Andrew Ross, BSc(Hons) MSc PhD MRICS MCIOB, Head of postgraduate programmes, School of the Built environment, Liverpool John Moores University. Andrew is a chartered quantity surveyor and chartered builder, after graduation he worked as a commercial manager for Balfour Beatty Building and financially managed projects ranging from refurbishment, adaptation of industrial facilities, health care and new build industrial building. He joined Liverpool John Moores University and has an MSc in Information Technology and a PhD in Construction Economics. He has published over 100 journal and conference papers on construction economics and procurement and is the joint author of three text books, Building Design Cost Management, Construction UK and Financial Management for Construction contracting. His current position at LJMU is head of post graduate programmes and he teaches construction project financial management to undergraduate and post graduate students. He has successfully supervised many PhD students and has been an external examiner to numerous UK and overseas Universities for undergraduate, postgraduate and research degree courses.

Peter Williams is a Consultant and Lecturer with extensive practical experience in building, civil engineering and surveying. Formerly a chartered builder, chartered quantity surveyor and principal lecturer, he is now a writer, researcher, lecturer and consultant with particular interests in contracts and finance, delay analysis and health and safety management.

About the Authors xvii

Preface xviii

1 Finance in the construction industry 1

1.1 Introduction 1

1.2 The purpose of this book 2

1.3 Construction contracting 3

1.4 Work in progress 3

1.5 Reporting 4

1.6 Structure of the book 5

1.7 The construction industry 6

1.7.1 Industry reports 6

1.7.2 Industry reform: origins and responses 7

1.7.3 Housing Grants, Construction and Regeneration Act 1996 9

1.8 Industry output 12

1.9 Industry clients 15

1.9.1 Clients for small buildings 16

1.9.2 Major clients developing for their own occupation 16

1.9.3 Property developers 17

1.9.4 Private house buyers 17

1.10 Structure of the industry 17

1.10.1 Size and distribution of firms 17

1.10.2 Risk culture 19

1.10.3 Specialist contractors 20

1.10.4 Payment processes 21

References 22

2 Stakeholders and the regulatory environment 23

2.1 Accounting 24

2.1.1 Accounting reference period 24

2.1.2 Accounting reference date 24

2.1.3 Statutory compliance 24

2.1.4 Annual accounts 25

2.1.5 Audit procedures 26

2.2 The Companies Acts 26

2.3 Accounting standards 26

2.4 UK accounting standards 27

2.4.1 SSAP9 27

2.5 International accounting standards 28

2.6 Financial reporting 28

2.7 Financial reports 29

2.7.1 Management reports 30

2.7.2 Lenders and banking covenants 31

2.7.3 HMRC reports 33

2.7.4 VAT returns 33

2.7.5 Companies House 35

2.8 Annual accounts 35

2.8.1 Operating statement 36

2.8.2 Directors' report 36

2.8.3 Profit and loss account 37

2.8.4 Balance sheet 37

2.8.5 Movement of funds statement 39

2.8.6 Auditors' report 39

2.8.7 Notes to the accounts 41

2.8.8 Group accounts 41

References 41

3 Risk and uncertainty 42

3.1 Definitions 43

3.2 Risk and reward 45

3.2.1 Risk 46

3.2.2 Reward 47

3.3 Corporate governance 48

3.3.1 Definition 48

3.3.2 The Cadbury Report 48

3.3.3 The Financial Reporting Council 48

3.3.4 The Companies Acts 48

3.3.5 The Turnbull Report 49

3.4 Market risk 49

3.4.1 Definition 49

3.4.2 Market risk factors 49

3.4.3 Governance 50

3.5 Working capital 50

3.5.1 Sources of working capital 50

3.5.2 The annual accounts 51

3.5.3 Loan capital 51

3.5.4 Risk capital 54

3.5.5 Overdrafts 55

3.5.6 Trade credit 55

3.5.7 PAYE, NIC and VAT 55

3.5.8 Capital gearing 56

3.5.9 Working capital ratios 56

3.5.10 Liquidity 57

3.5.11 Cash flow 57

3.6 Competition 58

3.6.1 Definition 58

3.6.2 Procurement 58

3.6.3 Subcontractors 58

3.7 Profitability 59

3.7.1 Definitions 59

3.7.2 Income gearing 59

3.8 Work in progress 60

3.8.1 Payment in arrears 61

3.8.2 Valuations and payments 62

3.9 Insolvency risk 62

3.9.1 Industry structure 63

3.9.2 Sole traders 63

3.9.3 Limited liability 63

3.9.4 Large firms 64

3.10 Instability 64

3.10.1 Living with instability 65

3.10.2 Indicators of instability 66

3.10.3 Multiple discriminant analysis 66

3.11 Credit control 67

3.11.1 Debtor days 68

3.11.2 Creditor days 68

References 68

4 Contracts and documentation 70

4.1 Types of contract 70

4.1.1 Form of tender 71

4.1.2 Lump sum contracts 71

4.1.3 Measure and value contracts 73

4.1.4 Cost reimbursement contracts 73

4.2 Financial implications of contracts 75

4.2.1 Lump sum contracts 75

4.2.2 Measure and value contracts 76

4.2.3 Cost reimbursement contracts 77

4.3 Project documentation 78

4.3.1 Definitions 78

4.3.2 Priority of documents 79

4.3.3 Drawings 79

4.3.4 Specification 80

4.3.5 Bills of quantities 82

4.3.6 Schedule of rates 84

4.3.7 Schedule of works 85

References 86

5 Payments in construction 88

5.1 Industry credit system 89

5.1.1 Labour and wages 89

5.1.2 Materials 90

5.1.3 Subcontractors 90

5.1.4 Plant hire 91

5.1.5 Credit terms 91

5.1.6 Discounts 92

5.2 Payment problems 93

5.2.1 Trust and money 94

5.2.2 The Construction Act 1996 95

5.2.3 The Construction Act - scope and application 95

5.3 The scheme for construction contracts 96

5.4 Payment under the Construction Act 96

5.4.1 Payment period 96

5.4.2 Periodic payments 97

5.5 Payment notification under the Construction Act 97

5.5.1 Contractual provisions 97

5.5.2 Payment notice 98

5.5.3 Default payment notice 98

5.5.4 Withholding (or pay-less) notice 98

5.6 Conditional payments 99

5.6.1 Pay-when-paid 99

5.6.2 Pay-when-certified 100

5.6.3 Pay-when-notified 100

5.7 Late payments 100

5.7.1 Legislation 100

5.7.2 Interest 101

5.8 Suspension of performance 101

5.9 Adjudication 102

5.10 Value Added Tax 103

5.10.1 VAT in construction 103

5.10.2 How VAT works 103

References 104

6 Managing the supply chain 105

6.1 Supply chain management 106

6.1.1 Definitions 106

6.1.2 Integrated supply chains 106

6.1.3 Managing cost and profit 107

6.1.4 Practical applications 107

6.1.5 Context 108

6.2 Subcontractors 108

6.2.1 The growth of subcontracting 108

6.2.2 Types of subcontractors 109

6.2.3 Construction Industry Scheme 110

6.2.4 Trade and other references 111

6.2.5 Bonds 111

6.3 Subcontract tenders 112

6.3.1 The decision to sublet 112

6.3.2 Tender enquiries/send outs 112

6.3.3 Scoping of work packages 113

6.3.4 Subcontractor selection 114

6.3.5 Pre-subcontract stage 114

6.4 Subcontract stage 115

6.4.1 Placing the subcontract 115

6.4.2 'Battle of the forms' 116

6.4.3 The discount 'spiral' 116

6.4.4 Partnering 117

6.5 Payment 118

6.5.1 Terms of payment 118

6.5.2 Retention and defects correction 118

6.5.3 Valuations and applications for payment 119

6.5.4 Liabilities, claims and accruals 120

References 121

7 Getting work 122

7.1 Business development 122

7.2 Decision to tender 124

7.3 Competitive tendering 129

7.4 Tender lists 130

7.4.1 Open competition 131

7.4.2 Frameworks and approved lists 131

7.4.3

Ad hoc

list 132

7.5 E-bidding and reverse auctions 134

7.5.1 Auctions 134

7.5.2 Online and reverse auctions 134

7.5.3 The process 135

7.5.4 Advantages 135

7.5.5 Disadvantages 135

References 135

8 Corporate governance and management 136

8.1 Definitions 137

8.1.1 Corporate Governance 137

8.1.2 Management 137

8.1.3 Directors 137

8.2 The UK Corporate Governance Code 138

8.2.1 Application 138

8.2.2 Principles 139

8.2.3 Other approaches to governance 139

8.2.4 Corporate governance and contracts 140

8.3 Turnover 140

8.3.1 Definition 140

8.3.2 Calculating turnover 140

8.3.3 Work in progress 141

8.3.4 Cost of turnover 142

8.4 Profit 142

8.4.1 Definition 142

8.4.2 Corporate profit 143

8.4.3 Project profit 144

8.4.4 Profit distribution 144

8.5 Long-term contracts 145

8.6 Management accounts 145

8.6.1 Control 145

8.6.2 Cost value reconciliation 146

8.7 Accounting for contracts 147

8.7.1 The role of directors 147

8.7.2 Work in progress 148

8.7.3 Short-term contracts 149

8.7.4 Long-term contracts 149

8.7.5 Worked examples 150

Reference 152

9 Company structure 153

9.1 Management functions 153

9.1.1 Principles 154

9.1.2 Estimating and tendering 155

9.1.3 Purchasing 156

9.1.4 Production 157

9.1.5 Quantity surveying 157

9.1.6 Supply chain management 158

9.1.7 Accounting 159

9.2 Organisation structures 159

9.2.1 Structure 160

9.2.2 SMEs 163

9.2.3 Large firms 163

9.2.4 Very large firms 163

10 Service departments 165

10.1 Estimating and tendering 166

10.1.1 Preparing the estimate 168

10.1.2 Tender enquires 169

10.1.3 Preliminaries 171

10.1.4 Employer's requirements 172

10.1.5 Contractor's requirements 172

10.1.6 Measured items 175

10.1.7 Attendances and profit associated with domestic

subcontract works 175

10.2 Tender submission 176

10.2.1 Tender margin 176

10.2.2 Design risks 177

10.2.3 Construction risks/opportunities 177

10.2.4 Tender committee 177

10.2.5 Final adjustments 178

10.2.6 Qualification 178

10.2.7 Production of allowance bill 178

10.3 Planning 179

10.4 Buying 179

10.5 Accounting, costs and information 179

10.5.1 Definitions of costs 180

10.5.2 Timing of cost information flows and reporting 181

10.6 Company management accounting systems 181

10.6.1 Company information systems 181

10.6.2 Contract operational ledger 184

10.7 Contract cost reports 190

10.7.1 Principle of cost cut off 190

10.7.2 Direct costs and accruals 190

10.7.3 Cumulative and period reporting 194

10.7.4 Cost provisions 194

10.7.5 Individuals involved 196

10.8 Project audits and site processes 196

References 197

11 Financial...