PROJECT CASH FLOW

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
 Contractor’s Expenses and Income Profile
 Contractor’s 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 Contractor’s Expenses and Income Profile
 To know the Contractor’s 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
S progress and costs
R
• Cumulative costs across
the duration of the
project
• A graphical portrayal of
Duration
the outflow of monies
(both direct & indirect)
 Cash Flow
Activity Days Cost ($) Cost/day
A 2 200 100
B 5 500 100
C 2 200 100
D 7 500 71.4
E 1 100 100
F 2 100 50

Source: Dr. L. K. Gaafar

 Cash Flow Daily Expenses
180

Activity Days Cost ($) Cost/day 160

A 2 200 100
140
B 5 500 100
C 2 200 100 120

Cost ($)
D 7 500 71.4 100

E 1 100 100 80

F 2 100 50 60

40

Day Activity Cost of day Total cost 20

1 A 100 100
0
2 A 100 200 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

3 B 100 300 Day

4 B 100 400 Cumulative Expenses
5 B 100 500
1800
6 B 100 600
7 B 100 700 1600

8 C,D 171.4 871 1400

9 C,D 171.4 1043
10 D,E 171.4 1214 1200
Cost ($)

11 D 71.4 1286 1000

12 D 71.4 1357
800
13 D 71.4 1428
14 D 71.4 1500 600

15 F 50 1550 400

16 F 50 1600
200

Source: Dr. L. K. Gaafar

1 2 3 4 5 6 7 8 9 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 owner’s 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
Contractor’s Income Profile

Stair-step
appearance since
the progress
$ payments are paid
in discrete
amounts
Duration
Contractor’s Expenses and Income
Profile

• Clear indication of
expenses and income
$
• The difference
between Expenses and
revenue makes it
necessary for the
contractor to obtain
Duration
temporary financing
Expenses and Income Profiles
Expenses and Income Profiles
 Contractor’s 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

contractor’s 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