Assume the contract has a 6-month duration.

The cost of borrowing money is

0.75% per month. Monthly pay estimates will be submitted on the fifth of the
month, for work completed as of the last day of the preceding month, with pay-
ment anticipated 30 days later. Under the terms of the contract, the owner will
retain 10% of the first 50% of the contract amount. Estimated cost is $500,000.
Using a 10% markup, the contractor bid $550,000. Expected monthly costs are
as shown:

Month 1 2 3 4 5 6
Estimated Cost $50,000 $100,000 $100,000 $100,000 $100,000 $50,000

The working capital requirements are

Month 1. Costs  $50,000
Interest  $50,000  0.0075  $375
Cash requirement  $50,000  $375  $50,375
Month 2. Costs  $100,000
Invoice 1  $55,000  $5,500  $49,500
Interest  ($50,375  $100,000)  0.0075  $1,128
Cash requirement  $50,375  $100,000  $1,128  $151,503
Month 3. Costs  $100,000
Invoice 2  $110,000  $11,000  $99,000
Cash received from owner  $49,500
Interest  ($151,503  $100,000  $49,500)  0.0075  $1,515
Cash requirement  $151,503  $100,000  $49,500  $1,515
 $203,518
Month 4. Costs  $100,000
Invoice 3  $110,000  $11,000  $99,000
Cash received from owner  $99,000
Interest  ($203,518  $100,000  $99,000)  0.0075  $1,534
Cash requirement  $203,518  $100,000  $99,000  $1,534
 $206,052
Month 5. Costs  $100,000
Invoice 4  $110,000
Cash received from owner  $99,000
Interest  ($206,052  $100,000  $99,000)  0.0075  $1,553
Cash required  $206,052  $100,000  $99,000  $1,553
 $208,605
Month 6. Costs  $50,000
Invoice 5  $110,000
Cash received from the owner  $110,000
Interest  ($208,605  $50,000  $110,000)  0.0075  $1,115
Cash requirement  $208,605  $50,000  $110,000  $1,115
 $149,719

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 Month 7. Costs  $0.00
Invoice 6  $82,500 (the unbilled balance of the bid amount)
Cash received from owner  $110,000
Interest  ($149,719  $110,000)  0.0075  $298
Cash requirement  $149,719  $110,000  $298  $40,017
Month 8. Costs  $0.00
Cash received from owner  $82,500
Project profit  $82,500  $40,017  $42,483

These calculations are shown in Fig. 3.8. Note that the maximum working
capital requirement, which occurs at the end of month 5, is $208,605. To perform
the contract, the contractor must have at least that amount available. Change
orders will increase the working capital required. Also note that the estimated
costs were $500,000 and the bid was $550,000 for an estimated profit of $50,000,
but the cost of borrowed money reduced the profit to $42,483. That profit reduc-
tion is real whether the company borrows the money or uses its own assets.
A schematic of the cash flow requirements is shown in Fig. 3.9.

profit (loss) to date The cash flow analysis shown in Example 3.2 should be accomplished
Calculation of the before the project begins so the construction contractor will know there is suf-
profit to date based on ficient working capital available. During the project, the project manager must
the progress and calculate profit (loss) to date on a regular, weekly basis. The four items that
expenditures to date, make up the financial statement and come from the project manager are
compared to the
expected progress and ■ Cost to date
expenditures to date. ■ Reestimated cost to complete

Project Cash Flow Calculation

Estimated cost $500,000
Bid price $550,000
Cost of money  0.0075
Invoice date  5th of the month
Payment received 30 days later
Retainage  10% of the first 50% (of the contract amount)
Month 1 2 3 4 5 6 7 8 Total
Est. cost 50,000 100,000 100,000 100,000 100,000 50,000 500,000
Invoice amt. 49,500 99,000 99,000 110,000 110,000 82,500 550,000
Amt. received 0 0 49,500 99,000 99,000 110,000 110,000 82,500 550,000
Cash req’d. 50,000 150,375 202,003 204,518 207,052 148,605 39,719
Interest 375 1,128 1,515 1,534 1,553 1,115 298 7,517
Total 50,375 151,503 203,518 206,052 208,605 149,719 40,017 0
Profit 42,483
FIGURE 3.8 Excel spreadsheet of cash flow requirements (Example 3.2).

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