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Contracts Capsules - Episode 5 Cost Value Reconciliation - CVR - in Construction Domain

Hello everyone wherever you are. Welcome to my channel and thank you for your interest to watch this video. This is Contractual Capsules videos series, where I am providing topics about construction contracts to stakeholders in the construction domain worldwide, and to support the profession by elaborating on some definitions, for reducing the numbers of doubts, conflicts, and disputes among the involved parties.

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Today’s topic is short but important for the project's success:
Cost Value Reconciliation, or CVR!

Have you heard before about CVR?

We spoke in one of our previous episodes about the basic and advanced Project Constraints, and we explained how Cost forms a crucial factor that controls the success or failure of any project, along with other constraints, especially if the project, like most of the ones we have nowadays, is with a commercial aspect, profit-based objectives, and a Return on Investment focus.

Today, I want to put the spotlight on one of the terminologies you might have come across but could not fully recognize; CVR, stands for Cost Value Reconciliation.
CVR is simply one of the most effective techniques to plan a project’s cost at both pre- and post-contract phases.

In fact, it has become the most adoptable method after quantifying technical and contractual information, to convert them into costs and prices. From its title, it reconciles project’s cash-flow during and after the pricing process, mainly at the tender stage all the way towards the project completion, therefore it should not be downplayed with. This process starts with estimating the dry cost, putting the desired margin, uplift, and selling price or budget after adding contingencies and management reserves. Then, the cost is distributed on a monthly basis to tailor the planned cash-flow, allowing you to identify negative gaps and reconcile the fund, perhaps by adjusting the sequence of activities, or early procurement of materials, or by securing banking facilities such as loans or payment discounting, though these options may introduce additional cost burdens to the project.

Consequently, during tendering, reconciliation may reveal unforeseeable costs to our estimated price, mostly additional indirect costs. Performing this exercise at an early stage not only helps reduce commercial risks from missing cost elements during tender, but also optimizes cash-out and cash-in in our cashflow, the procurement sequence, fund planning, and ultimately enables delivering a profitable project without commercial conflicts.

During the project’s execution, CVR continues and never stops, through reporting, monitoring, identifying shortfalls, new gaps, errors, defaults, or setting revised thresholds and milestones. These findings help detect variances early, to timely interfere with corrective and preventive actions, and support cost control. One key tool to achieve this is Earned Value Management, which allows you to control costs at any point of time, understand variance reasons, correct them, and implement preventive measures until project completion, and gain some learned lessons for future similar projects as well. This process not only affects the project’s Cost but also positively impacts all other project’s constraints, protecting the project’s success, profitability, and investors’ bottom-lines.

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