PROJECT CASH FLOW

ARE 413

CONSTRUCTION MANAGEMENT

By
MOHAMMED JALALUDDIN LECTURER CONSTRUCTION ENGINEERING & MANAGEMENT DEPT Handout # 11

Presentation Outline

Cash Flow |Cash Flow Projection / What is Cash Flow Projection

Example Cash Flow of Simple Project

S-Curve

Cash Flow to Contractor

Progress Payment

Contractors Expenses and Income Profile Contractors Financing

Overdraft
Mobilization Advance Payment

Objectives of Class :

To introduce cash flow concept during the life of a project

and example of cash flow projection of simple project

To draw the Contractors Expenses and Income Profile To know the Contractors sources of Financing

Cash Flow Projection

Projection of Income and expenses during the life of the project Several time scheduling aids used by contractor

Project S-Curve
Owner requires contractor to provide an S curve of estimated progress and costs Cumulative costs across the duration of the project A graphical portrayal of the outflow of monies (both direct & indirect)

S R

Duration

Activity A B C D E F

Days 2 5 2 7 1 2

Cost ($) 200 500 200 500 100 100

Cost/day 100 100 100 71.4 100 50

Cash Flow

Source: Dr. L. K. Gaafar

Cash Flow
180

Daily Expenses

Activity A B C D E F
Day 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Days 2 5 2 7 1 2

Cost ($) 200 500 200 500 100 100

Cost/day 100 100 100 71.4 100 50

160

140

120

Cost ($)

100

80

60

40

Activity Cost of day Total cost A 100 100 A 100 200 B 100 300 B 100 400 B 100 500 B 100 600 B 100 700 C,D 171.4 871 C,D 171.4 1043 D,E 171.4 1214 D 71.4 1286 D 71.4 1357 D 71.4 1428 D 71.4 1500 F 50 1550 F 50 1600

20

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Day

Cumulative Expenses
1800

1600

1400

1200

Cost ($)

1000

800

600

400

200

Source: Dr. L. K. Gaafar

1 2 3 4 5 6 7 8

10

11

12

13

14

15

16

Cash Flow to the Contractor

Progress Payments - Flow of money from owner to the contractor Estimates of work completed by the contractor periodically and (usually monthly) and verified by owners reps Evaluation based on type of contract Lump Sum: Percentage of total contract completion Unit Price: Actual field measurements of work completed

Progress Payments
Contractor prepares a monthly progress claim (bill) usually at the end of each month The Owner evaluates the bill and pay contractor within the time period stipulated in the contract (usually within 30 days) Owner keeps a retainage of 10% from each payment (usually until cumulative progress bills reach 50% of the total contract sum)

Sample S Curve

Contractors Income Profile

Stair-step appearance since the progress payments are paid in discrete amounts
Duration

Contractors Expenses and Income Profile

Clear indication of expenses and income The difference between Expenses and revenue makes it necessary for the contractor to obtain temporary financing

Duration

Expenses and Income Profiles

Expenses and Income Profiles

Contractors Financing
Usually a bank extends a line of credit against which the contractor can buy materials, make payments and pay other expenses while waiting for reimbursement from owner. Bank charges interest on the outstanding balance (overdraft) Good policy to to try to minimize overdraft

Overdraft depends ON
Amount of markup (or profit) applied to contractors bid Amount of Retainage withheld by the owner Delay between billing and payment by the owner

Banks evaluation of construction contractors

High risky borrowers If the contractor defaults, the loan is secured only by some materials inventories and partially completed construction Charges very high interest rates on borrowings

Mobilization Advance Payment

Some contractors offset the overdraft borrowing requirement by requesting mobilization, money from owner Influence of mobilization on payment and income profiles

Expenses and Income Profiles (with mobilization advance)

Mobilization Advance Payment

Some owners issue 20% of the advance payment at the inception against a bank guarantee submitted by the contractor The advance payment recovered in each progress payment at a rate of 20%. Since the owners are less risky than the contractors, they can borrow short-term money at a lower interest rates Transfer the interim financing requirement from contractor to the owner Overall cost savings to owner and the contractor

Overdraft Requirement
The contractor needs to know what is the maximum overdraft during the construction project Uses Income and expenses profiles to asses the overdraft Tabulate the expenses and revenues and find the maximum overdraft

Plot of maximum overdraft

Composite Overhead Profiles

Comparison of Payment Schemes

Rate-of-return (ROR) analysis is helpful in comparing the economic value to a contractor of varying payment schemes Examining the economic impact of;
varying retainage policies delay in payment strategies payment of mobilization

Evaluate the net present value between Revenue and Expenses

Summary
Projection of Income and expenses during the life of the project The difference between Expenses and revenue makes it necessary for the contractor to obtain temporary financing Usually a bank extends a line of credit against which the contractor can buy materials, make payments and pay other expenses while waiting for reimbursement from owner
References: Janaka Y. Ruwanpura