31 Cash flow forecasting

It has been stated in Chapter 30 that it is very easy to convert a network into a bar chart, especially if the durations and week (or day) numbers have been inserted. Indeed, the graphical method of analysis actually generates the bar chart as it is developed. If we now divide this bar chart into a number of time periods (say, weeks or months) it is possible to see, by adding up vertically, what work has to be carried out in any time period. For example, if the time period is in months, then in any particular month we can see that one section is being excavated, another is being concreted and another is being scaffolded and shuttered, etc. From the description we can identify the work and can then find the appropriate rate (or total cost) from the bills of quantities. If the total period of that work takes six weeks and we have used up four weeks in the time period under consideration, then approximately two-thirds of the value of that operation has been performed and could be certificated. By this process it is possible to build up a fairly accurate picture of anticipated expenditure at the beginning of the job, which in itself might well affect the whole tendering policy. Provided the job is on programme, the cash flow can be calculated, but, naturally, due allowance must be made for the different methods and periods of retentions, billing and reimbursement. The cost of the operation must therefore be broken down into six main constituents: Labour Plant Materials and equipment Subcontracts Site establishment Overheads and profit.

0 0

By drawing up a table of the main operations as shown on the network, and splitting up the cost of these operations (or activities) into the six constituents, it is possible to calculate the average percentage that each constituent contains in relation to the value. It is very important, however, to deduct the values of the subcontracts from any operation and treat these subcontracts separately. The reason for this is, of course, that a subcontract is self-contained and is often of a specialized nature. To break up a subcontract into labour, plant, materials, etc. would not only be very difficult (since this is the prerogative of the subcontractor) but would also seriously distort the true distribution of the remainder of the project.

196 Project Management, Planning and Control

EXAMPLE OF CASH FLOW FORECASTING

The simplest way to explain the method is to work through the example described in Figures 3 1.1 to 3 1.6. This is a hypothetical construction project of three identical simple unheated warehouses with a steel framework on independent foundation blocks, profiled steel roof and side cladding, and a reinforced-concrete ground slab. It has been assumed that as an area of site has been cleared, excavation work can start, and the sequences of each warehouse are identical. The layout is shown in Figure 3 1.1 and the network for the three warehouses is shown in Figure 3 1.2. Figure 31.3 shows the graphical analysis of the network separated for each building. The floats can be easily seen by inspection, e.g. there is a two-week float in the first paint activity (58-59) since there is a gap between the following dummy 59-68 and activity 68-69. The speed and ease of this method soon becomes apparent after a little practice. The bar chart in Figure 3 1.5 has been drawn straight from the network (Figure 3 1.2) and the costs in El00 units added from Figure 3 1.4. For example, in Figure 31.4 the value of foundation excavation for any one building is $9400 per four-week activity. Since there are two fourweek activities, the total is $18 800. To enable the activity to be costed in the corresponding

Roof sheeting

Side sheeting Steel frame (painted) R.C slab Mass concrete base Cross section of building (unheated warehouse) Site clearance movement

In period = 0 Labour oh & p (direct & s/c)

+ 1 month Sub contract Site establ

+ 2 months
Paint Materials

T-+n
Site clear
Site clear
Site clear

Durations in weeks

Building 'C'

10

14

16

20

23

27

29

32 33

40

Building '6

12

14

18

21

25

27

30 31

36

38

Building 'A

10

12

16

19

23

25

28 29

34

36

Figure 31.2 Construction network

198 Project Management, Planning and Control

Weeks Site clear Found; exc Founds conc. Harden Steel erect ,, ,, Re-bar lay
8,
I ,

12

16

20

24

28

32

36

Slab cpnc Roof sheet

I,

I,

Sides fheet Paint Founds exc.

#I I,

Founds conc.
8,
I ,

Harden Steel erect

8 I

I ,

Re-bar lay Slab cpnc Roof sheet

8,
I/

Sides Paint

:beet
I ,

Founds exc.
8,

Foundsconc
I,

I ,

Harden Steel erect

8,
I,

Re-bal; lay Slab cpnc Roof sheet Sides sheet Paint Weeks
0 4

12

16

20

24

28

32

36

Figure 31.3 Graphical analysis

measurement period, it is convenient to split this up into two-weekly periods of $4700. Hence in Figure 31 S , foundation excavation for building A is shown as 47 in period 1 47 in period 3 The summation of all the costs in any period is shown in Figure 31.6. Figure 31.6 clearly shows the effect of the anticipated delays in payment of certificates and settlement of contractors accounts. For example, material valued at 118 in period 2 is paid to the contractor after one month in period 3 (part of the 331, which is 90% of 368, the total value of period 2 ) , and is paid to the supplier by the contractor in period 4 after the two-month delay period. From Figure 31.6 it can be seen that it has been decided to extract overhead and profit monthly as the job proceeds, but this is a policy that is not followed by every company. Similarly, the payment delays may differ in practice, but the principle would be the same.

47

+ 47 = 94 in period 2

One building Activity Clear site Founds exc.

I,

Units in ! hration weeks

2 4 4 2 2 3 3 4 4 2 2 3 3 5

100

Total value
62 94 94 71 71 220 220 106 106 71 71 66 66 100 100 66 44 743 885 1628 4884

Labour Value
30 40 40 20 20
-

Plant Value

Yo 48 43 43 28 28

Y O 3 2 $3 $3 14 14

Y O 5

Value

8 8 8 8 8

I ,

Founds conc.
I ,
I,

Steel erect
I,

I ,

91 91 28 28 28 28 14 14

Re-bar lay
I , I,

30 30 20 20
-

9 9 9 9 8 8 9

Slab conc.
"
I,

Roof sheet
I , I ,

Sides sheet
I, I ,

Paint

5 3 2

Total direct Total sub-cont Grand total For 3 blgs

250

34

19

Figure 31.4 Earned value table

1 IF
91 91 90 90 91 91 803 91

9 10

10 9 9
8 9

Period Yeek Total SIC

2 4 8

3 12

4 16

6 20 24 381 347 34 368 159 89 150 33 37 849

7 28 318 289 29 284 97 54 91 20 22 602

8 32 438 399 39 36 12 7 11 3 3 474

9 36

10 40

11

0
% 91 9 % 34 19 32

I 367

SIC OH&P

- I -

660 600 60 247 84 47 79 17 20 907

334 33 216 74 41 69 15 17 583

Direct Labour Plant $ x 100 Material Site est. OH&P

Total value

171 58 33 55 12 13 171

354

128

>

Outflow
Plant
$x100

Ix
58
55

74 70 118 31 17 33 343 403 60

Site est. OH&P

13 71

12 29

26 36

84 85 143 334 15 20 60 741 525 (216) 1624

159 41 69 600 17 37 34 957 816 (141) 2581

97 47 79 347 33 22 29 654 764 110

12 89 150 289 20 3 39 602 542 (60) 3837

7 116

31
116 115 (1) 4416

In 90% $x100 Net flow

-

I
Curnul. out
I

71

Curnul.

Curnul.

-7 1

y
-83
-55

883

3235

4768

4884

888

1413

2229

2993

3535

3962

I
I

+5

-21 1

-352

-242

-302

-454

4281

4396

-487

-488

Figure 31.6 Cash flow chari

202 Project Management, Planning and Control

Period

10

11

Figure 31.7 Cash flow graph

-200

Y/

/.A
Tp"

Period

10

11

Figure 31.8 Cash flow graph

Figure 3 1.6 shows the total outflow and inflow for each time period and the net differences between the two. When these values are plotted on graphs as in Figures 3 1.7 and 3 1.8, it can be seen that there are only 3 periods of positive cash flow, i.e. periods 3 , 4 and 7. However, while this shows the actual periods when additional moneys have to be made available to fund the project, it does not show, because the gap between the outflow and inflow is so large for most of the time, that for all intents and purposes the project has a negative cash flow throughout its life. This becomes apparent when the cumulative outflows and inflows, which are tabulated in the last three lines of Figure 3 1.6. are plotted on a graph as in Figure 3 1.9 and 3 1.10. From these it can be seen that cumulatively, the only a positive cash flow (a mere $500) is in period 4.

Cash flow forecasting

203

Period

5 6 7 Cumulative curves

10

11

Figure 31.9

This example shows that the project is not self financing and will possibly only show a profit when the 10% retention moneys have been released. To restore the project to a positive cash flow, it would be necessary to negotiate a sufficiently large mobilization fee at the start of the project to ensure that the contract is self financing.