Open book accounting - Revision history

Designing Buildings at 08:39, 22 September 2020

2020-09-22T08:39:11Z

← Older revision		Revision as of 08:39, 22 September 2020
Line 46:		Line 46:
	Although open-book accounting is about actual costs, very often a target price is set on the basis of a shared risk formula. In effect the client and contractor share any gain by notional savings of actual costs against the target, or any pain through notional losses. The formula is normally set as a stick or carrot against fees or profit. There are usually cut off levels, so for example, a sliding formula set at a 3% base fee for the target price might be capped at 4.5% as a maximum and 1.5% as a minimum. The target price will include allowances for contingency and inflation. It will be subject to adjustment if the client introduces variations to the base scheme against which the target price was agreed, providing the variation is deemed to have a significant effect on actual cost. The advantage of a target-cost arrangement is that it incentivises the contractor to build within the budget and achieve savings whenever possible. Some fee is guaranteed and the reimbursement of cost removes the element of contractor risk that so often leads to adversarial relationships.		Although open-book accounting is about actual costs, very often a target price is set on the basis of a shared risk formula. In effect the client and contractor share any gain by notional savings of actual costs against the target, or any pain through notional losses. The formula is normally set as a stick or carrot against fees or profit. There are usually cut off levels, so for example, a sliding formula set at a 3% base fee for the target price might be capped at 4.5% as a maximum and 1.5% as a minimum. The target price will include allowances for contingency and inflation. It will be subject to adjustment if the client introduces variations to the base scheme against which the target price was agreed, providing the variation is deemed to have a significant effect on actual cost. The advantage of a target-cost arrangement is that it incentivises the contractor to build within the budget and achieve savings whenever possible. Some fee is guaranteed and the reimbursement of cost removes the element of contractor risk that so often leads to adversarial relationships.

−	~~= Find out more =~~	+	= Related articles on Designing Buildings Wiki =
−		+
−	=== Related articles on Designing Buildings Wiki ===	+

	* Accounting.		* Accounting.
Line 65:		Line 63:
	* Management contracts		* Management contracts

−	[[Category:Construction_management]] [[Category:Contracts_/_payment]] [[Category:Cost_/_business_planning]] [[Category:Procurement]]	+	[[Category:DCN_Definition]] [[Category:DCN_Guidance]] [[Category:Construction_management]] [[Category:Contracts_/_payment]] [[Category:Cost_/_business_planning]] [[Category:Procurement]]

Designing Buildings at 07:33, 14 June 2018

2018-06-14T07:33:47Z

← Older revision		Revision as of 07:33, 14 June 2018
Line 51:		Line 51:

	* Accounting.		* Accounting.
		+	* Adversarial behaviour in the UK construction industry.
	* Collaborative practices.		* Collaborative practices.
	* Construction contract.		* Construction contract.

Designing Buildings at 12:16, 12 January 2017

2017-01-12T12:16:01Z

← Older revision		Revision as of 12:16, 12 January 2017
Line 53:		Line 53:
	* Collaborative practices.		* Collaborative practices.
	* Construction contract.		* Construction contract.
		+	* Early contractor involvement.
	* Fixed-price contract.		* Fixed-price contract.
	* Framework agreement.		* Framework agreement.

Editor at 15:23, 4 July 2016

2016-07-04T15:23:43Z

← Older revision		Revision as of 15:23, 4 July 2016
Line 50:		Line 50:
	=== Related articles on Designing Buildings Wiki ===		=== Related articles on Designing Buildings Wiki ===

		+	* Accounting.
	* Collaborative practices.		* Collaborative practices.
	* Construction contract.		* Construction contract.

Designing Buildings at 13:05, 4 July 2016

2016-07-04T13:05:48Z

← Older revision		Revision as of 13:05, 4 July 2016
Line 1:		Line 1:
−
	= Introduction =		= Introduction =

Line 6:		Line 5:
	= Definition of actual allowed costs =		= Definition of actual allowed costs =

−	There is no industry standard as to how incurred costs are recorded. Some public sector framework agreements and civil engineering contracts carry standard formats but in the majority of cases it is a matter for the client to be given access to the ~~contractor’s~~ records and accounting systems and then agreeing how costs can be monitored and audited using data output from such systems.	+	There is no industry standard as to how incurred costs are recorded. Some public sector framework agreements and civil engineering contracts carry standard formats but in the majority of cases it is a matter for the client to be given access to the contractor's records and accounting systems and then agreeing how costs can be monitored and audited using data output from such systems.

−	Collaboration and trust are paramount to success under such arrangements. Clearly the client must be satisfied that codes are being used that separately allocate accounts, hours worked and invoices paid project by project. Where costs are shared, such as head office staff and overhead costs, these need to be analysed on an annual basis and then pro-~~rata’d~~ to the ~~client’s~~ project. This should be agreed prior to the start of construction. Normally overheads are expressed in the form of a percentage against the total specific project expenditure running through the ~~contractor’s~~ books. The agreed profit needs to be determined at the outset on the basis of the amount of risk being taken by the contractor and market forces. Profit can be paid as a fixed, lump sum or as a percentage on the same basis as overheads. It is best to agree that profit covers pension contributions and finance charges, whether corporate or a project cost.	+	Collaboration and trust are paramount to success under such arrangements. Clearly the client must be satisfied that codes are being used that separately allocate accounts, hours worked and invoices paid project by project. Where costs are shared, such as head office staff and overhead costs, these need to be analysed on an annual basis and then pro-rata'd to the client's project. This should be agreed prior to the start of construction. Normally overheads are expressed in the form of a percentage against the total specific project expenditure running through the contractor's books. The agreed profit needs to be determined at the outset on the basis of the amount of risk being taken by the contractor and market forces. Profit can be paid as a fixed, lump sum or as a percentage on the same basis as overheads. It is best to agree that profit covers pension contributions and finance charges, whether corporate or a project cost.

	= Contentious costs =		= Contentious costs =
−	*All trade discounts and other credits such as insurance claim receipts should benefit the client. They may well be recorded separately from the expenditure systems. Some discounts may be paid annually and apply to purchases across all projects such as brick orders, so they need to be tracked and proportioned.	+
−	*Care should be taken that the contractor is achieving value for money in obtaining prices. This means random market testing. Relationships with subsidiary companies can give rise to a conflict of interests.	+	* All trade discounts and other credits such as insurance claim receipts should benefit the client. They may well be recorded separately from the expenditure systems. Some discounts may be paid annually and apply to purchases across all projects such as brick orders, so they need to be tracked and proportioned.
−	*Any cost associated with rectification of defective work is normally disallowed.	+	* Care should be taken that the contractor is achieving value for money in obtaining prices. This means random market testing. Relationships with subsidiary companies can give rise to a conflict of interests.
−	*Having defined what is a head-office overhead, it should not then be duplicated in the reimbursable element. Examples might be; a visiting safety inspector, or transport costs between the head office and site.	+	* Any cost associated with rectification of defective work is normally disallowed.
−	*Unauthorised or overpayments to sub-contractors should not be reimbursed.	+	* Having defined what is a head-office overhead, it should not then be duplicated in the reimbursable element. Examples might be; a visiting safety inspector, or transport costs between the head office and site.
−	*Costs incurred through contractor negligence should be challenged, though items such as poor planning, over ordering and wastage might be fiercely contested.	+	* Unauthorised or overpayments to sub-contractors should not be reimbursed.
		+	* Costs incurred through contractor negligence should be challenged, though items such as poor planning, over ordering and wastage might be fiercely contested.

	= Auditing =		= Auditing =

−	Auditing is within the skill set of either a professional quantity surveyor or an accountant. Both will require experience and knowledge of construction contracting. Detailed understanding of the ~~contractor’s~~ cost systems and project procedures is essential. This will include:	+	Auditing is within the skill set of either a professional quantity surveyor or an accountant. Both will require experience and knowledge of construction contracting. Detailed understanding of the contractor's cost systems and project procedures is essential. This will include:
−	*Code numbering systems.	+
−	*Site records.	+	* Code numbering systems.
−	*Allocation sheets for labour and plant.	+	* Site records.
−	*Bonus and non-productive overtime payments.	+	* Allocation sheets for labour and plant.
−	*Valuation and payment to sub-contractors including claims and variations.	+	* Bonus and non-productive overtime payments.
−	*Inter-company charging.	+	* Valuation and payment to sub-contractors including claims and variations.
−	*National agreements with unions, suppliers and sub-contractors.	+	* Inter-company charging.
−	*Discount credits.	+	* National agreements with unions, suppliers and sub-contractors.
−	*Insurance claims.	+	* Discount credits.
−	*Policy on accruals.	+	* Insurance claims.
−	*Random market testing to ensure pricing has obtained fair value.	+	* Policy on accruals.
−	*Changes in legislation affecting cost.	+	* Random market testing to ensure pricing has obtained fair value.
−	*An understanding of the contract conditions.	+	* Changes in legislation affecting cost.
		+	* An understanding of the contract conditions.

	This requires routine site and head office inspection of documentation.		This requires routine site and head office inspection of documentation.
Line 48:		Line 49:

	=== Related articles on Designing Buildings Wiki ===		=== Related articles on Designing Buildings Wiki ===
−	*Collaborative practices.
−	*Contract.
−	*Fixed-price contract.
−	*Framework agreement.
−	*Procurement routes.
−	*Profit and overheads.
−	*Schedule of rates.
−	*Target-cost contract.
−	*Two stage open book.
−	*Two-stage tender.
−	*Management contracts

−	[[Category:Construction_management]]	+	* Collaborative practices.
−	[[Category:Contracts_/_payment]]	+	* Construction contract.
−	[[Category:Cost_/_business_planning]]	+	* Fixed-price contract.
−	[[Category:Procurement]]	+	* Framework agreement.
		+	* Procurement routes.
		+	* Profit and overheads.
		+	* Schedule of rates.
		+	* Target-cost contract.
		+	* Two stage open book.
		+	* Two-stage tender.
		+	* Management contracts
		+
		+	[[Category:Construction_management]] [[Category:Contracts_/_payment]] [[Category:Cost_/_business_planning]] [[Category:Procurement]]

Designing Buildings at 07:53, 30 September 2014

2014-09-30T07:53:18Z

← Older revision		Revision as of 07:53, 30 September 2014
Line 52:		Line 52:
	*Fixed-price contract.		*Fixed-price contract.
	*Framework agreement.		*Framework agreement.
−	*Open book accounting.
	*Procurement routes.		*Procurement routes.
	*Profit and overheads.		*Profit and overheads.

Designing Buildings at 07:52, 30 September 2014

2014-09-30T07:52:04Z

← Older revision		Revision as of 07:52, 30 September 2014
Line 52:		Line 52:
	*Fixed-price contract.		*Fixed-price contract.
	*Framework agreement.		*Framework agreement.
		+	*Open book accounting.
	*Procurement routes.		*Procurement routes.
	*Profit and overheads.		*Profit and overheads.
	*Schedule of rates.		*Schedule of rates.
	*Target-cost contract.		*Target-cost contract.
		+	*Two stage open book.
	*Two-stage tender.		*Two-stage tender.
	*Management contracts		*Management contracts

−	~~[[Category:Contracts_/_payment]]~~
	[[Category:Construction_management]]		[[Category:Construction_management]]
	[[Category:Contracts_/_payment]]		[[Category:Contracts_/_payment]]
	[[Category:Cost_/_business_planning]]		[[Category:Cost_/_business_planning]]
	[[Category:Procurement]]		[[Category:Procurement]]

Designing Buildings: moved Open-book accounting to Open book accounting

2013-12-19T09:52:02Z

moved Open-book accounting to Open book accounting

← Older revision

Revision as of 09:52, 19 December 2013

David Trench at 09:50, 19 December 2013

2013-12-19T09:50:39Z

← Older revision		Revision as of 09:50, 19 December 2013
Line 1:		Line 1:
−

	= Introduction =		= Introduction =

−	Open-book accounting is a method of procuring work under which contractors are reimbursed on the basis of transparent records of the costs they have incurred. It is generally associated with incentivised target-cost contracts, management contracts and framework contracts but can also be applied to the first stage of a two-stage, fixed-price contract. Transparency can apply to the main contractor (whose direct costs may only amount to 20% of the total construction cost) who procures tendered, fixed-priced sub-contracts that are not open book and/or down the whole supply chain for every party involved in a project.	+	Open-book accounting is a method of procuring work under which contractors are reimbursed on the basis of transparent records of the costs they have incurred. It is generally associated with incentivised target-cost contracts, management contracts and framework contracts, but can also be applied to the first stage of a two-stage, fixed-price contract. Transparency can apply to the main contractor (whose direct costs may only amount to 20% of the total construction cost) who procures tendered, fixed-priced sub-contracts that are not open book and/or down the whole supply chain for every party involved in a project.

	= Definition of actual allowed costs =		= Definition of actual allowed costs =
Line 9:		Line 8:
	There is no industry standard as to how incurred costs are recorded. Some public sector framework agreements and civil engineering contracts carry standard formats but in the majority of cases it is a matter for the client to be given access to the contractor’s records and accounting systems and then agreeing how costs can be monitored and audited using data output from such systems.		There is no industry standard as to how incurred costs are recorded. Some public sector framework agreements and civil engineering contracts carry standard formats but in the majority of cases it is a matter for the client to be given access to the contractor’s records and accounting systems and then agreeing how costs can be monitored and audited using data output from such systems.

−	Collaboration and trust are paramount to success under such arrangements. Clearly the client must be satisfied that codes are being used that separately allocate accounts, hours worked and invoices paid project by project. Where costs are shared such as head office staff and overhead costs these need ~~analysing~~ on an annual basis~~, “pro~~-~~rata’d”~~ to the client’s project. This should be agreed prior to the start of construction. Normally overheads are expressed in the form of a percentage against the total specific project expenditure running through the contractor’s books. The agreed profit needs to be determined at the outset on the basis of the amount of risk being taken by the contractor and market forces. Profit can be paid as a fixed, lump sum or as a percentage on the same basis as overheads. It is best to agree that profit covers pension contributions and finance charges, whether corporate or a project cost.	+	Collaboration and trust are paramount to success under such arrangements. Clearly the client must be satisfied that codes are being used that separately allocate accounts, hours worked and invoices paid project by project. Where costs are shared, such as head office staff and overhead costs, these need to be analysed on an annual basis and then pro-rata’d to the client’s project. This should be agreed prior to the start of construction. Normally overheads are expressed in the form of a percentage against the total specific project expenditure running through the contractor’s books. The agreed profit needs to be determined at the outset on the basis of the amount of risk being taken by the contractor and market forces. Profit can be paid as a fixed, lump sum or as a percentage on the same basis as overheads. It is best to agree that profit covers pension contributions and finance charges, whether corporate or a project cost.

	= Contentious costs =		= Contentious costs =
Line 15:		Line 14:
	*Care should be taken that the contractor is achieving value for money in obtaining prices. This means random market testing. Relationships with subsidiary companies can give rise to a conflict of interests.		*Care should be taken that the contractor is achieving value for money in obtaining prices. This means random market testing. Relationships with subsidiary companies can give rise to a conflict of interests.
	*Any cost associated with rectification of defective work is normally disallowed.		*Any cost associated with rectification of defective work is normally disallowed.
−	*Having defined what is a head-office overhead, it should not then be duplicated in the reimbursable element. Examples might be; a visiting safety inspector or transport costs between the head office and site.	+	*Having defined what is a head-office overhead, it should not then be duplicated in the reimbursable element. Examples might be; a visiting safety inspector, or transport costs between the head office and site.
	*Unauthorised or overpayments to sub-contractors should not be reimbursed.		*Unauthorised or overpayments to sub-contractors should not be reimbursed.
	*Costs incurred through contractor negligence should be challenged, though items such as poor planning, over ordering and wastage might be fiercely contested.		*Costs incurred through contractor negligence should be challenged, though items such as poor planning, over ordering and wastage might be fiercely contested.
Line 25:		Line 24:
	*Site records.		*Site records.
	*Allocation sheets for labour and plant.		*Allocation sheets for labour and plant.
−	*Bonus and non productive overtime payments.	+	*Bonus and non-productive overtime payments.
	*Valuation and payment to sub-contractors including claims and variations.		*Valuation and payment to sub-contractors including claims and variations.
	*Inter-company charging.		*Inter-company charging.
Line 36:		Line 35:
	*An understanding of the contract conditions.		*An understanding of the contract conditions.

−	This requires routine site and head office inspection of documentation.	+	This requires routine site and head office inspection of documentation.

	= Schedule of rates =		= Schedule of rates =
Line 44:		Line 43:
	= Target cost =		= Target cost =

−	Although open-book accounting is about actual costs, very often a target price is set on the basis of a shared risk formula. ~~So in~~ effect the client and contractor share any gain by notional savings of actual costs against the target, or any pain through notional losses. The formula is normally set as a stick or carrot against fees or profit. There are usually cut off levels so for example a sliding formula set at a 3% base fee for the target price might be capped at 4.5% as a maximum and 1.5% as a minimum. The target price will include allowances for contingency and inflation. It will be subject to adjustment if the client introduces variations to the base scheme against which the target price was agreed, providing the variation is deemed to have a significant effect on actual cost. The advantage of a target-cost arrangement is that it incentivises the contractor to build within the budget and achieve savings whenever possible. Some fee is guaranteed and the reimbursement of cost removes the element of contractor risk that so often leads to adversarial relationships.	+	Although open-book accounting is about actual costs, very often a target price is set on the basis of a shared risk formula. In effect the client and contractor share any gain by notional savings of actual costs against the target, or any pain through notional losses. The formula is normally set as a stick or carrot against fees or profit. There are usually cut off levels, so for example, a sliding formula set at a 3% base fee for the target price might be capped at 4.5% as a maximum and 1.5% as a minimum. The target price will include allowances for contingency and inflation. It will be subject to adjustment if the client introduces variations to the base scheme against which the target price was agreed, providing the variation is deemed to have a significant effect on actual cost. The advantage of a target-cost arrangement is that it incentivises the contractor to build within the budget and achieve savings whenever possible. Some fee is guaranteed and the reimbursement of cost removes the element of contractor risk that so often leads to adversarial relationships.

	= Find out more =		= Find out more =

	=== Related articles on Designing Buildings Wiki ===		=== Related articles on Designing Buildings Wiki ===
		+	*Collaborative practices.
	*Contract.		*Contract.
	*Fixed-price contract.		*Fixed-price contract.

David Trench: Created page with " = Introduction = Open-book accounting is a method of procuring work under which contractors are reimbursed on the basis of transparent records of the costs they have incurred...."

2013-12-19T09:35:55Z

Created page with " = Introduction = Open-book accounting is a method of procuring work under which contractors are reimbursed on the basis of transparent records of the costs they have incurred...."

New page

= Introduction =

Open-book accounting is a method of procuring work under which contractors are reimbursed on the basis of transparent records of the costs they have incurred. It is generally associated with incentivised target-cost contracts, management contracts and framework contracts but can also be applied to the first stage of a two-stage, fixed-price contract. Transparency can apply to the main contractor (whose direct costs may only amount to 20% of the total construction cost) who procures tendered, fixed-priced sub-contracts that are not open book and/or down the whole supply chain for every party involved in a project.

= Definition of actual allowed costs =

There is no industry standard as to how incurred costs are recorded. Some public sector framework agreements and civil engineering contracts carry standard formats but in the majority of cases it is a matter for the client to be given access to the contractor’s records and accounting systems and then agreeing how costs can be monitored and audited using data output from such systems.

Collaboration and trust are paramount to success under such arrangements. Clearly the client must be satisfied that codes are being used that separately allocate accounts, hours worked and invoices paid project by project. Where costs are shared such as head office staff and overhead costs these need analysing on an annual basis, “pro-rata’d” to the client’s project. This should be agreed prior to the start of construction. Normally overheads are expressed in the form of a percentage against the total specific project expenditure running through the contractor’s books. The agreed profit needs to be determined at the outset on the basis of the amount of risk being taken by the contractor and market forces. Profit can be paid as a fixed, lump sum or as a percentage on the same basis as overheads. It is best to agree that profit covers pension contributions and finance charges, whether corporate or a project cost.

= Contentious costs =
*All trade discounts and other credits such as insurance claim receipts should benefit the client. They may well be recorded separately from the expenditure systems. Some discounts may be paid annually and apply to purchases across all projects such as brick orders, so they need to be tracked and proportioned.
*Care should be taken that the contractor is achieving value for money in obtaining prices. This means random market testing. Relationships with subsidiary companies can give rise to a conflict of interests.
*Any cost associated with rectification of defective work is normally disallowed.
*Having defined what is a head-office overhead, it should not then be duplicated in the reimbursable element. Examples might be; a visiting safety inspector or transport costs between the head office and site.
*Unauthorised or overpayments to sub-contractors should not be reimbursed.
*Costs incurred through contractor negligence should be challenged, though items such as poor planning, over ordering and wastage might be fiercely contested.

= Auditing =

Auditing is within the skill set of either a professional quantity surveyor or an accountant. Both will require experience and knowledge of construction contracting. Detailed understanding of the contractor’s cost systems and project procedures is essential. This will include:
*Code numbering systems.
*Site records.
*Allocation sheets for labour and plant.
*Bonus and non productive overtime payments.
*Valuation and payment to sub-contractors including claims and variations.
*Inter-company charging.
*National agreements with unions, suppliers and sub-contractors.
*Discount credits.
*Insurance claims.
*Policy on accruals.
*Random market testing to ensure pricing has obtained fair value.
*Changes in legislation affecting cost.
*An understanding of the contract conditions.

This requires routine site and head office inspection of documentation.

= Schedule of rates =

Some public sector authorities look to tender schedules of unit prices with or without inflation criteria. In particular this can apply to framework contracts, or where work is of an unknown quantity but its general scope can be identified. In such cases a document requesting unit prices against various specifications and quantities is sent out to selected contractors for tendering, together with percentages to be applied for overheads, risk and profit. As the project reaches the point of starting construction, the contractor commences work on the basis of measurement of quantity applied to the appropriate unit rate. This saves a lot of auditing since the majority of payment to the contractor is based on quoted pricing and not actual cost. Open books will be required to demonstrate quantities involved and the unit rate applied. However there will be the question of items for which there is no appropriate rate. Generally this is settled by transparency of accounts and open books to establish actual costs.

= Target cost =

Although open-book accounting is about actual costs, very often a target price is set on the basis of a shared risk formula. So in effect the client and contractor share any gain by notional savings of actual costs against the target, or any pain through notional losses. The formula is normally set as a stick or carrot against fees or profit. There are usually cut off levels so for example a sliding formula set at a 3% base fee for the target price might be capped at 4.5% as a maximum and 1.5% as a minimum. The target price will include allowances for contingency and inflation. It will be subject to adjustment if the client introduces variations to the base scheme against which the target price was agreed, providing the variation is deemed to have a significant effect on actual cost. The advantage of a target-cost arrangement is that it incentivises the contractor to build within the budget and achieve savings whenever possible. Some fee is guaranteed and the reimbursement of cost removes the element of contractor risk that so often leads to adversarial relationships.

= Find out more =

=== Related articles on Designing Buildings Wiki ===
*Contract.
*Fixed-price contract.
*Framework agreement.
*Procurement routes.
*Profit and overheads.
*Schedule of rates.
*Target-cost contract.
*Two-stage tender.
*Management contracts

[[Category:Contracts_/_payment]]
[[Category:Construction_management]]
[[Category:Contracts_/_payment]]
[[Category:Cost_/_business_planning]]
[[Category:Procurement]]