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• Question No 1
• You have received the following email from the
  Group Finance Director, Felicity Bunyan
• From Felicity Bunyan, Group Finance Director
  To Senior Management Accountant
• Subject Contract Costing
• Hi,
• I need your thoughts on two related matters.
• The Board is concerned that the Build Civil
  Engineering subsidiaries are failing to achieve
  their targets. The subsidiary directors claim
  that this is due to poor contract costing and
  budgeting arrangements. Profit targets for these
  subsidiaries are established as follows
• Build Civil Engineering has a sales force that
  supports all four of the subsidiaries. The sales
  forces responsibilities include makingedto
  bidcontactforw construction contracts and also
  monitoring advertised invitations to submit
  bids.
• Each opportunity to bid is evaluated by a
  contract costing team of surveyors and other
  experts who are employed by Bild Civil
  Engineering.
• When the team decides that there is a realistic
  possibility of winning a contract and making a
  profit they start to estimate the costs of
  fulfilling the
• contract.
• Once the total costs have been estimated, the
  team adds a mark-up to cover administration and
  marketing costs for both Bild Civil Engineering
  and the subsidiary responsible for the contract.
  The result is then combined with a target profit
  to set the bidding price. The team allows for
  likely bids from competitors when setting the
  target profit.
• Each subsidiary is required to report the profit
  earned on each contract in progress during the
  year. The subsidiarys directors are r each
  contract and
• also of the subsidiary as a whole. These reports
  are collated and submitted to B board.

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• The latest report showed that 40 of the
  contracts completed during the year had an
  overall profit of less than 70 of target. Also,
  55 of the contracts under way were reported as
  being unlikely to achieve the targeted profit.
  All of the subsidiary directo targets had been
  unduly optimistic.
• The subsidiary directors complain that a longer
  term review shows that Bild is heavily affected
  by the economy and changes in the economic
  outlook can have a serious impact on their
  ability to meet targets for signing up new
  contracts. They have suggested that it is
  inappropriate to manage the Bild Civil
  Engineering subsidiaries as profit centres until
  the economy has fully recovered from the
  downturn and enters a period of strong growth.
• I need you to draft a paper that I can submit to
  the board that deals with the following
• Firstly, please evaluate our contract costing
  arrangements, paying particular attention to the
  difficulties associated with setting realistic
  profit targets.
• Secondly, how valid is the argument that the
  subsidiaries are subject to economic forces?
  Which economic variables should we pay particular
  attention to?
• Thanks Felicity
• Question No 2
• The Group Finance Director, Felicity Bunyan, has
  asked you into her office, where she tells you
  the following
• We have been asked to bid for a major Public Pri
  have ever undertaken before. The government
  wishes to build a new college on a greenfield
  site on the outskirts of Capital City. They do
  not have sufficient cash available to pay for
  this outright so they have proposed that we work
  with them on a PPP basis.
• The construction work will take approximately
  three years. We would normally set a price of
  350 million for a project of this size, with our
  own costs estimated at 300 million for the
  construction work.

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• Once the construction work is over we will
  maintain and operate the buildings and the site
  itself. We will be responsible for all support
  services, including landscaping, repair work,
  cleaning and catering. The government will
  appoint the academic and administrative staff
  and will cover the costs of providing
  educational services.
• We will generate revenues from three sources.
  Firstly, the government will pay an annual
  facilities charge, which will cover both the cost
  of leasing the college buildings and our
  commitment to maintenance and upkeep. Secondly,
  the site will include student accommodation.
  Students will be able to rent rooms from us
  during term time and we will be permitted to
  charge a commercial rent. Thirdly, the college
  catering will be a profit-making venture. We will
  be able to charge staff and students for meals
  and refreshments.
• The proposed contract will run for 20 years after
  the construction work has been completed. At the
  end of that time we will sell the buildings,
  including the student accommodation and catering
  outlets, to the government for a nominal sum of
  1.
• This is by far the largest PPP project that we
  have undertaken. I need you to email me your
  views on the following
• Firstly, how will Bild recognise profits from
  this project? What matters will the company have
  to consider when deciding how much profit we have
  earned, if any, in any given year?
• Secondly, what are the specific challenges

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• Question No 3
• Mark Grassington, Managing Director of Bild Civil
  Engineering, has asked for your advice.
• We have been receiving from some of our larger
  complaints sub-contractors about our working
  relationships. They feel that time and effort are
  being wasted because we do not properly manage
  our relationship with them.
• To put this in perspective, Bild Civil
  Engineering has seventeen major subcontractors
  on its list of preferred suppliers. Some are
  general builders who provide most of the major
  trades, from digging foundations to bricklaying
  and other trades. Others are more specialised
  and focus on drainage or other specific tasks.
  We find that the specialists are more expensive
  than the general builders, but they have greater
  expertise and so they may be used for difficult
  tasks, such as installing drainage in unstable
  soil.
• The regional subsidiaries of Bild Civil
  Engineering usually contract for a project and
  then invite the subcontractors to tender for the
  work. Subcontractors have very little input into
  the contract specification itself. They also find
  it difficult to manage their commitments because
  they are often invited to tender for work by
  more than one Bild subsidiary at the same time,
  even though they would not have the capacity to
  accept all of the work if all of their tenders
  were successful.
• There have been times when it has been difficult
  to find a subcontractor for a project because
  many of our preferred subcontractors would choose
  to work with our competitors rather than with us
  when they have a choice.
• Could you give me some ideas that I can present
  to the next board meeting?
• Firstly, I have always been impressed by the
  balanced scorecard diagrams that you prepare for
  other aspects of the business. Could you outline
  a set of measures that could be developed into a
  balanced scorecard for managing the whole
  process of working with subcontractors? Please
  also provide a brief explanation for each
  measure.
• Secondly, advise the company regarding processes
  and controls that we could adopt to manage the
  whole process of the collaboration wit

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Question No 4 he Group Finance Director has left
you the following memo MEMORANDUM To Senior
Management Accountant From Felicity Bunyan,
Group Finance Director Subject Debt covenant As
you know, we have significant bank borrowings.
The bank has put a number of 'debt covenants' in
place. These are conditions that must be met if
we are to be allowed to carry on with the loan.
If we breach any of those conditions, the bank
has the right to demand immediate repayment of
their loan and to take possession of the assets
that we have pledged as security in the event
that we cannot afford to repay. One of those
conditions is that our gearing ratio cannot
exceed 37 when we measure debt as a percentage
of total long term finance. Our gearing ratios
were as follows over the past few years 2012
32 2013 34 2014 33 We have a problem on the
horizon. As you are aware, in order to maintain
flexibility, Bild has used operating leases to
finance the majority of its construction
equipment. Most of these leases are over three or
five years. Proposed changes to the rules
relating to the accounting treatment of leases
mean that we may have to recognise additional
long term liabilities before the loans are due
for repayment. Doing so will put us in technical
default with respect to our debt covenant,
pushing our gearing to around 40. Please draft a
paper for me that
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• Analyses our gearing position with respect to the
  nature of our business and its overall position.
• Suggests an approach that might be taken to
  negotiating a change to the loan conditions with
  the bank so that our technical default might be
  overlooked.
• Question No 5
• The following memo was on your desk when you
  arrived at work this morning MEMORANDUM
• To Senior Management Accountant
• From Felicity Bunyan, Group Finance Director
  Subject public-private partnership proposal
• The Central subsidiary of Bild Civil Engineering
  has received a very interesting proposal to
  tender for a major government contract. The
  intention is that we will build a new hospital
  for the City Health Board, which is funded by the
  government and is responsible for the management
  of health care. City Health Board is keen for us
  to tender for the running of the hospital
  infrastructure once the construction work is
  complete. It is that aspect that I need you to
  consider.
• I have copied the City Health Boards summary of
  its requirements for you. I need you to write me
  a report covering two issues
• What are the planning and control issues,
  including financial controls, associated with
  our undertaking to run this hospital on the basis
  outlined by City Health Board?
• What factors should Bild take into account in
  deciding whether to bid for this proposal?
  Please justify the inclusion of each factor that
  you identify.
• The summary of City Health Board's requirements
  can be found by clicking the Reference Materials
  button.
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