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T4 Test of Professional Competence - Part B Case Study Examination

T4 –Part B Case Study Examination

For examinations on Tuesday 1 March 2011 and
on Thursday 26 May 2011


This booklet contains the pre-seen case material for the above examinations.
It will provide you with the contextual information that will help you prepare
yourself for the examinations.

The Case Study Assessment Criteria, which your script will be marked
against, is included on page 13.

You may not take this copy of the pre-seen material into the
examination hall. A fresh copy will be provided on the examination day.

Unseen material will be provided on the examination day; this will comprise
further context and the examination question.

The examination will last for three hours. You will be allowed 20 minutes
reading time before the examination begins during which you should read
the question paper and, if you wish, make annotations on the question paper.
However, you will not be allowed, under any circumstances, to either begin
writing or using your computer to produce your answer or to use your
calculator during the reading time.

You will be required to answer ONE question which may contain more than
one element.

PC examination only: Your computer will contain two blank files – one Word
and an Excel file. Please ensure that you check that the file names for these
two documents correspond with your candidate number.

Contents of this booklet: Page

Pre-seen material –BZCS construction case 2
Pre-Seen Appendices 1 - 4 9
Case Study Assessment Criteria 13

© The Chartered Institute of Management Accountants 2011

BeeZed Construction Services (BZCS) case

Construction industry background

Due to the current economic climate, the demand for building work in Europe has fallen overall
by over 10% from 2008 levels. Furthermore, it is forecasted that the volume of construction work
will not increase until the start of 2011. Many companies in the construction industry have
suffered falls in profits as a direct result of the slowdown in new contracts being awarded.

Many European construction companies are involved in a large range of projects in many
countries worldwide. Few large construction companies (except some house building
companies) operate only within their national boundaries. Most construction companies have
established a range of expertise in specific types of project, such as construction of office
buildings, hospitals, airports, roads or schools. This expertise allows the construction companies
to use their skills and reputation to bid for, and win, further projects in Europe and in other
countries around the world.

Many large construction projects are financed using Private Finance Initiatives (PFI). PFI is
defined as private finance being used to fund public infrastructure work. Private finance is
defined as finance provided mainly by banks, institutional investors and pension funds. The
Private Finance Initiative (PFI) is a way of creating Public Private Partnerships (PPP). PPP is
defined as agreements between public bodies or central governments and private construction
companies to deliver the agreed projects. Examples of public infrastructure works are road
building and construction of new schools. PFI projects also involve the private sector
construction company taking on responsibility for providing an on-going service. This typically
includes maintaining and managing the project over the life of the building or for a fixed term of
20 years or longer. Therefore, PFI projects generate revenue streams for the construction
company for the initial construction project as well as for long-term maintenance and
management of the asset. PFI projects involve the private construction company as a partner in
the project and this has generated favourable outcomes in respect of the percentage of projects
completed on time and completed to the agreed budget.

In the construction industry there are 3 main types of contract, which are:

1. Fixed price contracts – this is where the revenue for the private construction company is
fixed at the contract stage, subject to changes in specifications agreed during

2. “Cost plus” contracts – this is where the revenue for the private construction company
will comprise all of the actual costs of the project plus an agreed profit element.

3. Long-term PFI projects – this is where the revenue for the private construction company
will include the contracted construction revenue as well as revenues for on-going
maintenance and property management for a long-term project, typically 20+ years.

The process for private construction companies to win a new contract for a large construction
project is summarised in the following steps:

1. A company or government body will invite tenders

2. The construction company will tender for the contract by preparing a detailed bid
3. A company or government body will select its “preferred contractor”
4. The bid price and the contract details will be negotiated and agreed
5. Contracts are then signed
6. Selection and appointment by the construction company of suppliers for manpower
resources (sub-contractors), as well as for materials
7. Work commences

T4 - Part B Case Study 2 March & May 2011

It should be noted that during construction work, there are often many requests for changes to
the original contract specifications or design which are submitted to the construction company.
These changes usually affect costs and manpower. All of these change requests have to be
negotiated and additional revenues agreed before the changes can be made.


BeeZed is a construction and property management company listed on a European stock


BeeZed has 3 wholly owned subsidiary companies which are:

• BeeZed Construction Services (BZCS) – concerned with a wide range of construction


• BeeZed Professional Services (BZPS) – concerned with offering consultancy services

• BeeZed Building Support Services (BZBSS) – concerned with property management

and maintenance services.

In respect of PFI projects, the parent company, BeeZed, will sign the overall contract for the
project. BZCS will be involved only with the construction work and BZBSS will manage the
ongoing maintenance and property management work. When a PFI contract is signed, the
parent company, BeeZed, will agree on how the revenues will be split between BZCS and

This case study is concerned ONLY with BeeZed Construction Services (BZCS).


BZCS has many construction projects around the world, ranging from road building, construction
of public sector buildings, including hospitals, schools and university buildings to commercial
contracts for office buildings. Some of the construction projects that BeeZed is involved with are
financed by PFI. However, only the revenue related to the construction project is allocated to
BZCS. The revenue relating to the ongoing maintenance and property management work is
allocated to BZBSS and is not included in this case study. BZCS has a good reputation in this
industry for quality and safety as well as its ability to deliver projects on time. These are all
critical success factors for keeping its existing customers content and for providing a basis for
winning future business.

BZCS has 6 divisions, which are:

1. Office Buildings Division – includes building bespoke office buildings for specific
company orders, as well as speculative construction of office buildings in city centres or
on business park complexes.

2. Sports Facilities Division – includes the construction of large sports stadiums as well as
the construction of small regional sports facilities.

3. Environmental Projects Division – includes the construction of water treatment facilities,

the construction of sophisticated waste management facilities and marine projects,
including the construction of container terminals and marinas.

4. Infrastructure Projects Division – includes road building and airport construction.

5. Community Projects Division – includes the construction of hospitals and smaller

healthcare facilities as well as schools and university facilities.

6. Energy Projects Division – includes the construction of gas storage facilities and power

March and May 2011 3 T4 – Part B Case Study

Each of these 6 divisions is headed by a Commercial Director who is responsible for all of the
projects undertaken by that division.

A summary of the organisational structure for BZCS, effective from 1 January 2011, is shown in
Appendix 1 on page 9.

In the year ended 30 September 2010, BZCS generated total revenues of €1,267 million and
operating profit of €34.7 million.

BZCS is a wholly owned subsidiary of BeeZed. An extract from the accounts for BZCS is shown
in Appendix 2 on page 10.

All of the non-current liabilities represent inter-company long-term loans from its parent
company, BeeZed. BeeZed has a range of non-current liabilities with several external bodies
including bank loans.

BZCS’s cash flow statement for the year ended 30 September 2010 is shown in Appendix 3 on
page 11.

Geographical analysis of revenues

BZCS currently has construction projects operational throughout Europe, the USA, the Middle
East and in some other countries, mainly in Asia.

The geographical analysis of the total construction services revenue of €1,267 million for the
year ended 30 September 2010 was as follows:

Europe €690 m

USA €369 m

Middle East €110 m

Rest of World €98 m

Analysis of revenues and operating profit by division

The revenues and operating profit for each of BZCS’s 6 divisions for the year ended 30
September 2010 are shown in a table on the next page:

T4 - Part B Case Study 4 March & May 2011

Revenue Operating
€ million € million

Office buildings 220.0 8.5

Sports facilities 145.2 3.4

Environmental projects 193.1 4.2

Infrastructure projects 365.2 16.8

Community projects 213.6 1.3

Energy projects 129.9 0.5

Total 1,267.0 34.7


The operating profit margins achieved by BZCS are low, as is the norm for this industry.
However, for some of BZCS’s PFI construction projects, BZBSS, which is part of the BeeZed
group, earns additional revenues for a further 10 to 30 years for the ongoing maintenance and
property management of the PFI projects.

Whilst BZCS prepares annual financial accounts, all of the accounting for each construction
project is accounted for on a project basis. All direct costs are allocated to the respective project,
including salary and associated costs for all of BZCS’s employees working on each project as
well as sub-contractor costs. All non-project based overhead costs are allocated to projects
using activity based costing techniques based on appropriate cost drivers.

The monthly management accounts show the following information for all on-going operational
construction projects:

• Contract revenues and costs

• Approved change requests to contracts and amended revenues and costs
• Cumulative costs to date for the project (spanning current and past financial years)
• Forecast of costs for the remainder of the project (which are split between costs to be
incurred in the current financial year and costs to be incurred in future financial years)

BZCS uses a project management system called BZPM. Each Project Manager is responsible
for all direct costs incurred on the project for which he / she is responsible.

Each Project Manager is responsible for presenting the projects’ financial and operational issues
that have occurred for each project on a monthly basis. These presentations are to senior
management groups chaired by the Commercial Director for the relevant division of BZCS.
These presentations cover all aspects of the project, including safety issues, forecasts for the
delivery of the project against plan and any significant operational problems or successes. If
there is a significant problem, the Project Manager will be expected to travel to BZCS’s Head
Office to present the information to the BZCS Board. Where there are no operational or financial
concerns, the Project Manager conducts his monthly presentation by video conferencing.

Order book

At 30 September 2010 BZCS had an order book valued at over €2,400 million. This is 30%
higher than the level of BZCS’s order book at the 30 September 2009. The order book
represents the value of contracts signed which have either not yet been commenced or are
currently in progress.

March and May 2011 5 T4 – Part B Case Study

Project Management

BZCS uses a project management system to plan each project, called BZPM. The contract
details and agreed key stages are set up in BZPM when the contract is signed for each new
construction project. A Project Manager is appointed for each project. He or she is responsible
for controlling all stages of the project using BZPM. This includes control of resources, both
BZCS employees and outsourced sub-contractors, timings for each stage of the project, project
planning and managing contract change requests. The Project Manager is also responsible for
control and reporting of costs against the original contract and the updated budget for the

The finance system interfaces directly with BZPM allowing data on payments for materials and
sub-contractors, payroll costs and revenues to be directly allocated to each stage of the relevant
project. The Project Manager and his team, assisted by the Finance Department, prepare
monthly accruals based on activities undertaken in the month, which have not been invoiced.
BZPM is able to generate reports on all aspects of each project, including forecast timings for all
activities and costs, by the end of day 3 after each month end.

Corporate Social Responsibility

BZCS takes its Corporate Social Responsibility (CSR) very seriously. The BZCS Board is
committed to safety on all projects and also to the reduction of waste from sites and the
reduction of carbon emissions. It is also very aware of environmental concerns and works
closely with the communities in which it operates.

BZCS’s commitment to health and safety and environmental issues is shown below.

Health and Safety

Health and safety is a top priority for BZCS. BZCS continues to enhance its culture of safety
throughout the company and its supply chain, to ensure that its employees, sub-contractors and
the public are safe. BZCS also ensures that environmental safety is adhered to, so as to try to
ensure that the communities in which it operates are not damaged or polluted.

BZCS, like all construction companies, adheres to all Health and Safety legislation and BZCS
goes beyond what is required by law. It trains all of its employees to ensure their competency
and full understanding of what and why safety is so important in all aspects of the company.
This training covers all aspects of health and safety, from construction work at building sites to
transportation of materials and disposal of waste. BZCS continues to measure its performance
against a range of key Health and Safety indicators.

BZCS’s annual accident frequency rate has fallen over the last 7 years and is currently 0.16
accidents per 100,000 work hours. This is the lowest accident rate ever achieved by BZCS and
is amongst the lowest of the top construction companies globally. 20,000 person days of Health
and Safety training has been provided by BZCS during the last financial year ended 30
September 2010.

BZCS recognises that it is also important that its supply chain is fundamental to the safe delivery
of all construction projects and it works closely with the companies in its supply chain. It tries to
ensure that best practice is promoted and that a positive safety culture is created. BZCS
provides Health and Safety awareness training to its key suppliers to ensure that they meet
BZCS’s challenging Health and Safety requirements. BZCS also conducts audits of its suppliers.
Recently some suppliers’ contracts were not renewed as they did not meet the criteria set by
BZCS for Health and Safety standards.

Environmental issues
BZCS is committed to complying with a European Union (EU) wide programme to reduce the
volume of waste that goes to landfill sites. Where possible waste from construction sites is
sorted by category of material (such as earth, packaging or materials which can be recycled)
and is recycled or disposed of in a safe way. BZCS has a range of waste management
contractors which manage the safe disposal of site waste. They have demonstrated their

T4 - Part B Case Study 6 March & May 2011

abilities to divert waste from landfill sites. Last year, ended 30 September 2010, BZCS’s target
was to dispose of, or recycle, 60% of site waste that would otherwise have ended up in landfill
sites. BZCS exceeded this target and disposed of, or recycled, 62% of its waste from its
construction sites.

BZCS is committed to reducing its carbon footprint and to minimising its impact on the
environment. BZCS uses the latest technology on its construction projects so that new buildings
are able to operate in an environmentally responsible way and utilise efficient electrical fittings.
Many of the buildings contracted by European government departments, such as schools and
hospitals, use renewable energy sources and BZCS works closely with the architects to ensure
that the buildings will help to deliver planned reductions in carbon emissions.

BZCS’s Mission Statement and CSR initiatives are shown in Appendix 4 on page 12.


BZCS is continuously working on bids for possible new contracts. It has specialised teams
headed up by Bid Managers in each of BZCS’s 6 divisions. When a bid has been won and a
contract signed, then a Project Manager is appointed to manage the project. Sometimes, on a
particularly complicated project, the initial Bid Manager will become the Project Manager.

Each of BZCS’s 6 divisions usually has between 1 and 5 projects in progress at any point in
time. Furthermore, each of the 6 divisions is usually involved in the bid preparation and the
bidding process for several other proposed projects. Whilst BZCS has been the preferred
supplier for some European government departments in the past for infrastructure projects and
community projects, these large customers are now imposing increasingly strict criteria for
suppliers to meet. Bids need to be competitive in the current challenging economic climate.
Therefore, BZCS, like many other construction companies, is not successful in winning all of the
projects for which it bids for.

In order to balance the risk of relying on specific construction sectors and a relatively small
customer base, BZCS tries to win contracts from a wide selection of organisations. These
include government and private sector customers. BZCS also undertakes a wide range of
different types of construction project.

BZCS has secured some construction projects for the London 2012 Olympic Games.

At any point in time BZCS usually has between 12 and 20 projects in progress, with bid
preparations taking place for a further 10 or more projects. The bid value of a contract varies
greatly, ranging from €5 million to over €800 million for individual contracts. Contract duration
often spans more than 2 years.

As at the end of December 2010, BZCS has 14 projects currently operational, of which 10 are
due for completion during 2011 and the remaining 4 are due to be completed in 2012.

Bid tendering process

In the UK, the Government’s regulator, the Office of Fair Trading (OFT) has been undertaking
investigations of “bid-rigging” in the construction industry. The OFT has established that there is
widespread evidence of construction companies which have been involved in manipulating the
bidding process. This has allowed specific companies to win Government awarded construction
projects at higher prices than could be achieved through a fair competitive bidding process. This
on-going investigation has involved the OFT accessing paperwork for over 100 contracts from
20 construction companies. It will also impact on the ways that construction companies,
including BZCS, bid for new projects in the future.

In order to be treated leniently, BZCS has advised the OFT that it did have discussions with
some other construction companies concerning the level of its bid for a UK hospital construction
project that it won the contract for in 2008. The project is proceeding on time and it is forecast
that it will not over-run the agreed fixed price budget.

March and May 2011 7 T4 – Part B Case Study

BZCS is waiting to hear the outcome of the OFT’s investigation into this specific contract. BZCS
has included a provision for a contingent liability, for a possible fine, in the accounts for the
current financial year ending 30 September 2011.

Re-structuring of BZCS

During 2009 and the early part of 2010, BZCS underwent a re-structuring process to enable it to
become more competitive following the downturn in construction projects due to the current
economic environment. The Board of BZCS recognised the need to become more flexible and to
sub-contract a greater volume of its core construction work. Following a Board decision in March
2009, BZCS reduced the number of its employees by 1,800 within 1 year. At the end of
September 2010, BZCS had 10,100 employees. Many of BZCS’s ex-employees have joined
some of BZCS’s supply chain companies, which are BZCS’s sub-contractors. Therefore some of
these people work on the same project as previously but now are employed by sub-contractors
or have become short-term freelance contractors to BZCS.

BZCS has also focused on winning a wider range of private construction projects as many
European governments have cut the budgets on public sector projects and bidding is more
competitive than ever.

A summary of the organisational structure for BZCS, effective from 1 January 2011, is shown in
Appendix 1 on page 9.

Within each division, the Commercial Director has responsibility for each of the Project
Managers who are each responsible for one operational project. Projects that are operational
are defined as a project in which the contracts have been signed but construction is not
complete. Each division also has Bid Managers responsible for preparing bids or tenders for
new projects and Sales and Marketing Managers for selling to, and liaising with, customers.
Additionally there is a Post Completion Manager responsible for all projects that have ongoing
problems or require minor rectification work after the project has been completed.

Re-structuring of the Procurement Department

Before the re-structuring of BZCS, each division was responsible for the procurement for each of
the projects under its control. Effective from 1 January 2011, there is a new central Procurement
Department for the whole of BZCS. This is under the direct control of an experienced
Procurement Director, who reports directly to BZCS’s Managing Director. The new Procurement
Director was recruited from a rival construction company and joined BZCS in October 2010.

The employees who worked in the procurement departments within each of BZCS’s 6 divisions
have been brought together in one centralised Procurement Department, based in Europe. This
should help to facilitate better control over purchases and achieve higher bulk discounts,
especially for some raw materials. On an operational level, all of BZCS’s Project Managers at
construction sites in each country will now make all purchases through the new centralised
Procurement Department. They will be given limited authority to purchase goods locally where
no global contract is in place for particular materials.

The new centralised Procurement Department is in the process of selecting “preferred suppliers”
within each country in which it operates. Where possible, the preferred supplier will be another
large international company that can provide materials to BZCS in many of the countries in
which BZCS has on-going construction projects. The Finance Department is working closely
with the Procurement Director in the selection and appointment of new and existing suppliers.
The re-structuring of BZCS’s Procurement Department has resulted in an overall reduction in
headcount in procurement employees. The new centralised Procurement Department will help
meet BZCS’s target for Head Office cost savings.

T4 - Part B Case Study 8 March & May 2011

Appendix 1
BZCS’s new organisational structure – effective from 1 January 2011


Office Sports Environmental Infrastructure Community Energy BZCS BZCS BZCS BZCS
Buildings Facilities Projects Projects Projects Projects Finance Procurement Public Human
Division – Division – Division – Division – Division – Division – Director Director Relations and Resources
Commercial Commercial Commercial Commercial Commercial Commercial Marketing Director
Director Director Director Director Director Director Director

Within each Division

Project Bid Managers Post Sales & BZCS -

Managers – – for each Completion Marketing IT Manager
for each new proposed Manager Managers –
project for each

March and May 2011 9 T4 Part B Case Study

Appendix 2
Extracts from BZCS’s Statement of Comprehensive Income,
Statement of Financial Position and Statement of Changes in Equity
Year ended Year ended
Statement of Comprehensive Income 30 September 2010 30 September 2009

€ million € million

Sales revenue 1,267.0 1,280.0

Cost of sales 1,210.3 1,222.0
Gross profit 56.7 58.0
Administrative expenses 22.0 22.8

Operating profit 34.7 35.2

Finance income 0.2 0.3

Finance expense 7.5 8.7
Profit before tax 27.4 26.8
Tax expense (effective tax rate is 20%) 5.5 5.4

Profit for the period 21.9 21.4

As at As at
Statement of Financial Position 30 September 2010 30 September 2009

€ million € million € million € million

Non-current assets (net) 241.0 234.0

Current assets
Inventory 3.1 3.4
Trade receivables 167.0 167.8
Cash and cash equivalents 23.4 31.2
193.5 202.4
Total assets 434.5 436.4

Equity and liabilities

Share capital 10.0 10.0
Retained earnings 176.0 154.1
186.0 164.1
Non-current liabilities
Inter-company loan
(provided by parent company BeeZed) 125.0 145.0

Current liabilities
Trade payables 118.0 121.9
Tax payables 5.5 5.4
123.5 127.3
Total equity and liabilities 434.5 436.4

Note: Paid in share capital represents 10 million shares of €1.00 each at 30 September 2010 which are
100% owned by parent company BeeZed

Share Share Retained Total

Statement of Changes in Equity Capital premium earnings

€ million € million € million € million

Balance at 30 September 2009 10.0 - 154.1 164.1

Profit - - 21.9 21.9
Dividends paid - - - -
Balance at 30 September 2010 10.0 - 176.0 186.0

T4 - Part B Case Study 10 March & May 2011

Appendix 3

Cash Flow Statement

Year ended
30 September 2010

€ million € million
Cash flows from operating activities:

Profit before taxation (after Finance costs (net)) 27.4

Depreciation 88.0
Finance costs (net) 7.3
(Increase) / decrease in inventories 0.3
(Increase) / decrease in trade receivables 0.8
Increase / (decrease) in trade payables
(excluding taxation) (3.9)
Cash generated from operations 119.9

Finance costs (net) paid (7.3)

Tax paid (5.4)

Cash generated from operating activities 107.2

Cash flows from investing activities:

Purchase of non-current assets (95.0)

Cash used in investing activities (95.0)

Cash flows from financing activities:

Repayment of inter-company loans (20.0)

Cash flows from financing activities (20.0)

Net decrease in cash and cash equivalents (7.8)

Cash and cash equivalents at 30 September 2009 31.2

Cash and cash equivalents at 30 September 2010 23.4

March and May 2011 11 T4 – Part B Case Study

Appendix 4

BZCS’s Mission Statement and CSR initiatives

BZCS’s mission statement is:

“To be the preferred supplier for quality construction projects and to strive to implement a
long-term relationship with our customers based on safety, quality and a timely service”

BZCS has the following CSR initiatives:

Prudent use of natural resources:

• Reducing waste
• Improving design
• Improving the use of resources
• Improving its supply chain
• Increasing the use of locally sourced resources

Environmental issues:
• Reducing water pollution
• Reducing emissions into the atmosphere
• Reducing waste going to landfill sites

Social issues:
• Improving Health and Safety for our employees and sub-contractors
• Supporting our employees
• Giving due consideration to the communities in which we work
• Developing the skills of our employees

Economic growth
• Investing in the communities in which we operate
• Rewarding our shareholders
• Satisfying our customers
• Managing our risks

End of pre-seen material

Your script will be marked against the T4 Part B Case Study Assessment Criteria
shown on the next page.

T4 - Part B Case Study 12 March & May 2011

Assessment Criteria

Criterion Maximum
Analysis of issues (25 marks)
Technical 5
Application 15
Diversity 5
Strategic choices (35 marks)
Focus 5
Prioritisation 5
Judgement 20
Ethics 5
Recommendations (40 marks)
Logic 30
Integration 5
Ethics 5
Total 100

March and May 2011 13 T4 – Part B Case Study