Chapter Four: Construction Planning and Scheduling

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Jimma UNIVERSITY

JIMMA INSTITUTE OF TECHNOLOGY


SCHOOL OF CIVIL AND ENVIRONMENTAL ENGINEERING

CONSTRUCTION MANAGEMENT

CHAPTER FOUR
CONSTRUCTION PLANNING AND
SCHEDULING
95 Lecture Notes By: Ahmed N.
Construction Planning
 It requires an intimate knowledge of construction methods

combined with the ability to visualize discrete work


elements and to establish their mutual interdependencies.

 It is a fundamental and challenging activity in the

management and execution of construction projects.

 It is a corner stone of effective construction management

96 Lecture Notes By: Ahmed N.


 It is result oriented - Predefined scope, budget & time

 It is one of the ingredients in a successful project

 Construction planning as well as scheduling must be done by

people who are experienced in and thoroughly familiar with


the type of field work involved.

97 Lecture Notes By: Ahmed N.


 It involves;

 the definition of work tasks

 Choice of technologies & method of construction. (Labor

intensive, Equipment intensive, particular ground


condition, experience & expertise of workers…)
 estimation of the required resources

 estimation of duration for individual tasks

 identification of any interactions among the different

work tasks

98 Lecture Notes By: Ahmed N.


 Construction planning may be said to consist of the

following steps:
 Choice of technology and construction method,

 Determination of the job steps or „activities‟ that must be

performed to construct the project,


 Ascertainment of the sequential relationships among these

activities,
 The presentation of this planning information in the form of a

network,

99 Lecture Notes By: Ahmed N.


Planning Techniques:
A variety of planning techniques are available of which only three
are to be outlined indicating the advantages and disadvantages and
the most application in practice.
 The Networking Schedule Technique

The Critical Path Method (CPM),


The Performance Evaluation & Review Technique (PERT)
 The Bar Charts

 Line of Balance Chart

100 Lecture Notes By: Ahmed N.


1) The Networking Schedule Technique
The Critical Path Method (CPM)
 It is the most widely used scheduling technique

 This method calculates the minimum completion time for a

project along with the possible start and finish times for the
project activities.

 The critical path itself represents the set or sequence of

predecessor/successor activities which will take the longest time


to complete.

101 Lecture Notes By: Ahmed N.


 The duration of the critical path is the sum of the activities'

durations along the path.

 Thus, the critical path can be defined as the longest possible path

through the "network" of project activities.

 The duration of the critical path represents the minimum time

required to complete a project.

 Any delays along the critical path would imply that additional

time would be required to complete the project.

102 Lecture Notes By: Ahmed N.


Program Evaluation & Review Technique (PERT)
 Both PERT and CPM are termed critical path methods

because both use the critical path to complete expected project


duration, early and late times, and slack.

 PERT was developed for application in projects where there is

uncertainty associated with the nature and duration of


activities.

103 Lecture Notes By: Ahmed N.


2) The Bar Charts
 Bar charts present the project schedule plotted to a horizontal

line scale.

 The bar lines represent the time period allocated to each

operation and

 The relationship between the commencement and completion of

each can be readily observed.

 The bar chart has been the traditional management device

104 Lecture Notes By: Ahmed N.


Example of schedule using bar chart

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Advantages of Bar chart:
 Useful to report information to people who are concerned about

a project but may not be involved in day-today management.

 A simple format and readily understood at all levels of

management

 It can provide a quick, visual overview of a project in

convenient way

106 Lecture Notes By: Ahmed N.


Disadvantages:
 Interdependencies among activities are difficult to show.

 The bar chart itself doesn‟t provide a basis for ascertaining

which activities are critical and which are floaters.

 It is not an adequate planning and scheduling tool

107 Lecture Notes By: Ahmed N.


3) The Line of Balance Scheduling Technique
 The Line of Balance schedules are a series of inclined bar lines,

one for each activity.

 The difference between Line of Balance Schedules and a

traditional bar chart is the balance lines are inclined at different


slopes to denote the rate of working of the various operations.

108 Lecture Notes By: Ahmed N.


109 Lecture Notes By: Ahmed N.
Advantages of the Line of Balance scheduling:
 Clearly displays the rate of working of one activity against
another,
 Relates the requirement of specified resources to the
achievement of a planned completion date,
 The schedule clearly indicates the number of units to be
completed by a specific date,
 The principles of planning system are readily understood at site
management level. The schedule is easily updated. Actual
performance can be compared with planned requirements at
any date.

110 Lecture Notes By: Ahmed N.


Disadvantages:
 Only applicable to repetitive forms of construction,

 Summarizes many considerations, this short of detail and hence

explanations

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Construction Scheduling
 A project scheduling is a projected timetable of construction
operations that will serve as the principal guideline for project
execution.
 Scheduling basis itself on planning, and planning ties up its
phase with scheduling.
 Scheduling is necessary for

 Optimum utilization and orderly arrangements of resources,

 control of cost, progress and quality of executed work, and

 capacity allocation to be efficient and effective.

112 Lecture Notes By: Ahmed N.


 Steps in devising an efficient & workable job schedule

 estimate the time required to carry out each activity,

 using these time estimates, compute the time period

required for the overall project completion,


 establish time intervals within which each activity must

start and finish to satisfy the completion date requirement,

113 Lecture Notes By: Ahmed N.


 identify those activities whose expedient execution is

crucial to timely completion of the project,


 using surplus or float times that most activities possess,

adjust the start and finish times of selected activities to


minimize resource conflicts and smooth out demands for
manpower and equipment,
 make up a working project schedule that shows

anticipated calendar dates for the start and finish of each


activity.

114 Lecture Notes By: Ahmed N.


Network diagrams
 show the precedence relationships among activities. It‟s

easier to understand these relationships graphically


 help to understand the flow of work in a project

 are a useful tool for project planning and control, as well as

for scheduling

115 Lecture Notes By: Ahmed N.


Activity-on-Arrow (AOA) networks
 Elements of an activity- on –arrow diagram.

 An activity, which is an element of the work entailed in the

project.
 An event, which is the start and/or finish of an activity or

group of activities.

116 Lecture Notes By: Ahmed N.


Conventions adopted in drawing AOA networks.
 There are only two conventions usually adopted in drawing

networks
i. Time flows from left to right.
ii. Head nodes always have a number higher than that of
the tail node.

117 Lecture Notes By: Ahmed N.


The graphical representation of events and activities
in AOA
 Nodes are represented by labels within convenient geometric
shapes – usually circles.
 Activities are represented by arrows, the arrow-heads being at
the completion of the activities.
 AOA allows only for the finish to start relationship.
 The length and orientation of the arrow are of no significance
whatsoever, being chosen only for convenience of drawing.
 The activity of digging a hole can equally well be represented
by the following Fig.

118 Lecture Notes By: Ahmed N.


 It is equally not essential that arrows should be straight,

119 Lecture Notes By: Ahmed N.


The representation of time
 The expected time that will be required to carry out an

activity (the duration time) is written as a central subscript to


the activity.

 If an activity must, for some reason external to the network,

be completed by a given date, then an inverted triangle can


be drawn above the node at the head of the activity arrow

120 Lecture Notes By: Ahmed N.


Identification of activities
 The node at the beginning of an activity is known as a 'tail' or

'preceding„ node, while that at the conclusion of an activity is


known as a 'head' or 'succeeding' node.

121 Lecture Notes By: Ahmed N.


Fundamental properties of events and activities
 If activity B depends upon activity A, then the two activities

are drawn as :

 while if activity C is also dependent upon activity A, but is

not dependent on activity B, then the three activities are


drawn as:

122 Lecture Notes By: Ahmed N.


 This dependency rule gives rise to two fundamental
properties of events and activities:
1. An event cannot be said to be realized (or 'be reached'
or 'occur') until all activities leading into it are
complete.(event 11 can only be said to occur when
activities 7-11, 8-11 and 9-11 are all complete)

123 Lecture Notes By: Ahmed N.


2. No activity can start until its tail event is realized. Thus,
activity 10-1 1 cannot start until event 10 is realized.

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'Merge' and 'burst' nodes
 Events into which a number of activities enter and one (or

several) leave are known as 'merge' nodes.

125 Lecture Notes By: Ahmed N.


 Events that have one (or several) entering activities

generating a number of emerging activities are known as


'burst' nodes

126 Lecture Notes By: Ahmed N.


Two errors in logic
 Two errors in logic may come about when drawing a

network, particularly if it is a complicated one. These are


known as looping and dangling.

 looping

127 Lecture Notes By: Ahmed N.


 dangling
 „all nodes, except the first and the last, must have at least one

activity entering and one activity leaving them' and 'all


activities must start and finish with a node'

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 Dummy Activity

 An artificial activities which do not require resources and

have zero time duration that only shows a precedence


relationship among activities
 They are drawn as broken or dotted arrows

129 Lecture Notes By: Ahmed N.


 For example, if in making a cup of instant coffee two
activities
 'boil water' and

 'heat milk' could proceed simultaneously,

 This would result in two activities having the same head and

tail numbers

Boil water

130 Lecture Notes By: Ahmed N.


 it is preferable to avoid confusion by the introduction of a

dummy

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 Another example

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Process for Creating AOA Diagrams
1. Find all of the activities that start at node 1. Draw their finish
nodes and draw arrows between node 1 and those finish nodes. Put
the activity letter or name on the associated arrow.

2. Continuing drawing the network diagram, working from left to


right. Look for bursts and merges.

3. Continue drawing the project network diagram until all activities


that have dependencies are included in the diagram.

4. As a rule of thumb, all arrowheads should face toward the right,


and no arrows should cross in an AOA network diagram.

133 Lecture Notes By: Ahmed N.


Activity-on-Arrow (AOA) networks
Example:
Suppose that a site preparation and concrete slab foundation
construction project consists of nine different activities:
A. Site clearing (of brush and minor debris),
B. Removal of trees,
C. General excavation,
D. Grading general area,
E. Excavation for utility trenches,
F. Placing formwork and reinforcement for concrete,
G. Installing sewer lines,
H. Installing other utilities,
I. Pouring concrete.
134 Lecture Notes By: Ahmed N.
Precedence Relations for a Nine-Activity Project Example

Activity Description Predecessors

A Site clearing ---


B Removal of trees ---
C General excavation A
D Grading general area A
E Excavation for utility trenches B,C
F Placing formwork and reinforcement for concrete B,C
G Installing sewer lines D,E
H Installing other utilities D,E
I Pouring concrete F,G

135 Lecture Notes By: Ahmed N.


This network being a graphical display of the proposed plan.

136 Lecture Notes By: Ahmed N.


Estimating duration for an activity

 The time required to complete an activity should depend not

only on the quantum of work to be executed (Q) but also the


resources allocated (R) and the (unit) productivity of the
resources (P).

 Simply put, the time required (T) to complete an activity can be

calculated using the following relationship, provided care is


taken to ensure proper units for all the quantities.
 T = Q / (RxP)

137 Lecture Notes By: Ahmed N.


 For example, the time taken to paint 100 m2 (Q) using 2

painters (R) and assuming each painter can do 5 m2 in an hour


(P), is simply 10 hours (T).

 Life in real projects is however, not as simple, and there could

be uncertainties involved in the estimation of quantities,


resources, and the productivity of a resource.

138 Lecture Notes By: Ahmed N.


 It is really a very challenging task to estimate the productivity of a

particular resource. as it is dependent on a number of parameters:


 quality of management

 technological changes

 workforce knowledge and skill resulting from training and

experience etc.

 Statistical data stored over a period of time for a number of

similar construction projects plays an important role in the


estimation of the three parameters namely, Q, R, and P and
consequently helps in estimating the duration of an activity.

139 Lecture Notes By: Ahmed N.


 Statistical data stored over a period of time for a number of

similar construction projects plays an important role in the


estimation of the three parameters namely, Q, R, and P and
consequently helps in estimating the duration of an activity.

140 Lecture Notes By: Ahmed N.


Activities relationships
Types of activities relationships
 Four types of relationships among activities are:

a) Finish to start (FS).

 The successor activity can begin only when the current

activity completes.
b) Finish to finish (FF).

 The finish of the successor activity depends on the finish of

the current activity.

141 Lecture Notes By: Ahmed N.


c) Start to start (SS).

 The start of the successor activity depends on the start of

the current activity.


d) Start to finish (SF).

 The successor activity cannot finish until the current

activity starts.

142 Lecture Notes By: Ahmed N.


Start and finish times
 Earliest Start Time of an activity (i,j) [EST(i,j)]

 This is the earliest that the activity (i,j) can be started, i.e., all

the necessary preconditions are met.

 Earliest Finish Time of an activity (i,j) [EFT(i,j)]

 This is the earliest that an activity can be completed.

Mathematically, the relationship can be expressed as

 EFT (i,j)= EST(i,j) + D(i,j)

143 Lecture Notes By: Ahmed N.


 Latest Finish Time of an activity (i,j) [LFT(i,j)]

 the latest time that an activity needs to be completed in order

that there is no delay in the project completion.

 Latest Start Time of an activity (i,j) [LST(i,j)]

 the latest time when an activity must be started, in order that

there is no delay in the project completion.

LST(i,j) = LFT(i,j) – D(i,j)

144 Lecture Notes By: Ahmed N.


Scheduling Computations
(Forward Pass Rules)
Rule 1 : The initial project event is assumed to occur at time
zero.
Rule 2 : All activities are assumed to start as soon as possible,
that is, as soon as all the predecessor activities are
completed.
Rule 3 : The early finish time of an activity is merely the sum
of its early start date and the estimated activity
duration.
Rule 4 : At merge point, the early start is the largest value of
the preceding early finish time.
145 Lecture Notes By: Ahmed N.
Rule 5 : The late start date of the last activity is equal to its
early start date.
Rule 6 : The late start date for other activities found by
subtracting the activity duration from the late start
date.

146 Lecture Notes By: Ahmed N.


Total and Free Float
 Total Float (TF)

 The total number of days that the activity can be delayed without

delaying the total project

 Free Float (FF)

 The total number of days that the activity can be delayed without

delaying the successor activity


 (i.e. the amount of time that an activity can be delayed without
taking float away from any other activity.)

 Total Float and Free Float will be zero in critical path of the schedule

147 Lecture Notes By: Ahmed N.


Critical Path Method (CPM)
Background
 In CPM also, the workflow can be shown schematically by the

means of an arrow, where the logical relationships between


the various activities can clearly be seen.
 For CPM, activity durations are considered more deterministic

than a probabilistic .
 Accordingly ,instead of the three time estimates for an

activity, in CPM single time estimate for an activity is


adopted.
148 Lecture Notes By: Ahmed N.
 In CPM also, the similar process of forward and backward

paths calculations to find out the start and finish times, the
floats, the critical activities, and the length of the critical path
are adopted.
 CPM is mostly in use for the construction projects.

149 Lecture Notes By: Ahmed N.


Some questions about the project
 How long will the entire project take to complete?

 Which activities determine total project time?

 Which activity times should be shortened, if possible, or in

other words, how many resources should be allocated to each


activity?

150 Lecture Notes By: Ahmed N.


Definition:
 Critical Path Method (CPM), is a procedure for using network

analysis to identify those tasks which are on the critical path: i.e.
where any delay in the completion of these tasks will lengthen the
project timescale, unless action is taken.
 Critical path (CP) is Longest sequence of activities in a project

plan which must be completed on time for the project to complete


on due date.

 Network charts and CPM analysis used to be carried out by hand.

 Software is now available to perform CPM calculations.

151 Lecture Notes By: Ahmed N.


How to use the CPM?

 List the activities and relationships

 Create a start node

 Draw arrows from Start node to the First activity‟s node

 Sequentially Arrange all Activities from “Start”

 Repeat process from successors for all activities

 Double check for missed relationships

152 Lecture Notes By: Ahmed N.


3

B D
7
2
A F
1 2 5 6
3 8
C
E
7
4
4

Activity on Arrow (AOA)


153 Lecture Notes By: Ahmed N.
Early Start Date Calculation

ES LF
ES= Early Start
3
LF= Late Finish

B D
7
2
A F
1 2 5 6
3 8
C
E
7
4
4

Lecture Notes By: Ahmed N.


Forward Pass
154
ES LF
ES= Early Start
5 LF= Late Finish
3

B D
7
2 14
0 3 22
A F
1 2 5 6
3 8
C
E
7
4
7
4

Forward Pass
155 Lecture Notes By: Ahmed N.
Late Finish Date Calculation
ES LF
ES= Early Start
5 7 LF= Late Finish
3

B D
7
2
0 0 3 3 14 14 22 22
A F
1 2 5 6
3 8
C
E
7
4
7 7
4

Backward Pass
156 Lecture Notes By: Ahmed N.
Critical Path
ES LF
ES= Early Start
5 7 LF= Late Finish
3

B D
7
2
0 0 3 3 14 14 22 22
A F
1 2 5 6
3 8
C
E
7
4
7 7
4

Critical Path

157 Lecture Notes By: Ahmed N.


Illustration for TF, IF, and FF calculation

 Total Float

 Total Float in an activity (i,j) [TF(i,j)]

 Total float is the amount of time by which the start of an

activity may be delayed without causing a delay in the


completion of the project. This is calculated as
 (TF(i,j) = [LST(i,j)]– [EST(i,j)]) or ([LFT(i,j)]– [EFT(i,j)])

158 Lecture Notes By: Ahmed N.


 Free Float
 Free float is the amount of time by which the start of an

activity may be delayed without delaying the start of a


following activity.
 Free Float = (Earliest start time of the following activity –

Duration of the activity – Earliest start time of the activity)


that is
 Free Float = TEj- TEi -D

159 Lecture Notes By: Ahmed N.


 Independent Float
 Independent float is the amount of time by which the start

of an activity may be delayed without affecting the


preceding or the following activity.
 Independent Float = Earliest date for succeeding event –

Latest date of preceding event – Activity duration that is


Independent Float= TEj- TLi-D

160 Lecture Notes By: Ahmed N.


 Interference Float
 It is defined as the difference in Total Float and Free Float. In

other words: Interference Float= Total Float – Free Float.

161 Lecture Notes By: Ahmed N.


PERT
 Commonly used in manufacturing industry especially in the
research and development types of programs.
 It is assumed that activities and their interdependence are well
defined though it recognizes uncertainty in the time estimate of
an activity.
 PERT incorporates uncertainties in activity durations by
requiring three durations for each activity.
 the most probable,

 the optimistic (shortest), and

 the pessimistic (longest) duration.


162 Lecture Notes By: Ahmed N.
 The average or expected time te is given by

 te= (to+4tm+tp)/6

 It is often difficult to arrive at one activity-time estimate; three

subjective definitions of such estimates do not help the matter


(how optimistic and pessimistic should one be).

 Nevertheless, the three time estimate also provides the

advantages of ascertaining the variability or uncertainty


associated with a particular set of estimate.

163 Lecture Notes By: Ahmed N.


 For example, suppose we have two sets of estimate provided

by the different estimator for the same „design foundation‟


activity.

 In order of (te, tm,tp), let the first set of estimate (14, 18, 28) and

the other set of estimates be (17, 18, 25).

 There is large variability in the estimates of first estimator

compared to the second one, even though the expected or


average activity duration turns out to be 19 in both the cases .

164 Lecture Notes By: Ahmed N.


 In order to measure the uncertainty associated with the

estimate of duration of an activity, the standard deviation (St)


and the variance Vt are determined, which in PERT are
defined as:

 St = (tp-to)/6 and

 Vt = (St)2

 The formula for St indicates that it is one sixth of the

difference between the two extreme time estimates.

165 Lecture Notes By: Ahmed N.


Total and Free Float
 Total Float
 The total number of days that the activity can be delayed
without delaying the total project
 Free Float
 The total number of days that the activity can be delayed
without delaying the successor activity
 Total Float and Free Float will be zero in critical path of
the schedule

166 Lecture Notes By: Ahmed N.


FS – Finish to Start relationship With Lead & Lag
 Task „B‟ can‟t start unless Task „A‟ is completed
 For (e.g.) consider a project with two tasks
• Task 1 – Laying bricks
• Task 2 – Plastering
• Plastering can‟t start until laying bricks is complete
(common dependency)
 Case „a‟:

12 5 17 17 15 32
FS=0 Plastering
Laying Bricks
12 0 17 17 0 32
• There is no lead or lag

167
• Plaster
Lecture Notes commences
By: Ahmed N. after complete laying of bricks
 Case ‘b’:
12 5 17 24 15 39
FS=7
Laying Bricks Plastering
12 0 17 24 0 39
• There is a lead of 7 days
• Plaster commences 7 days after laying bricks

 Case ‘c’:
12 5 17 12 15 27
FS=-5
Laying Bricks Plastering
12 0 17 12 0 27
• There is a lag of 5 days
• Plaster commences 5 days before completion of laying bricks
168 Lecture Notes By: Ahmed N.
Resource Management
 A resource usually means any of the 4M; manpower, materials,

machine and money. The basic objective of resource


management is to supply and support the field operations so that
established time objectives can be met and cost can be kept
within the construction budget,

169 Lecture Notes By: Ahmed N.


When a resource is overload, there are three solutions
available to address the problem;
1. Delay activities with float
2. Resource limited leveling - where resources are assigned
to a predetermined limit and rescheduled if necessary
3. Time limited leveling - where the end date of the project
is fixed and resources are increased to meet the revised
histogram

170 Lecture Notes By: Ahmed N.


Resource Estimating
The resource estimate is linked directly to the scope of work (SOW)
and bill of materials (BOM).

Illustration;
 How many workers are needed to do the excavation job of 100m3 in
10 days?

 Resource and duration trade-off analysis;


a. 1 worker can do it at 10 m3 per day
b. 2 workers can do it at 5 m3 per day
c. 4 workers can do it at 2.5 m3 per day
d. 8 workers can do it at 1.25 m3 per day
e. 10 workers can do it at 1 m3 per day

171 Lecture Notes By: Ahmed N.


Forecasting and Loading
 During Forecasting the total resource requirement the

following should be considered;


1. the normal efficiency of the work force
2. the existing and future resource commitment
3. the anticipated sickness and absenteeism rate
4. resource availability (can be increased by working
overtime, changing the work pattern and using sub-
contractors)

172 Lecture Notes By: Ahmed N.


 In resource loading the resource forecast is compared with

available resources with overloads and under loads are noted

 An overload occurs when the forecast exceeds the available

resource and an under load is when the forecast is lower than


the available resource.

 An overload can cause the activity to take longer than

estimated while an under load can also a problem because these


resources consume money even though they are not utilized.

173 Lecture Notes By: Ahmed N.


 Suggestion to address an overload resource problem
1. Working overtime (but consider the effect on productivity)
2. Increasing productivity through education & training
3. Incentive are given to for early finish

 Suggestion to address an underload resource problem


1. moving un employed resource to critical activity
2. Moving unemployed resource to fill-in jobs and tasks
3. Hiring out resources internally or externally.

174 Lecture Notes By: Ahmed N.


Leveling and crushing
 crushing
 CPM is based on the assumption that duration of an activity

can be reduced or crashed to a certain extent by increasing the


resources assigned to it.
 As is known the execution of an activity involves both the

direct costs and indirect costs.


 However, there is no point in attempting to crash all the

activities by increasing the resources.

175 Lecture Notes By: Ahmed N.


 Any reduction in duration of critical path activities can reduce

the project duration.

 An activity can be performed at its normal or most efficient

pace or it can be performed at higher speed. The duration


associated with the former is called ‘normal duration‟ and the
duration associated with the latter is called ‘crash duration‟.

 Some activities along the critical path sometime need to be

shortened in order to reduce the overall duration of the project.

176 Lecture Notes By: Ahmed N.


 This leads to a decrease in the indirect expenses (due to

decrease in duration) and an increase in the direct expenses


(due to more mobilization of resources).

 The relationship between the cost of the job and the duration

has been assumed to be linear. The steeper the slope of the line,
the higher the cost of expediting the job at an earlier date.

 This expedition of activity at an earlier time is referred to as

Crashing.

177 Lecture Notes By: Ahmed N.


 Leveling

 Resource leveling is the process of moving activities to

improve the resource loading profile. It involves the


smoothening of the resource overload to meet the available
resource through
1. Changing the logic of the activities in the network
2. Moving non- critical activities within their float

178 Lecture Notes By: Ahmed N.


Cash Flows
 Cash Flows for Construction Projects / Companies
 The Two Primary Threats for determining construction company’s financial cash
flow are:
 Sufficiency of the Working Capital, and
 Profitability
 The three major parts of Cash flows are:
 Cash Inflows,
 Cash Outflows, and
 Cash Flow Net Balance
 Cash Flow Net Balance (Cash Generated by the Project) = Cash Inflows (Cash
receipts) – Cash Outflows (Cash Disbursements)
 Cash Inflows > Cash Outflows  Cash Flow is +ve  Project is Liquidity Provider
 Cash Outflows > Cash Inflows  Cash Flow is -ve  Project is Liquidity
Consumer

179 Lecture Notes By: Ahmed N.


 Cash In Flows, Cash Out Flows and Net Cash Flows
 Cash Inflows
 Payments

 Advance, Interim, Final and Closing of Account Payments


 Works Financing

 Supplier‟s Credit and Sub Contracting


 Loans / Credits

 Short and / or Long Term Loans


 Capital and Operational Incomes

 Equipment, rent and lease incomes


 Construction Plants sales incomes
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Managing Cash Flows
 Cash Outflows
 Direct Costs
 Material, Labour and Machinery Costs
 Indirect Costs
 Project and Head office Overheads; Risk Allowances and Reserves;
Profit Margins;
 Works Financing / Loans and Credits Settlements
 Suppliers‟ Credit and Sub Contracting Settlements; Loans and
Credits Settlements
 Capital and Operational Expenses
 Equipment, rent & lease admt‟n expenses
 Construction Plants production expenses

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Example
 The project life is 25 years

 The project cost=10million

 The sum of annual maintenance cost, overhead cost and lease

payment equals 332,800Birr per year two years after the


commencement of the project.
 The sum of annual maintenance cost, and overhead cost equals

182,800Birr per year for the first two years.


 Periodic maintenance cost each five years equals 300,000Birr

 Salvage value 2.5million Birr.

 The rent income 1,524,000Birr per year


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Cash Flow Diagram

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The Time Value of Money

Which would you rather have -- $1,000 today or


$1,000 in 5 years?

Obviously, $1,000 today.

Money received sooner rather than later allows one to


use the funds for investment or consumption purposes.
This concept is referred to as the TIME VALUE OF
MONEY!!

184 Lecture Notes By: Ahmed N.


Formulas
 Common formulas that are used in TVM calculations:*

 Present value of a lump sum:

PV = FV * (1/ (1+i) n)
 Future value of a lump sum:

FV = PV * (1+i)n
 Present value of a cash flow stream:

PV = S [FVt * (1/ (1+i) n)]


t=0

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 Future value of a cash flow stream:
n

FV = S [PVt * (1+i)n-t]
t=0

 Present value of an annuity:

PV = A*((( 1+i)n -1) / (i*(1+i)n))

 Future value of an annuity:

FV = A*(((1+i)n -1) / i)

Lecture Notes By: Ahmed N. 187


Variables

 where

 i = interest

 t = time period

 n = number of time periods

 A = annuity

 PV = present value

 FV = future value

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Compound Interest
When interest is paid on not only the principal amount invested,
but also on any previous interest earned, this is called
compound interest.

FV = Principal + (Principal x Interest)

= 2000 + (2000 x .06)

= 2000 (1 + i)

= PV (1 + i)

Note: PV refers to Present Value or Principal

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Future Value (Graphic)
If you invested $2,000 today in an account that pays 6%
interest, with interest compounded annually, how much
will be in the account at the end of two years if there are no
withdrawals?

0 1 2
6%
$2,000
FV
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Future Value(Formula)
FV1 = PV (1+i)n = $2,000 (1.06)2
= $2,247.20

FV = future value, a value at some future point in time


PV = present value, a value today which is usually designated as time 0
i = rate of interest per compounding period
n = number of compounding periods

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Present Value
 Since FV = PV(1 + i)n.

PV = FV / (1+i)n.

 Discounting is the process of translating a future value or a set

of future cash flows into a present value.

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Solved problems under this chapter

is available on separate pages

please use it!!!!!!!

193 Lecture Notes By: Ahmed N.

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