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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.

 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.

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

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

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:

 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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