Calculating the Cash Flow

for a Project

Chapter 4 (page 135) of the Handbook emphasises the importance of contractors

to monitor cash flow carefully. At the tender stage, it is important to calculate the
cash flow for the project to estimate the cost of borrowing, an overhead for the
project. After award of the contract cash flow must be monitored to ensure that
bank overdrafts are not exceeded.

Introduction

This example of the calculation of the cash flow for a small construction project
is based on a similar example to show how, based on initial value data, the maxi-
mum amount of cash required to complete the work may be calculated. For sim-
plicity and ease of understanding, a number of assumptions have been made when
undertaking the calculations. The data used to represent the calculations of cost
and value are purely illustrative and not representative of the true costs and value
of actual construction work.

The Data Required

Chapter 4 indicates that the following data are required to calculate the cash flow
for a project:
■
a graph of contract value against time;
■
a graph of contract cost against time;
■
the measurement and certification interval;

A Handbook for Construction Planning and Scheduling, First Edition. Andrew Baldwin and David Bordoli.
© 2014 John Wiley & Sons, Ltd. Published 2014 by John Wiley & Sons, Ltd.
 ■
the delay in payment between certification and the contractor receiving the
cash;
■
the retention conditions and repayment arrangements;
■
the project costs broken down into labour, plant, materials and subcontractor
categories and
■
the terms of payment for the cost of the resources used.
Each of these is now discussed.

A graph of contract value against time

In this example, it is assumed that the total value of the construction work is
£54,000. (This value is calculated from the bid rates and quantities in the Bill of
Quantities document.)
The value of the work for each month of the project is shown in Table 1 together
with the profit margin covering all overheads is shown as a percent of value for
each month of the project. (It is assumed that the profit margin varies with the
type of construction work.)

Table 1 Value of work per month and profit margin.

Month Number 1 2 3 4 5 6 7 8 9 10
Value of work each month 2 3 4 8 9 9 8 5 4 2
Profit (% of value) 6 6 6 6 6 6 10 10 10 10

A graph of contract cost against time

Having calculated the value of the construction work each month, it is possible to
calculate the cost per month. Reviewing the costs that were used to make up the
cost rates in the Bill of Quantities could produce these data. Alternatively, an
approximation may be made by assuming the cost of construction, which is a
fixed percentage of the value of the work. In this example, it has been assumed
that the gross profit margin is 10% of the contract value and that this percentage
applies to each activity. On this basis, it is possible to calculate the cost of con-
struction work completed each month together with the cumulative cost of con-
struction. From these data, it is possible to produce a graph of cumulative cost
against time.

The measurement and certification interval

These data are known from the contract documents. In this example, it is assumed
that a measurement and certification are made monthly.
The delay in payment between certification and the contractor receiving the cash
In this example, it is assumed that there is a delay of payment of 1 month from
agreed certification to the contractor receiving payment.
The retention conditions and repayment arrangements
Retention is at a rate of 5% up to a maximum of £3000. Half of the total reten-
tion is to be released on practical completion and half 6 months later.

The project costs broken down into labour, plant, materials and subcontractor categories
In practice, the activity costs will probably comprise labour, plant, materials and
subcontractor costs. It is important to know the build up of these costs because
the payment terms for each type of resource may vary. In this example, it has been
assumed that all costs are subcontractor costs.

The terms of payment for the cost of the resources used

In this example, it is assumed that the main contractor meets all subcontractor
costs in the month in which these costs are incurred.
The calculation of the cash flow is shown in Table 2.
From Table W4, it is evident that the project is in a negative cash flow situation
throughout the construction period and the cumulative cash flow only becomes
positive 1 month after the completion of the construction work. The contractor
will have to fund all the construction work from company resources or via a loan.
Table 2 Calculation of Cash Flow (Cash-In and Cash-Out).
Month 1 2 3 4 5 6 7 8 9 10 11 16
Value of work completed (£’000) 2 3 4 8 9 9 8 5 4 2
Cumulative Value of work 2 5 9 17 26 35 43 48 52 54
completed
Cumulative Value less retention 1.8 4.5 8.1 15.3 23.4 31.5 38.7 43.2 46.8 48.6
Cumulative monies received 1.8 4.5 8.1 15.3 23.4 31.5 38.7 43.2 46.8 48.6 48.6
Cumulative retention paid 2.7 5.4
Cost of work completed 1.88 2.82 3.76 7.52 8.46 8.46 7.52 4.5 3.6 1.8
Cumulative cost 1.88 4.70 8.46 15.98 24.44 32.90 40.42 44.92 48.52 50.32
Cumulative cash out 1.88 4.70 8.46 15.98 24.44 32.90 40.42 44.92 48.52 50.32 50.32
Cumulative cash flow −0.08 −0.2 −0.36 −0.68 −1.04 −1.40 −1.72 −1.72 −1.72 0.98 3.68
Notes:
1. All the value, cost, retention, cash in and cash out figures shown are multiples of £’000.
2. Cumulative cash flow = cumulative monies received + cumulative retention paid – cumulative cash out.