Cost forecasting: financial reporting

The format of the financial report for a project, and the contents, will depend on the method of procurement adopted and the form of contract. However, the basic principles outlined below will apply.

• The report should compare the latest forecast view of out-turn cost with the previously approved budget.
• The forecast out-turn cost should be derived from the base estimate, plus the risk allowance.
• The report should contain a change control log.
• Any future anticipated changes should be identified.
• The report should contain an updated risk register.
• Any claims or potential claims should be indicated.
• The report should give a commentary on the key areas of expenditure change since the previous report.
• If the report is indicating overspend, it should comment on the steps being taken to bring costs back in line with the budget.
• The report should provide a forecast payment profile.
• The report should comment on payments made to date.

These points are expanded below.

Out-turn cost

This is the sum total of all costs committed to date, plus an estimate of amounts as yet uncommitted but required to complete the project.

Change control

See also 'Change control and variations' for a more detailed description of the change control process.

A proper change control process ensures that changes are identified, costed and approved prior to issue. It ensures that authority is obtained for instructions issued and that full consideration is given in terms of value for money and impact before the change is made.

Changes could arise in a number of ways:

• through instructions of the project manager or architect;
• through drawing changes or design development;
• through site instruction or requests for information (RFIs);
• as a result of client changes; or
• through value engineering opportunities.

The change control log included in the financial report will describe all changes, allocate a cost to them and identify a funding source. The change could be funded from the risk allowance (see below), or from budget transfers, or from a source external to the project.

Anticipated changes

It is important that the financial report identifies anticipated changes that have not yet been the subject of formal change control processes. These can be picked up from a variety of sources, including progress meetings and through informal discussion with the contractor and the design team members.

Risk register

The risk allowance will have identified risks for the costs that could potentially occur over the life of the project, over and above the base cost.

This risk allowance should be managed through the project life - risk allowances should only be expended on the occurrence of the identified risk, and not simply used as a contingency. As a risk is expended, the associated cost will move from the risk allowance into the base estimated out-turn cost, and this will be recorded through the change control process.

A review of the remaining risk allowance on the overall financial report summary, when considered with the time period remaining on the project, will give a quick view of the financial health of the project.

If a risk occurs that has not been identified in the original register, or indeed if a risk overspends the allowance in the register, then both of these situations should be covered by change control.

Claims

The report should identify any claims for delay or disruption issued by the contractor, with their potential costs, and should also seek to identify the potential for such claims, in order to form an early warning mechanism. Such claims may be as a result of the client or design team failing in their contractual obligations.

Key areas of change

It is useful for a client reviewing a financial report to have a brief headline indication of the main changes since the last report, rather than being left to study and interpret the full report.

Actions to reduce overspend

If the project is in an overspend situation, it is important that the team is pro-active in finding solutions to the problem, and that the overspend is not simply presented as inevitable.

Value engineering opportunities should be examined by the whole team, and a schedule of opportunities produced, listing the potential areas of saving, together with a note of the likely impact of those changes on time, cost and quality. This will enable the client to make an informed decision on measures to reduce expenditure. Care should be taken to investigate thoroughly all the potential implications of change - the introduction of a change intended to make a saving, but which eventually introduces uncertainty, delay and disruption, will be unhelpful.

Any accepted value engineering opportunities should be introduced to the project using the change control process.

Cash flow forecast

Cash flow is important to all clients - particularly those with a large portfolio of construction projects to manage within a set annual financial budget. It is crucial, then, that the financial report gives a clear indication of when funds will be required, as well as the level of funding needed. Depending on the procurement and contract method, there may be an agreed cashflow with the contractor for the base cost when the project starts on site. The forecasting element will then be limited to anticipation of when the expenditure of risk monies is likely to occur. It might still be necessary to adjust the forecast, however, if delay events occur.

A graphic representation of anticipated cashflow against planned cashflow is a quick and useful guide to project progress.  

Payments made to date

The report should include a brief comment on valuation status. Information should be provided on the gross amount and retention monies on the current valuation, together with an indication of the percentage value of the contract sum to which this equates. Valuations will be recorded against anticipated expenditure in the cashflow section of the report.

See Valuations for more information.