Prof. MadYa Ir.

Salihudin Hassim
FORECAST CASH FLOW Ptofesor Ma<lga
Jabatan Keir.r ruteiaan Arram
Falct:lti Kcjurtlteraarr
{.hrivrlsi.ti ?utta t':1al:'.;::"*r
4.? iOi) ::er r:tur3. SaidlE()l'
Tendering Process

One of main activity of construction company.

Most common way of getting job.
Testing/assessing company' s competitiveness in the market.
Promoting the company. Active company will get market's att€ntion.
Fix overhead for the company

Pre-contract Activity

Exploring opportunities
Deciding whether to participate in the tender or not
Buying tender document
Estimating base cost
Determining tender price
o Analyzingtenderdocument
o Getting quotation from suppliers and sub-contractors.
o Evaluating the quotations.
o Determining fix cost and overhead cost.
o Planning execution schedule
o Forecasting cash flow
o Analyzing financial cost
o Analyzingmarket price among competitors
o Finalizing final tendei price
o Strategizing price distribution to improve cash floil maximizing potential
gain from possible variation.
Filling up tender document
Checking tender documenf
o To avoid possible calculation error
o To a.void from being disqualified because of non conformance of tender
requirement.
Submitting complete tender document before closing of tender.

Decision to participate in any tender is based on the following criteria:-

- current work load
- capabilitylcapacity of company's estimating team.
- Grace period for preparing tender
- ReQuired working capital
- Type, size and project value.
- Availability ofresources
- Terms and conditions of contract especially method of payment.
- Type, size and value ofproject.
- Location of project
- Market condition
- Background of client
 ,---

-
- Background of S'O

the contractor shall study the tender requirements:

After deciding to participate in the tender, and instruction to tenderer.
- Study the drawings, bill or q,umity, specifications
- Explore th";"rip;actical and cosi effective method of construction'
- StudY the site condition:
o Neighboringboundaries'
o Access road
o ScoPe of work
' o Services
ootherthingsthatcaninfluencethecostofconstruction. cost of the
- terms and conditions of contract on the
Study the influence of tire
Project:-
o Contract Period
o ofcontract
TYPe
o Form of contract
o Addendum
o Amount of Liquidated Ascertain Damage
o Defect liabilitY Period
o Maintenance cost if anY
o Retention fund
o Bonds and insurances
o Tender validitY Period
- period
Market condition during the contract
o Availability of the materials and services
o Interest rate
o Government policy and regulation service cost
o Up u'd down of the material price zlnd

Price'
Good Practice for Preparation of Tender

- Separate the documents accordingly:-

o Drawings
o SPecifications
. o Billof quantitY
o Preliminary
o Tender forms to be comPleted
completed'
- Make 2 copies of the tender forms to be
o origirrui"ofy;[ only be used after everything has been finalized.
o One copy for the working estimate' s'o before the
o orr. cop| i;1;" if therJ it *v changes to be notified by the
closing of the tender'
 . Always compare the document with TTD before submitting the
tender if there is any amendments to the tender .
For the Lump Sum type of contract:
o Refer to the previous record of similar facilities
o Study if there is any special requirements compare to the previous project.
o If the company or estimator does not have any previous experience on
similar project, bill of quantity shall be prepared.
o Cost for temporary work shall be given special attention because it is deem
to be considered as part ofthe price.
Divide the list of work according to various categories:
o Specialist works such as piling work, electrical, air-cond, etc.
. o Works to be given to sub-con
o Works to be done by sub-labour.
o Works to be done by direct-labour
o Works involving machineries.
o Other works
Estimating methods
- Volume & Area
o For lump sum tender where bill of quantity is not provided.
o Calculate the volume/area of the work to be done
o Multiply by standard per unit cost.
o The project/company must have the following characteristics before this
method can be applied.
. Past data for previous projects must be reliable.
. Project must be similar in nature with previous projects. It has
similar shape, functions etc.
. Location, time and other factors that can influence the must be
factored in the price.
. This method can only served as rough/fast estimate for comparison
to verify the reasonableness of the total cost.
o A reliable estimate must be done based on the estimated quantity of required
material, labour and machine.
. Study the drawings and specifications.
: IdentiVlist all materials, machineries, labour etc required for the
project. Missing items will caused the contractor to under price the
tender.
r Strategize the method of construction
. Prepare work schedule
. Calculate the quantity of material, machineries and labour.
. Multiply the quantity by per unit price.

Bill of Quantity.

The quantity of items listed in the BQ is done by professional. Accuracy is

within l}ohrunge.
o Get the price for per unit item and multiply by the given quantity.
o Unless the quantity is specified as provisional the quantity is considered
final. Contractor will get full payment even if the quantity is overstated.
r

o Contractor shall verify the quantity with the drawing if the quantity is stated
as provisional.
o If the final figure differ a lot with the actual work, it will definitely effect the
cost/ profitability of the project.

Quotations from sub-con / supplier

o To get the information on the estimated price.
o Ensure that the same terms & conditions and specifications is applied to the
sub-con.
o Ensure that every sub-con has the same amount and understanding of
information
. o Check for the counter proposal from sub-con.
o If necessary the following information shall be given to sub-contractors to
help them to make a reasonable quotation:-
. Drawings and specifications
r Terms with the sub-con
' Special information on the main contract
'. Completeness requirement for the quotation.
Over-time
. Bond
Quotation validity period.
. Work regulation
r Storage
' '' Implementation schedule
'. Construction method
Closing date
o Ample time shall be given to the sub-cons for them to submit their
quotations.
o Shortage of information, document and time will cause:
. Sub-cons/supplier offering higher price because of the uncertainties
arrd risk involved.
. No response
. Unreliablequotations.
After the base cost (dir.ect cost) has been calculated, the contractor will have to decide on the
final tender price to be offered to the client. He has to strike a balance between market price
and fair price as to increase the chance of getting the job without sacrificing too much on the
profitability.

Market Price
- Based on supply and demand
- Influence by economic situation.
- Depend on competitors' strategy
- Change from time to time

Fair Price
- base cost r financial cost rover head + reasonable profit
 depend on the company's capability, skill and efficiency to execute the project
Company's rating amongst the vendors, sub-cons, suppliers will influence the base
cost and financial cost.
To be able to construct at the lowest reasonable price, lhe company must:
o Have the right skill and experience of the compariy's staff
o Employ the most efficient construction method
o Have proper work schedule
o Get the full support from the sub-cons, suppliers and vendors
o Get cooperation from the s.o and authorities
o Have good rePutation.

Tender Price Decision.

The contractor must have the knowledge of the following information before deciding on the
tender price:
- base cost
o material
o machineries
o labour
- preliminaries
o mobiliZation
o contractual requirement such as bond and insurance
o maintenance of site office
o supervisoryteam
o temporary facilities such as assess road, temporary diversion etc.
o entertainment
o etc
- fix over-head cost
o tendering cost
o office maintenancs
o office staff
o licensing
o etc
- profit
o relationshiP with client
o companY's strategY
o market condition
o comPetitors

The above data will be analyzed with the work schedule to estimate:

cash flow
required working capital
financial cost
opportunity cost
=-F-

Working Capital

It is very important for the contractor to know the estimated wor|ing capital for a project as to
avoid financial problems during construction.

Estimated amount of required working capital can only be prepared if the contractor has done
his forecast cash flow. To be able to do the forecast cash flow, the contractor need to know:
- estimated cash-irV income
- estimated cash-out/ expenditur

Estimated oash-in requires the following information:

- Contract value schedule

- Work schedule
- terms and condition of the payment from client

Estimated cash-out requires the following infprmation

- Work schedule
- Method of construction
- Work Breakdown Structure
Terms of payment with sub-con, labour, supplier etc.

Direct cost data

focus on cost for every item/ activity of the project to be incurred at site.
- Based cost
- Tabular form.
- Profit and over-head are excluded

, Work Schedule
- Information on when to start and the duration of each activity.
- Relationship between activities
- Resources for each activity.
- Person I team responsible for the activity.
Presented in Gantt Chart and CPM

Cost Curve
- Combination of direct cost data and work schedule.
- Cost of work distributed through all activities along the time scale in work schedule.
- Only include direct field cost which is considered as direct cost.
- In the form of s-curve

Production Curve
 Modified cost curve which represent total tender cost
Based cost r overhead + profit * other indirect cost
Indirect cost include insurance, bond, supervision, tax, entertainment etc.

Schedule ofL value Curve

vaxlLlg uL,lr vv

Adjusted weighted value for all items for the contractor's / owner convenience.
Served as basis for progress payment.
Adjustment shall not change total tender price.
Modified production curve.

Cash Income Schedule

Cash to be received throughout the contract period.

Based on the certified interim pa;rment prepared by the s'o'
Interim Certifioate valuation made based on schedule value and progress at site.
- Histogram / s-curve'
Work Schedule P1anning.

The following factors need to be considered:-.

Construction/ contract Period ' i
. o Period must be reasonable and achievable
o Proposed period will become contractual'
o-rl,**rj1;,ilH*"es must be considered
. Labour
. Material
. Financial
- Handing over (partial, total completion, commissioning)
Weighted for each item / activitY.
- Method of construction
- Payment Process/ Procedure
- Cost for each item/ activitY
Payment terms with sub-con, supplier etc'

Scheduling
- Identify all activities to be done.
- Decide how the activities are going to be carried out'
o Own labour
o Sub- labour
o Sub-con
- Determine the time taken to complete each activity based on the available resources.
- Prepare CPM
- Transfer to Gantt Chart.

Ex.
 Activity Duration (davs) Precedence Activity
A 5 none
B 12 none
a
D -) A
F 4 B&A
E 10 F &D
G 8 A&B

Fig 3

Critical Path B-F-E

Fig 4. Ghantt Chart. Project

Schedule

I tBt
F
E

A
D -

5 10 15 20 25

Prepare Cost Schedule

Resources Activitv days cost CosVday

Direct labour A 5 1000 200
Material B t2 6000 500
a
Direct Labour D J 1500 500
Supplier E 10 5000 s00
Sub- F 4 4000 1000
contractor
Sub-labour G 8 8000 1000

Estimated cost 25500

overhead 10oZ 2550
Total cost 280s0
Add Profit 5% 1403

Total Contract Price 29453

Prepare cost schedule, cost curve and production curve.

Total (profit & overhead) shall be equally distributed to every iGms.

Total contract price / Total cost

:29453 I 25500
:1.155

Fig 6. Production Schedule

Period workinq (davs) 5 1C 15 20 25 30

week 1 2 3 4 5 6
Labour (A) 1000 (D) s00 (G) 3000 rG) 5000
Material (B) 2500 (B) 2500 (B) 1000
Sub-con (F) 3000 (F) 1000
Suppliers (E) 2000 (E) 2500 (E) 500
Total Cost for the week 3500 4000 7000 8000 2500 500
Cumulative Cost 3500' 7500 14500 22500 25000 2ss00
Production value 4043 4620 8085 9240 2887 578
(x1.155)
Cumulative Production 4043 8663 16748 25988 28875 29453
value

week 1 2 3 4 5 o
Cumulative Cost 3500 7500 14500 22500 25000 25500
Cumulative' Prod uction 4043 8663 16748 25988 28875 29453
value

10
 Production Curve vs Cost curve

25000
.q
o
(5 20000
o
'E 15000
E
10000

5000

0
34
Period (week)

Forecast cash flow

- direct impact on project implementation strategy.
- Cost curve and production curve do not give accurate indication of the estimated
amount and timing of the cash requirement.
- Cost curve does not take into consideration the terms and conditions with the sub-
con, sub-labour, suppliers, vendors etc.
- Terms and conditions with the client such as progress payment procedure, retention
fund clause etc. need to be factored in.

Production Value Curve

11
 - Value of items/works listed in the tender documents will be used as a base for
progress valuation and rate ofvariation order.
- Corting for certain items are suppose to be hidden and need to be distributed for
paSrment pu{pose.
o Overhead
o Profit
o Lobbying cost
o Risk
o etc
Unequal distribution is done for strategic reasons (manipulation) to increase the
potential profit or improve the cash flow of the project.
,Client will counter the manipulation during price rationalizationprocess.
Price manipulation can be risky if the scope of work change.
Cash flow can be improved by employing 'front loading' strategy.

Ex.

distribute (overhead and profit) equally ( X 1.155)

activities A, B and D are schedulep to be carried out at the beginning of the project.
Assume that we have decided to increase the value of activities A, B and D by 20%
for the pu{pose of getting higher progless payment at the beginning of the project.
The adjusted value will be as follows;

Activity Original Weight Weighted Value

Value factor (RM)
(RM)
A I 155 t.2 1 386
B 6930 1.2 83 16
D 1733 t.2 2080
9818 11782

B alance of c ontrac t t7 82
:-ifoo li ;rt

Balance of contract before adjustment

:29453 - 9818
: RM 19635
Weight factor for balance of work
:17671 .l 19635
:0.9

Activitv Orieinal Value Weieht factor Weiehted value

12
 (RM) (RM)
E 5775 0.9 5198
F 4620 0.9 4158
G 9240 0.9 8315
k7571

Fig. 8 Schedule of Value

Activity cost Production Contract

Value value
Labour r A 1000 1 155 1386
material B 6000 5930 8316
labour D 1500 1733 2080
Sub-con E 5000 5775 5198
Sub-con F 4000 4620 41 58
labour G 8000 9240 8315
10a% 25500
107o overhead 2550
110 % 28050
5V"prafit 1403
115.5% 29453 294s3 29453
(Contract Value)

Calculate the production value based on schedule of value

Activity Duration Contract Contract value per

(dav) Value day
A 5 1386 277
B t2 83 16 693
D J 2080 693
E 10 st98 520
F 4 4198 1040
G 8 8315 1040

l3
 qrnlative Fno*.rtim Qne vs Arrrddi\re Oolffid Val rc
/ O,I1e n,
(
36m0
.H 3oooo
e25000
g 20m0
.='15000
B room
C
E 50m
0

'r
"4F
kiod (upd0

+ qrmiiti\,e @Ldicn + cumrlltirc vdue

t4
Cash lncome Curve

- Estimated income is based on

o Progress schedule
o Rate of the itemslworks
o Terms and conditions of payment
r Valuation frequency
. Processing procedure and period
. Retention clause
1' r Etc
For the above case, the terms and conditions are as follows:

- valuation is made every end of the week (fifth day)

- l}%retention fund
- Payment made 3 days after the valuation.
- Final payment will be made 5 duyf after the completion of the project.

Prepare cash income schedule .

Cash lncome Schedule

Ddlation (week) 1 .2 3 4 5 6 7
Production Value 4851 5545 7624 831 5 2598 520 0
Cumulative Production Value 4851 10396 1 8020 26335 28933 29453 29453
10% retention fund 485 1040 18A2 2634 2893 2945 0
Pavment due 4366 9356 16216 23701 26040 26s08 29453

lnterim certificate 4366 4990 6860 7485 2339 468 0

Pavment received 4366 4990 6860 7485 2339 3413
Total 4366 9356 16218 23701 26040 29453

15
 lncome curve vs Contract Value Cunve

35000

30000

25000
.g
o
(E
G
20000

= {
E) 1 5000
E'
E 1 0000

5000

'4
Duration

16
Cash Requirement Planning.

- Cash is required to pay the direct labour, material, sublhbour, sub-contract etc.
- Each group has is own terms and conditions.
- Terms and conditions are usually clearly written in the contract form.
- Common practice in the industry will become the guideline if no formal agreement
is signed.
- Late payment will cause
o Delay
i. o LAD
o Termination
o Legal claim
- Estimate of the amount of cash and the time to ensure that the allocation is ready
when it is needed

Common Terms and Condition for Construction Industry in Malaysia

Group Terms and Conditions

Direct Labour Monthly

Cash
Advance/loan every week
Supplier Cash
Credit
- 30 to 60 days
discount for cash payment

Own plant and machinories Monthly installments

Latest bv 3 months or repossess
Rental machineries Based on rental agreement
- daily
- weekly
- monthly
Sub-labour Monthly
Based on progress valuation
Sub-contractor Monthly
Back to back
Based on Drosress valuation
Total sub Immediately after receiving payrnent
from client
Lons term establish suoolier Credit limit to be serviced montly

L7
For the above example, assume that

- direct labour to be paid daily

- sub-contractor to be paid every end of the week n
- supplier to be paid every end of the fifth day n"
- Sub-contractor to be paid 4 days after valuation minus 1004 retention fund.
- Main vendors to be paid 4 days after valuation.
- Valuation for sub-contractor and vendor to be made every 5 days

Cost Schedule

)uration (days) 1C 1l 2C 2l 3C

rveek 1 2 3 4 5 6
abour (A) 1000 (D)1500 (G) 3000 (G) 5000
natrerial (B) 2500 (B) 2500 (B) 1000
3ub-con (fl 3000 (n 1000
Vendor (E) 2000 (E) 2500 (E) 500
fotal cost 3500 4000 7000 8000 2500 500
lumulative Cost 3500 7500 14500 2250A 25000 25500

18
35000
30000
25000
20000
1 5000
1 0000
5000
0

t9
Cost Incurred Schedule

/Vork Duration (day) E

1C 1l 2C 2l 3C
/Ueek 1 2 3 4 5 6
-abour (A) 1000 :D) 1500 G) 300c iG) 500c
Vlaterial (B) 2500 t'B) 2500 :B) 1000
Sub-con (F) 3000 (F) 1000
- retention -300 -100
travable sub-con 2700 900
rendor rE) 2000 'E) 2500 (E) 500

Cash Requirement

/Uork Duration (dav) E 1C 1l 2C 2l 3C

1E

//eek 1 I A E
€

-abour A) 1000 D) 1500 G) 3000 :G) 5000

Vlaterial :B) 2500 B) 2500 B) 1000
Sub-con 270C 90c 40(
rendor 200c 250C 50(
Iotal cash req. 350( 400c 400c 770C 290C 25AC 90(
Sumulative cash req. 350C 750C 1150C 1 920C 2210C 2464C 2550C

20
 I
I

Cash-flow
- the difference between cash received and cash out.
1'

Cash received - cash requirement

: surplus/ deficit

Deficit shall be addressed by

- financing ,
o intemal source
o external financing
- negotiating better terms and conditions
- repackaging

Cash-flow schedule

luration 1 2 3 4 5 6 7
lash Received 4366 4990 6862 7483 2339 3413
lumulative cash received 4366 9356 16218 23701 26040 29453
]ash pavment 3500 4000 4000 7700 2900 2500 900
lumulative Cash oavmeit 3500 7500 1 1500 19200 22100 24640 25500
lash flow -3500 366 990 -838 4583 -161 2513
lumulative cash flow -3500 -3134 -2144 -2982 1601 1440 3953

2l
 Cash ln vs Gash Out

.q
I zoooo
.E
(s

=
=E''
P tsooo
E

Duration (week)

22