When a contractor receives regular payments throughout the duration of the contract several financial benefits come on board. Such financial benefits are further discussed in the following paragraphs.
This type of payment allows the contractor to conduct their program in such a way that they ensure they obtain regular payments that can be forecasted easily (Quartel, 2012).
It also saves the contractor from the need for expensive measurement of the works in progress.
By simply monitoring cash flow, senior management and the other stakeholders will be able to see and monitor the project progress. This helps them to notice difficulties and challenges earlier (Iacob, 2012).
It offers a clear plan for rewarding work. Thus, becomes easy for the parties involved to clearly understand the relationship between payment and performance. This boosts confidence in the contract (Li, 2013).
The client will benefit tremendously as the contractor is encouraged to make progress by the regular payments.
Regular payments significantly lower the costs for contractors and consultants. This is because splitting the contract into many stages decreases the cost of the contract.
Finally, the cost of administration is significantly lowered by removing the valuations of unfixed materials or incomplete work as well as the aggregation of trade subcontractors claims by the main contractor (Zhang, 2012).
Importance of retention and reasons in which money is held back on behalf of the client.
Retention assures the owner of a project that the project that the contractor has signed and agreed to work on will be completed for the contractor to be paid for the job fully. This is because a retention agreement allows for a retention of between 5 to 10 percent of until the job is done as agreed (Song, 2010).
Similarly, the other huge benefit that comes with retention is the items on the punch list. A punch list is a list that contains the items that need fixing after the contractor completes the job. Retention allows for the full completion of the items appearing on the punch list, or the items’ list that will vary after project completion. This is important because it not only ensures the project completion but also checks on the quality of work (Brown, 2013).
Money of between 5 to 10% is held back on behalf of the client when the agreed project is not completed as agreed between the contractor and the owner, as well as when the items on the punch list are not completed by the contractor as the law requires (Gimpelevich, 2011).
It is performed by building a financial model in excel and needs an extensive amount of detail and analysis. It is usually the most detailed of the approaches, needs the most assumptions and often generates a high value. The effort needed for preparing a DCF model will result in a most accurate valuation (Mathews, 2011).
It is a relative method of valuation whereby you compare the current value of a business to other similar businesses by looking at trading multiples (Quartel, 2010).
Question 2.
|
Item. |
Break down |
Month 2 |
|
Prelims |
£ 247,500.00 |
10% |
|
Own work |
£1,700,000.00 |
20% |
|
Own Sub-con |
£ 293,000.00 |
15% |
|
Contingencies |
£ 60.000,00 |
20% |
|
Nom Sub-Con |
£ 695,000.00 |
25% |
|
Nom Suppliers |
£ 282,500.00 |
20% |
|
Day Works |
£ 32,000,00 |
Nil |
|
Contract value |
£ 247,500.00 |
Question 3.
Describe with aid of a flowchart the procedure obtaining a quote, commissioning suppliers and payment from sending out inquiries to paying suppliers.
Question 4.
You have purchased a standard JCB for £95,000. The borrowed funds will be paid back over a period of 7 years; interest will be calculated at 4% above base rate for a commercial loan per annum.
Analyze a form of depreciation that you would consider the best way in which to write the plant down after its expectant life.
We will use the straight-line method of calculating depreciation to write the plant down after its useful life.
Straight-line depreciation method is a method that gradually but steadily and uniformly reduces the value of a fixed asset throughout its expectant life. This method studies the consumption pattern of the asset in question and is to be used when there exists no specific pattern to the manner in which the asset is to be exhausted over time (Lankhorst, 2010).
Here the depreciation expense charged to the income statement in each of the given periods is equal, hence the carrying amount of the asset on the balance sheet records depreciates in a straight line (Alaeddini, 2013).
The straight line method of calculating depreciation the most commonly used method due to its nature of simplicity. Principles of accounting require firms to depreciate the fixed assets using a method that effectively reflects the patterns that the assets are being used and depreciated (Doloi, 2011).
The following outlined steps are the steps used to arrive at the depreciation value of a fixed asset using the straight-line method:
After calculation, record the depreciation expense on the records of accounting as a debit to the depreciation account but a credit to the accumulated depreciation account (Leger, 2013).
Prove all your results graphically along with any calculations you have arrived at.
Calculation of depreciation
Initial cost is £95000
Salvage value is £0
Expectant life is 7 years
Depreciable asset cost = initial cost – salvage value
£95000- £0
=£95000
Depreciation rate per annum = 1/7×100%
14.286%
Annual depreciation = depreciable asset value × depreciation rate
= £95000 × 14.286%
= £13571.43
|
Time (years) |
Depreciation (£) |
Future value (£) |
|
0 |
95000 |
|
|
1 |
13571.43 |
81428.57 |
|
2 |
13571.43 |
67857.14 |
|
3 |
13571.43 |
54285.71 |
|
4 |
13571.43 |
40714.28 |
|
5 |
13571.43 |
27142.85 |
|
6 |
13571.43 |
13571.43 |
|
7 |
13571.43 |
0 |
Reducing balance method.
This method of depreciation computation in its entirety depends on a fixed percentage of the book value of the fixed asset as reduced by the previous conditions and provisions. It tends to show a fairly uniform charge against income yearly. From a different point of view, depreciation of the fixed assets being investigated is heavier in the early stages with repairs and maintenance being the lightest in the same period (KUANG, 2010). On the other hand, in the closing periods, the depreciation of the fixed assets is lightest while the repairs and maintenance are heaviest in the same closing periods of the assets useful life (Jianhua, 2012).
Initial cost is £95000
Salvage value is £0
Expectant life is 7 years
Depreciable asset cost = initial cost – salvage value
£95000- £0
=£95000
The depreciation rate of 14.286% is to be written off.
Initial cost £95000
1st year: less depreciation at 14.286% 13571.7
£81428.3
2nd year: less depreciation at 14.286% 11632.85
£69795.45
3rd year: less depreciation at 14.286% 9970.98
£59824.47
4th year: less depreciation at 14.286% 8546.52
£51277.95
5th year: less depreciation at 14.286% 7325.57
£43952.38
Thereafter, regardless of the method used, the ledger values are debited to the depreciation account, and in due course, the balance is taken to the profit and loss account. The asset account and the provision for depreciation are credited (Kongling, 2010). However, it is preferable to ignore the former and credit the latter since the balance sheet of a limited company is needed to exhibit the fixed assets at costs less the aggregate amount available for depreciation. The parties involved such as the shareholders of a company, can argue basing their opinions on the data given on the balance sheet concerning the adequacy of the provisions for depreciation. In the event that the value of depreciation is credited to the asset account, the asset cost is reduced annually until it varnishes, and the consequence is that the initial cost is obscured (Fei, 2011).
PQQ is known as a prequalification questionnaire, a document that provides a series of questions for the potential tenderers concerning their levels of experience, financial ability, and their general capacity. The answers to the above questions enable the client to write a short list of suppliers who qualify for the project in question, after which the shortlisted individuals may be invited for tender. As discussed below are the importance of the information recorded in the PQQ (Tsikalakis, 2011).
Using a PQQ enables the client to minimize the amount of evaluation work required. This is due to the fact that a PQQ gives a more detailed information that other methods would not offer. In addition, a more qualitative evaluation work is achieved in spite of the fact that the amount of the work is reduced (Baldwin, 2010).
It allows small and medium enterprises to apply for tenders, but take most of their time only on a promising tender if they qualify and stand a high chance of winning. This is very beneficial to the SMEs since they don’t have resources as bigger companies, thus preparing tenders for them will cost them a lot of money and time (Mach, 2011).
While the PQQ is an extra step on the staircase and may seem to elongate the time between the advertisement and the award of the tender, on the contrary, it can remarkably speed up the whole tendering process. It does so by using the PQQ to find out who goes through the next stage of tendering (Powell, 2012). In addition, it spreads out the time and commitment from the evaluators (Zhang, 2015).
Similarly, the information in the PQQ helps to sort great contractors from the good. This means that the client is able to choose the best contractors and suppliers in the business.
Finally, the information in the PQQ can be used to defend the decisions that were made during the early stages of the tendering. The tenderers are told at an earlier stage whether they qualify for tendering or not. Thus allowing time for changes made to be communicated before the award of the contract (Manganelli, 2013).
Competitive pricing
One benefit of negotiated tendering is that it gives the contractor the ability to manage risks for you by eliminating and prequalifying bidders and subcontractors and suppliers before the bids are accepted. In the end the owner benefits in both ways through driving competitive pricing and while minimizing risks and maximizing quality.
Going with the traditional hard bid method one would get less informed as opposed to a negotiated tendering process. A negotiated tendering allows one to be involved in the process from the beginning to the end, engaging team members and telling more about the project. The owner will get to know much about how money is spent on the project and the value being received from the project (Zongyu, 2010).
Value.
A negotiated tendering allows the owner to tell the contractors, the subcontractors and the whole team involved in the construction project what is valuable to him/her from the onset. This in entirety will inspire and enlighten the team to offer the client the best value from the beginning to the end.
Transparency.
A negotiated tendering helps build a trust-based relationship between the project team and the client. This is because one gets to see how the money is being spent on detailed transaction documents showing where all the money is going. Apart from monitoring the expenses during the construction process, there is transparency in the preconstruction stage as well, which allows the client to view and make a decision on where the money will be spent be the commencement of the construction phase (Galinato, 2014).
Fewer changes.
An easier way to reduce changes during the construction is to engage the construction crew earlier in the design stage way before the construction phase. The contractor can preview and review the designs for possible errors before time, thereby minimizing the errors that would occur during construction. Fewer changes translate to significant saves on the project cost.
Improved quality.
A negotiated tendering process enables the construction crew to control quality from the design stage up to the construction stage. The owner benefits as the contractors provide input to the best of their ability. This partnership kind of work also puts the lives of the contractors on the line and no contractor would want to do a poor job as this would cost them their reputations and make them lose contracts. In the long run the client benefits (Pereira, 2010).
Shorter schedules.
Another major element of any project is the schedule. Managing it is better if done earlier during the design stage. Engaging the contractors in this initial tendering process allows them to fast-track the project and sooner commence the project. Using the negotiated tendering gives the project crew ample time to plan for constructions procedures, analyze the cost-effective methods and identify any potential; disruptions to the operations and deal with them, accordingly.
Choice
Negotiated tendering enables one to choose whom to work with based on the qualifications and competitiveness rather than strictly depending alone as with the case of a hard bid approach. Besides choosing the firm to operate with you get right to interview and meet the people from various firms who will be working on the project. This is significant due to the fact that while the organization strength is of value, in this business, it is the peoples’ knowledge, experience, commitment to serving and the skill that make a difference.
Cost savings begin on the onset of the project preliminaries when the critical design steps are developed. Negotiated tendering allows the project crew to maximize value by bringing cost input into the design steps. Also, it allows early purchasing of the required major equipment by locking in cheaper prices. In addition, under a negotiated tendering format, any savings are returned based on the negotiations of the contract, unlike in the hard bid approach where the contractor remains with 100% of the savings.
Partnership.
In this type of tendering the contractor is always part of the team hence will always look for ways to increase value to the project. Here the objectives and the roles of the architect, owner, and the contractor are earlier aligned with the process.
Tender price = initial price + general overheads + running costs
Initial price £5000000
General overheads + running costs £2935900
Thus, tender price = £7935900
Mark-up cost is given by the sum of the following:
Mark-up cost = profit + contingency + general overheads + allowance for risks
Profit
Contingency
General overheads
Allowance for risks
Total = £42205000
Percentage mark-up = 7935900/42205000
=0.19×100
=19%
Product flow efficiency, as well as the material flow efficiency, is crucial within any organization. This is indicated by a factor known as the time-to-consumer. A more efficient product flow is guaranteed by less time taken by goods to reach the final consumer. Nevertheless, there are several other factors to consider. Those factors include inventories, demand and supply balance, shipment options and costs and quality of the materials.
An effective and efficient supply chain management system allows companies and organizations to improve the flow of materials and also improve inventory management to contain the bullwhip effect.
Enhanced flow of finances.
The financial inflows and outflows within a company are usually variable and unpredictable hence increasing the complexity of the already complex financial flow of the supply chain. This challenge along with other financial flow challenges reduces the efficiency of operations of a company.
Fortunately, by employing the services of a stringent supply chain management policy, a company or companies are able to curb these financial flow challenges, helping them to keenly assess their current procedures and processes, find out the weak links that limit the speed of financial flow, and determine the remedies for the problems.
Competitive edge
A company with stringent supply chain management policy is capable of fighting its competitors and become the leader in the field. This is because a stringent supply chain provides a number of financial advantages and a more strict compliance (Simao, 2013).
Quality control
Stringent supply chain policy helps in ensuring quality. This is because it becomes immensely hard to approve and allow faulty raw materials or products. There is only one authority responsible for the whole processes as this reduces confusion.
Controlled costs
Having a stringent supply chain management policy, a firm basically restricting frills and removing procedures that would otherwise delay the process thus incurring needless and unnecessary costs. In the long run, it reduces costs, more so transactional costs which are inevitable among suppliers, partners, and subsidiaries.
Increased revenue.
Stringent supply chain management policy allows a firm to concentrate and focus on assets that allow the firm to get more profits. This is because there are always sections of a firm that has a more notable Impact on the operating profits and revenues and therefore must be optimized and prioritized as much as possible.
Seamless flow of information
An effective supply chain management requires alongside the integration of material flow, the integration of information flow within the supply chain. In today’s world, customers constantly demand faster response and quick access to supply chain content, therefore flow of information should one that is smooth and uninterrupted. This is because interrupted and insufficient or intermittent flow of information due to a fragmented supply chain can cost the company huge losses.
A seamless and effective flow of information reduces the problems of miscommunication and distortion of information and enhances collaboration and promotes relationship value amongst the stakeholders of the supply chain. It also improves transparency and visibility into all the transactions (Zong-yu, 2010).
Expansion of sourcing opportunities.
A more stringent supply chain management policy makes it possible to handle a diverse selection of materials, workers, and products. Owing to the fact that the operations are seamless and faster hence giving room to address a big volume of the supply chain stakeholders. In the long run, this wider selection field of view offers an opportunity to find higher-quality and lower-cost options.
Having a more diverse source of materials and workers gives the company the benefit of easier expansion of the business. This is due to the fact that the company is able to produce and offer more very fast (Kristianto, 2015).
Opportunities to reach new customers
By facilitating a more diverse economy and improving the speed of operations in a company, a stringent supply chain management policy facilitates an access to more customers and more markets. This, in turn, translates into increased profits for the company.
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