PROJECT CASH FLOW

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PROJECT CASH FLOW
ARE 413 CONSTRUCTION MANAGEMENT By MOHAMMED
JALALUDDIN LECTURER CONSTRUCTION ENGINEERING
MANAGEMENT DEPT Handout 11
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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

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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

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Cash Flow Projection

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

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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)

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Cash Flow
Source Dr. L. K. Gaafar
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Cash Flow
Source Dr. L. K. Gaafar
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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

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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)

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Sample S Curve
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Contractors Income Profile

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

Duration
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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
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Expenses and Income Profiles
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Expenses and Income Profiles
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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

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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

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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

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Mobilization Advance Payment

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

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Expenses and Income Profiles (with mobilization
advance)
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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

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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

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Plot of maximum overdraft
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Composite Overhead Profiles
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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

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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