the rising need to hire subcontractors to perform specialized activities. Despite their expertise, the contractors must make an informed choice in awarding tenders to them. In a traditional procurement strategy, the contractor issues out tenders for various work packages. These work packages are subset projects involving a set of specialized activities requiring the expertise of a professional. In selective tendering, the contractor identifies potential subcontractors with a reputation of high quality services. They then invite them to tender on a competitive basis to motivate the subcontractors to adjust their prices downwards. This enables the project obtain the least priced services while ensuring high level of quality. The competitive nature of the tendering process also enables the exploration of all the available options in terms of services by encouraging participation of interested parties (Walker & Hampson 2003 pp.26). The traditional construction procurement strategy involves the design of contracts between the contractors and subcontractors, which begins with the invitation to tender. The contractors handle the design of contracts for the subcontractors and invite certain potential candidates to compete for the positions. The contractor- subcontractor relationship translates into the cooperation of both parties in performance of key activities. The subcontractor works under the contractor and receives directions on the specific work requiring execution. This begins with the design of various work packages and the contracts designed specify these special circumstances. Question 3 A tender refers to a submission by a prospective supplier of goods or services following an invitation to tender (Walker & Hampson 2003 pp.24). The contractor invites potential subcontractors to tender for the available work packages in form of selective tendering. The identification of potential sub-contractors precedes the invitation since only invited parties can participate in the process. Upon invitation, the subcontractors review the work packages to identify the potential opportunities for which they can exploit. Subcontractors perform specialized activities hence there is a high chance that they can potentially qualify for few of those opportunities. Despite their high level of expertise, they need to compete for the opportunities by proving superiority of their services. The award of tenders relies on the prices, quality, delivery period as well as the capacity to undertake the activities at hand. These are the point of evaluation for the submitted tenders to determine the most viable offer (Walker & Hampson 2003 pp.24). The contractor will definitely prefer lower quoted prices to higher ones, which aims at minimizing the operational costs. In commercial management of a project, the concept of maximizing returns while minimizing costs must guide the award of tenders. The subcontractor offering low prices therefore stand a higher chance of selection and vice versa. However, extremely low prices raise the question of quality and reliability since standard quality has a certain price across the industry. The competitive nature of the award of tenders helps in the acquisition of the best possible prices, and quality in the industry. The subcontractors are forced to review their prices to gain a competitive advantage, which works in favor of the hirer. After the identification of the most competitive subcontractors, the contractor offers them the contracts to act as a guide to their job description. The contract outlines the duties of the subcontractor by outlining the work package in detail (Walker & Hampson 2003 pp.25). This eliminates the possibility of confusion during the execution of the contractual duties. The contract also highlights the performance measure in place to grade the quality of the subcontractor’s work, which acts as a tool of measuring the performance. It also includes the terms and conditions of the work relationship to regulate the subcontractors and hold them accountable in the event that they fail to fulfill their obligations. The contract records the quoted prices to avoid future misunderstandings and eliminate room for adjustments. The maintenance of a good contractor-subcontractor relationship is the key to a successful execution process. This is due to the nature of the project activities that require different talents provided by subcontractors. Coordination of efforts between the subcontractors also helps in the standardization of efforts across the board. Question 4 Performance metrics measure the performance of the projects against predetermined standards. They measure the health status of the project against the metrics of time, cost, quality, safety, scope, actions, and resources. Generally, the performance of a project depends on the client’s requirements and expectations of the project (Walker & Hampson 2003 pp.17). Clients have varying opinions and the expectations of one may differ from another. The first step therefore begins with the determination of the client’s expectations of various segments of the project, for instance, the size of the stadium, electrical installation, and placement of various amenities. This provides a checklist against which various activities compare to determine the quality of services. The conformance to the client’s requirements is the definition of quality since the client acts as the final determinant of satisfaction. Obtaining a checklist is the first step, which should take place at the initial stages of planning for the project, from the conceptualization to the completion of the project. Therefore, every work schedule designed must incorporate these requirements as a yardstick of measuring progress and performance. After the completion of the tender process, the subcontractors must acquire information on these requirements before the commencement of their work. This helps in guiding the subcontractor from the initial steps of their activities to the end. A project operates within various constraints of time, cost, and resources, among others. This means that the effective execution of a project depends on the ability to work with these constraints to deliver the best possible results. The contract performance therefore includes a period within which the subcontractor must complete their work. Performance of the work therefore depends on the ability of the subcontractor to finish the assigned duties within the stipulated time. The most desirable position in the execution of a project is the completion of all activities within the anticipated time (Walker & Hampson 2003 pp.19). This is because projects exist for certain purposes that are time specific. For instance, the football stadium may require holding the world cup games within 4 years. The project must therefore realize its completion within the 4 years and it relies on the ability of various team players to complete their duties within allocated time. Resources are another major constraint that could determine the performance of the subcontractor’s work. The economic view suggests that there exists a scarcity of resources across the economy and therefore everyone must exercise careful choice of the required resources. The ability of a subcontractor to minimize wastage of resources provided and the proper utilization of available resources determine the level of performance (Walker & Hampson 2003 pp.26). Making the most use of available resources indicates efficiency in the performance of work. Other performance metrics include cost and safety of the execution of work. The project has a certain level of anticipated costs apportioned to its various activities. The subcontractors must therefore operate within the acceptable costs to avoid causing cash flow problems for the project. Safety also acts as a yardstick to measure performance of work for technical job descriptions. This refers to the safety of use of installed equipment for the users and conformance to set safety standards. Involvement of the client in the work performance of the subcontractors ensures coordination of efforts towards the achievement of the client’s requirements. Project monitoring and evaluation is a useful tool in ensuring the client’s participation and visibility of the work progress. This offers a record of the work performed to date for which the client can assess against his expectations (Walker & Hampson 2003 pp.24). The subcontractors must therefore maintain a record of work performed to act as evidence of performance as well as offer necessary information for evaluation purposes. The client may perform periodic evaluation of the progress to determine areas of weaknesses that require fixing. The Millennium Stadium construction team incorporated made use of cost effective procurement strategies to minimize costs in the installation process allocated to subcontractors (Walker & Hampson 2003 pp.26). Safety was a major performance metric used in the process by ensuring every bit of the installation process realized the set safety standards. They conducted safety assessment of the installation and set up fire and security measures. This offers a comprehensive guideline to the construction of other stadia across the globe through offering crucial lessons on the coordination of efforts, proper management of subcontractors, as well as the quality delivery of services. References PMI (2008), A Guide to the Project Management Body of Knowledge, 4th edn. Project Management Institute, Newtown Square, PA. Walker, D. & Hampson, K. (Eds.). (2003). Procurement systems and structures, in Walker, D. & Hampson, K. (Eds.), Procurement Strategies: A Relationship-based Approach, Blackwell, UK, 11-29. Read More