See discussions, stats, and author profiles for this publication at: https://www.researchgate.

net/publication/245283098

Company-Level Cash-Flow Management

Article in Journal of Construction Engineering and Management · March 1996

DOI: 10.1061/(ASCE)0733-9364(1996)122:1(22)

CITATIONS READS

89 2,822

1 author:

Ronie Navon
The Open University of Israel
117 PUBLICATIONS 2,687 CITATIONS

SEE PROFILE

All content following this page was uploaded by Ronie Navon on 25 March 2021.

The user has requested enhancement of the downloaded file.

 COMPANY-LEVEL CASH-FLOW MANAGEMENT

By R. Navon, l Member, ASCE ronie@g.technion.ac.il

ABSTRACT: The importance of cash-flow management, and thus the need for it, is a matter of consensus
among researchers and practitioners alike. They all agree about the difficulties in generating automatic cash-
flow forecasts at the project level due to such problems as compatability-which is explained in this paper-
or the lack of detailed data. At the company level it is even more difficult to forecast cash flow, due to the
varying levels of data detail for different projects. The paper begins with a comprehensive background of cash-
flow management. It then describes the development of a cash-flow management model for the organizational
level, followed by the detailed computer program written on this basis. The system presented here is unique
Downloaded from ascelibrary.org by Technion Israel Institute Of Technology on 03/22/21. Copyright ASCE. For personal use only; all rights reserved.

because it manages the cash flow of the company as a whole, it is flexible-accepting projects with varying
degrees of detailing levels, it requires no human involvement in cash-flow generation, it is accurate, and it is a
typical management tool. The uses of such a tool are also discussed.

INTRODUCTION forecasting models for project-level cost or cash flow, and a

Cash is the most important of the construction company's
resources, because more construction companies fail due to
lack of liquidity for supporting their day-to-day activities than
because of inadequate management of other resources (Singh
and Lakanathan 1992). Cash requirement and profitability are
two different issues, even though they are connected. Peer and
Rosental (1982) state that a company can survive for a tran-
sitional period without showing profit, or even with a loss, but
that it may collapse due to lack of cash even if it has a very
positive balance. They also state that most of the construction
companies in the world that have failed did so because of a
lack of working capital and in spite of their profitability.
Cash-flow management is an indispensable tool for con-
struction companies (Peer and Rosenthal 1982; Singh and Lak-
anathan 1992). It involves forecasting (planning) and control.
This is a dynamic process in the ever-changing environment
of a construction company, due to deviations in the progress,
or changes in the costs, of projects under way or the initiation!
termination of others.
An adequate cash-flow management system is necessary to
convince construction lenders to lend money. When they do,
they want to know that any lack of liquidity is both temporary
and expected. It often happens that in the absence, or inade-
quacy, of a cash-flow management system the liquidity prob-
lem arises without prior warning. In such a case, the company
goes on a pilgrimage to bank managers to request bridge loans.
But this, unfortunately, is exactly the situation in which lenders
are very reluctant to give loans. Even if it is an uncommon
event, at best they may give the money at a very high cost,
which reflects their conceived risk associated with the loan.
Cash-flow forecasts should be made at all phases of the
construction process, starting with the bidding stage. Ashley
and Teicholz (1977) emphasize that a decision to bid should
be based on financial considerations, such as capital cost, the
need to borrow money, etc., in addition to all other consider-
ations. Using cash-flow forecasting at this stage can also in-
fluence the choice of overhead markup policy.
The next sections gives the background needed to under-
stand the company-level cash-flow management model and the
need for it. This background includes the terminology used
throughout the paper, a brief explanation about mathematical
'Feld Academic Sr. Lect., Fac. of Civ. Engrg., Nat. Build. Res. Inst.,
Technion City, 32000 Haifa, Israel.
Note. Discussion open until August 1, 1996. To extend the closing
date one month, a written request must be filed with the ASCE Manager
of Journals. The manuscript for this paper was submitted for review and
possible publication on September 15, 1994. This paper is part of the
lOUT/UlI of Construction Engineering and Management, Vol. 122, No.
1, March, 1996. ©ASCE, ISSN 0733-9364/96/0001-0022-0029/$4.00 +
$.50 per page. Paper No. 9245.
22/ JOURNAL OF CONSTRUCTION ENGINEERING AND MANAGEMENT / MARCH 1996
presentation of the cost/schedule integration problem as well
as ways to solve it. The background ends with a report on the
results of a short survey of how things are done in 10 Israeli
construction companies. The fourth section describes an im-
plementation of the company-level cash-flow management
model by a very comprehensive computer program.
BACKGROUND
There is a consensus among researchers and practitioners
alike about the need to forecast cash flows [e.g., Abudayyeh
and Rasdorf (1993), Carr (1993), Cook (1991), Hackney
(1992), and Navon (1990)]. Accordingly, a wealth of tech-
niques and models have been developed for cash- or cost-flow
forecasting. The most popular models can be divided into two:
mathematical models and cost-and-time-integration models.
Terminology
This subsection defines terms that will be used throughout
the paper.
"Cost flow," which is, in fact, a technological term, is the
projection of the project's costs as a function of time. In prin-
ciple, to compile the cost flow for a project, the costs of each
activity have to be distributed over its duration. The time is
taken from the schedule, but no account is taken of the pay-
ment method, and the cost flow does not, therefore, reflect the
actual outflow of money. The money could have been paid
before the activity was performed, the resource was used
(down payment), or the service was given, or after completion
(credit). In other words, there is a difference between the time
that a resource is used on the site and the time when it is paid
for. This is called "time lag," which can be positive or neg-
ative depending on the payment method.
The "expense flow" is compiled on the basis of the cost
flow. This is done by projecting the costs as a function of their
usage time and the payment method. Consequently, in prin-
ciple, the expense flow can be defined as follows:
expense flow = cost flow + time lag (I)
Thus the expense flow reflects the actual outflow of all direct
costs.
The "cash flow" is defined as the difference between the
income flow and the expense flow and the overheads (field
and main office), formulated as follows:
cash flow = income flow - expense flow - overheads (2)
The "income flow" is the contractor's earnings in monetary
terms. The contractor bills the owner based on the work in
place, and the owner pays the contractor the appropriate

J. Constr. Eng. Manage., 1996, 122(1): 22-29

 "progress payments." There is a time lag between the dates
the bill is submitted and the progress payments are made. This
time lag is called the "billing period." Only part of the vali-
dated bills becomes progress payments. A certain percentage
of them is held back as an incentive for the contractor to com-
plete the contract. This is called "retainage" (or "retention"
or "escrow"). The retainage is paid to the contractor upon
satisfactory completion of the contract. The developers income
flow includes additional elements, such as capital contributions
from investors or partners, down payments from customers,
land or construction loan draws, and line-of-credit draws.
Mathematical Models for Cost/Cash-Flow Forecasting
Downloaded from ascelibrary.org by Technion Israel Institute Of Technology on 03/22/21. Copyright ASCE. For personal use only; all rights reserved.
compilation of a list associating resources (which constitute
the cost items) with activities is very time-consuming. An at-
tempt to computerize it normally fails because of the compat-
ibility problem. This problem occurs because the cost items
are specified in terms of the building elements, while the
schedule is specified in terms of activities. Consequently, the
relationship between cost and schedule items is complex. On
the one hand, a given schedule item may relate to only one
cost item. On the other hand, and more often, the resources of
a cost item are related to more than one schedule item and
those schedule items are associated with more than one cost
item. Thus the problem inherent in integration is how to make
the computer recognize these relationships and allocate the ap-

propriate resources to the activities. More about the compati-

These models are normally mathematically based and are
used when the availability of project data is limited. The min-
imal data needed for cash-flow forecasting with these models
includes the project's duration, its total cost, and general data.
Most of the mathematical models are developed for cost-
flow forecasting only, while cash-flow-forecasting mathemat-
ical models are based on forecasting the cost flow first and
later translating it into cash flow (Ashley and Teicholz 1977;
Gates and Scarpa 1979). The most popular of the mathematical
models is the third-, fourth-, or fifth-level polynomial.
Ashley and Teicholz (1977) suggested a detailed method for
cost-flow-based cash-flow forecasting. They divide the direct
cost into a number of elements such as labor, materials, etc.,
which are specified as a percentage of the total cost. For each
of these elements they determine a typical time lag and pro-
pose a simple formula that forecasts the cash flow based on
this principle.
The mathematical models are inaccurate, because they are
based on generic data (and consequently do not go down to
the resource level). Most of them do not take time lags into
account, and the income flow ignores the billing period. In
spite of this, there are reports that mathematical models have
been used successfully (Bathurst and Buttler 1980).
Cost/Schedule Integration
There is extensive discussion in the literature regarding cost!
schedule integration [e:g., Abudayyeh and Rasdorf (1993),
Carr (1993), Harris and McCaffer (1990), Mawdesley et al.
(1989), Sears (1981), and Teicholz (1987)]. Integration meth-
ods are developed for projects with detailed data (to be re-
ferred to as "detailed projects"), such as a detailed bill of
quantities (BOQ) and an estimate, which includes costs of re-
sources; quantities of resources, of building elements, and for
activities; costs of subcontractors; and overhead costs, as well
as a detailed schedule, including activity description and code,
activity duration, and a list of all resources associated with
each activity.
The major problem with integration methods is that the
bility problem can be found in Mawdesley et al. (1989), Navon
(1994), Sears (1981), and Teicholz (1987).
Three methods are commonly used to solve the compatibil-
ity problem
• Manual integration, which is done in various ways, such
as manually specifying the resources associated with each
activity. This is accurate, but it requires extensive manual
work. This method does not deal with the income flow,
although a rough income flow can be compiled by im-
provisation (and additional manual work).
• Approximate models (Booth et al. 1991), which do not
involve manual work. The integration is done automati-
cally in one of two ways: each cost item is divided
equally, or proportionally, among the activities with which
it is associated. This method is less accurate but requires
much less work.
• The automatic cost/schedule integration model, which in-
cludes an embedded database that enables it to associate
automatically each of the cost item's resources to the ap-
propriate activity. This method is unique to the model
presented here. It does not require human involvement
and is accurate.
Survey among Construction Companies
The background given in this section is based on a literature
survey, which mainly reflects the beliefs and ideas of acade-
micians. Most of the literature emphasizes the difficulties of
forecasting cash flow. Some software packages have "cash-
flow management" modules (only at the project level). Con-
sequently, it was desirable to have an ideal (even a rough one)
regarding the extent, the methods, and the frequency of cash-
flow management in construction companies.
A survey among construction companies was recently con-
ducted (in the first half of 1994). The methodology consisted
of interviews with key personnel of the surveyed compa-
nies-l0 construction organizations, among the largest Israeli
construction companies. The survey is by no means statisti-

TABLE 1. Survey Summary

Project-Level Cash Flow
Frequency
Number 10 Classification Prepared by Method Accuracy (Months)
(1 ) (2) (3) (4) (5) (6) (7)
I A Constructor Scheduling engineer Spreadsheet Approximate 3
2 B Constructor Scheduling engineer Computerized Detailed 1-3
3 C Constructor - - - -
4 D Constructor Project manager Computerized Detailed 1-2
5 E Constructor Engineering division Computerized Detailed I
6 F Owner - - - -
7 G Owner - - - -
8 H Owner - - - -
9 I Consultant Project manager Computerized Approximate I
10 J Consultant Project manager Spreadsheet Approximate I

JOURNAL OF CONSTRUCTION ENGINEERING AND MANAGEMENT / MARCH 1996/23

J. Constr. Eng. Manage., 1996, 122(1): 22-29

 cally valid, nor does it claim to be representative. It can, how-
ever, give some idea of common practices. Table I lists the
companies participating in the survey (for obvious reasons,
their identity is confidential, so they are marked alphabetically
in column 2). Column 3 classifies the companies into three
groups-constructors, owners (developers), and consultants
(both consultants operate as project managers for owners).
Columns 4-7 refer to project-level cash-flow management.
Column 4 specifies who prepares the cash flow, and column
5 specifies the method by which the cash flow is prepared,
either "computerized" using project management software
packages (this method is referred to as the second technique),
or essentially by a manual method, which is assisted by a
Downloaded from ascelibrary.org by Technion Israel Institute Of Technology on 03/22/21. Copyright ASCE. For personal use only; all rights reserved.
spreadsheet (referred to as the first technique). Column 6 clas-
sifies the project-level cash-flow preparation from the accura-
cy's point of view, and column 7 gives the frequency of cash-
flow preparation (in months).
Apparently all companies prepare cash flow at the company
level, which indicates the importance they all ascribe to cash
flow management. Only six of the companies compile cash
flows at the project level, which they do infrequently and at
varying degrees of accuracy. In all of the six, much manual
work is required. This conclusion may be more accurate for
contractors than it is for developers, because in many cases
the latter create individual legal entities for each project, es-
pecially the larger ones. In such a case, a project-level cash
flow is identical to the company-level one. It is also interesting
to note that in three of the five constructors, the project-level
cash flow is compiled centrally. Only in one construction com-
pany is the project-level cash flow prepared by the construc-
tion manager. Where project-level cash flows do not exist,
rough estimates of project-level cash flows are made for the
purpose.
The techniques the companies use for cash flow forecasting
at the project level can be divided into two. The first technique
involves a conceptual aggregated schedule (e.g., concrete,
plumbing, finishing activities, etc., for each floor), which is
prepared specifically for this purpose. Each activity is assigned
a cost taken manually from the estimate and distributed as a
function of time based on rules of thumb. The same method
is applied to income flow. No time lags for expenses or income
are taken into account. This technique is both inaccurate and
labor-intensive.
The second technique is more accurate and uses well-known
software packages. However, it also requires a significant
amount of manual work, and cash flows are therefore not pre-
pared more frequently than with the first technique. The sec-
ond is the technique described in the section, "Cost/Schedule
Integration" (manual integration).
Both methods are mainly used for expense-flow generation.
Income flow is normally assessed very roughly, while in cer-
tain cases the whole process has to be repeated to generate an
income flow.
COMPANY-LEVEL CASH-FLOW MANAGEMENT
MODEL
A company-level cash-flow model must be based on cash
flows of all the company's individual projects. Whenever pos-
sible, i.e., when detailed data is available, the project-level
forecast is resource-based. But detailed data is not always
available for all the projects in the company-for some proj-
ects the only available data are their total cost, their duration,
and some general data. The model presented here is flexible
enough to accommodate such projects as well. Cash-flow fore-
casts of such projects with limited data (LD projects) are based
on a cost-flow forecast, which is generated with the aid of
mathematical models. The model uses, for this purpose, a va-
riety of polynomial formulas for the project level, which cal-
24/ JOURNAL OF CONSTRUCTION ENGINEERING AND MANAGEMENT / MARCH 1996
J. Constr. Eng. Manage., 1996, 122(1): 22-29
culate its monthly costs. These monthly costs must be trans-
formed into monthly expenses by adding time lags, which
refer to resources and consequently cannot be added to costs
that are not resource-based. The solution to this problem, for
LD projects, is to divide the costs into cost groups (labor,
materials, equipment, formwork, scaffolding, etc.). This divi-
sion would be based on earlier experience of the company with
similar projects (the model provides default values for such
division, based on the literature). Some of the groups have a
typical time lag (such as labor), others (e.g., materials) do not.
For the latter group, a decision regarding a "typical" time lag
must be made based on the company's historical information.
The expense flow is generated by taking the monthly costs,
dividing them into cost groups, and projecting them according
to their "payment" time, on the basis of the appropriate time
lag.
When detailed project data are available, they include the
following files: resources, estimating, bill of quantities, sched-
ule, subcontractors data, contract data (with the owner and
subcontractors), and general data. The availability of detailed
data enables accurate (resource-based) cash-flow forecasts to
be generated at the project level. Only a resource-based fore-
cast can incorporate the correct time lag, because every re-
source has a different time lag.
The first stage in cash-flow generation of projects with such
detailed data is to integrate the bill of quantities with the
schedule, to integrate the two with the estimate, and to gen-
erate expense as well as income flows.
Project-level income-flow forecasting has two options, the
first being appropriate to projects for sale in the free market.
No model forecasting sales of construction projects was found,
and therefore a company must enter its own forecast manually,
in accordance with its best judgment. The second option ap-
plies to contracted-for projects. In these cases the income-flow
generation is based on the cost flow, taking into account the
retainage and the billing period.
Company-level management entails periodic forecasting and
frequent updating to accord with circumstantial changes and
actual performance on-site. It refers to the company as a
whole, and it must always be based on the most up-to-date
information. Consequently, the following were the guiding
principles in the development of the company-level model:
I. The model has to cover all projects of the company, and
should, for comprehensive cash-flow forecasts, include
company overheads and other general expenses and cost
centers of the company.
2. The model has to be flexible enough to accept data at all
levels of detailing (from detailed down to limited data).
Evidently, the accuracy of the forecast will increase with
the level of detail.
3. It has to be linked to all the company's databases (bill
of quantities, estimate, schedule, etc.) so that the fore-
casts are based on the most up-to-date data.
4. Construction projects undergo constant changes due to
changing environmental conditions. Therefore the model
has to make provisions for constant updating.
5. It must be simple and require minimal human involve-
ment and time investment, to permit frequent usage.
6. It has to allow for adjustments to inflation, so as to bring
the costs of different projects to a common denominator.
7. In view of the variability of the number of working days
per month according to the season, site location, holi-
days, and type of work, the model must provide alter-
native calendars, permitting each project to be linked to
the one most suitable.
8. The model has to accommodate logical and integrity tests
for reliability.
 The cash-flow model is based on the company's database,
which includes the following information for each detailed PROJECT-MANAGEMENT DATABASE
project.
For projects with detailed data only

• Bill of quantities (BOQ), which includes the quantities of

all the building elements, such as beams, columns, walls,
doors, floors, etc.
• Resource data, including the costs of the resources, their
individual terms of payment (credit, cash, or payment in
advance), and other data
• Schedule in network form, which includes the durations
Downloaded from ascelibrary.org by Technion Israel Institute Of Technology on 03/22/21. Copyright ASCE. For personal use only; all rights reserved.

and starting and finishing time of all activities

• A detailed resource-based estimate for all building ele-
ments with a linkage to the resources comprising them
• Subcontractors' data, including the cost of their work and
terms of payment

For all projects

• General project data, including project code and descrip-

tion, reference to the works "calendar," and the starting
date, duration, and total cost (the latter three only for LD
projects)
• Overhead costs, including site overhead costs [such as
field engineer, superintendent, warehousing, security, tem-
porary facilities, water, clerk/timekeeper, general purpose
laborers, office equipment, office trailer rental, telephone
and fax bills, office lighting, and heating, ventilation, and
air-conditioning (HVAC)] as well as company and main-
office overhead costs
• Contract data with owner (if there is one), including terms
of payments, retainage, and all other conditions
The structure of the company-level model is shown sche-
matically in Fig. I. The model first generates cash flows for
all the individual projects in accordance with data availability
(detailed or limited). Based on these cash flows, it then com-
putes the company cash flow.
The model includes two expense-flow generators: one for
detailed projects, the other for LD projects. The former gen-
erator first automatically links cost items with the appropriate
activities (schedule items), based on their coding system.
When this is done, the model associates the resources with the
activities. The other expense-flow generator, the one for LD
projects, generates the cost flow by computing the direct
monthly costs, then dividing them into components and pro-
jecting them onto a time axis, taking into account the time
lags.
The income flow is also computed separately for projects
with detailed data and those with limited data. In addition to
the expense flow for detailed projects, the expense-flow gen-
erator computes the work in place as a function of time. On
the basis of this, together with the calendar data (which are
optionally project-specific) and contract data, the income flow
is generated. The cost-flow generator also computes the work
in place for LD projects. In contrast to the cost flow, which is
based only on direct costs, the work in place of LD projects
includes overheads. The income flow of the LD projects is
generated in a way similar to that of the detailed ones. The
difference between work in place and the income flow consists
of the billing period and the retainage, which are taken from
the contract data.
Both the expense flow and the income flow depend on the
number of working days per month-even identical projects
may have different cash flows because of the difference in this
number. Accordingly, the work in place and the cost flow are
first calculated on a daily basis and then translated into
JOURNAL OF CONSTRUCTION ENGINEERING AND MANAGEMENT / MARCH 1996/25
FIG. 1. Cash-Flow Management Model
monthly sums according to the actual working days per month
for each project.
Normally, once a project is in progress, the project man-
agement signs contracts, or agreements, with vendors and sub-
contractors, referring to the purchasing of products and/or ser-
vices. In such agreements the price is also fixed, and in
countries with high inflation, the price is normally linked to
the index (the Consumer Price Index or the Construction Cost
Index). This means that when the bill is issued, the price is
adjusted in accordance with any change in the rate of inflation.
This, and control considerations, are some of the reasons why
the cost estimate database of each project is normally based
on the costs of resources prevailing at the time the estimate is
compiled. Company-level cash-flow compilation (based on the
individual projects' cash flows) entails the aggregation of the
monthly expenses and the incomes of each project. Because
the various projects have different inflation-index bases, prices
must be adjusted and brought to a common base before
summation.
The output is the main objective of the model. It includes
• A company-level cash flow for various forecasting hori-
zons and according to different sorting criteria (by project
type, for different company divisions or branches, etc.)
• A project-level cash flow for various forecasting horizons
(which is needed for project-level management purposes.
It is given by this model as a by-product)
• Actual versus forecast cash flows for control purposes.
This output is given at the company level and at the proj-
ect level, and it includes a comparison between the actual
and the forecast cash flows as well as the difference be-
tween them. This output is available on a month-by-
month basis, as well as in cumulative form to avoid mis-
takes based on incidental deviations.
Some of the algorithms developed for the updating module

J. Constr. Eng. Manage., 1996, 122(1): 22-29

 TABLE 2. Default Values of Site and Company Overhead
Costs
Refer-
Range" Default" Time ence
Cost (%) (%) variability level
(1 ) (2) (3) (4) (5)
Fixed site costs 1.2-2.7 2.2 Fixed Site
Guarantees 0.5-1.0 0.7 Fixed Site
Site supervision and con-
struction management 3.2-7.5 4.8 Variable Site
Insurance 0.1-0.6 0.4 Variable Site
Main office 5.4-10.0 6.4 Variable Company
Downloaded from ascelibrary.org by Technion Israel Institute Of Technology on 03/22/21. Copyright ASCE. For personal use only; all rights reserved.

Contingency and profit 4.0-10.0 7.0 Fixed Company

a Percentage of the direct costs.

TABLE 3. Direct-Costs Components Breakdown

Range Default
b
Component Percent" Time lag Percent"
(1 ) (2) (3) (4)
Labor 35-45 0-1 40
Materials 50-61 4-6 54
Equipment 5-10 8 6
aPercentage of dlfect costs.
bIn weeks.
and for project-level cash-flow forecasting are described in Na-
von (1990).
A company-wide model must include default values for a
variety of parameters. These values may reflect standard com-
pany procedures or common practice in the specific area. It is
very difficult to make such a comprehensive model work ef-
ficiently and with minimal human involvement without default
values for important parameters, because in many cases the
values of the parameters are non-project-specific. Moreover,
sometimes the values of the parameters are not known to the
user of the model, at any rate not at the moment the mode is
used.
Because the model was not developed with a specific com-
pany in mind, the default values were determined on the
strength of a comprehensive literature survey, which resulted
in a relatively wide range of values. This is because any spe-
cific value depends on many factors, such as the construction
method, the sizes of the individual apartments and the build-
ings, site location and conditions, economic and business en-
vironments, etc. Table 2 summarizes default values of site and
company level overheads from Hackney (1992), Laufer et al.
(1993), Means (1991), Peer (1975), Peer and Warszawski
(1972), Siddens (1989), Warszawski (1983); and Warszawski
(1992).
Table 2 specifies the following overhead-cost items (col-
umn 1):
" Fixed site costs, such as setup and mobilization costs,
costs of temporary facilities, connection to water and elec-
tricity and communication costs, etc.
• Performance guarantee, to ensure that the contractor ful-
fills hislher obligations regarding the satisfactory comple-
tion of the project
• Site supervision and construction management, such as
field engineer, superintendent, clerk/time-keeper, security,
power supply and communication costs, etc.
• Insurance, including all-risk, public liability, equipment,
etc.
• Main office expenses, including company management,
bookkeeping, advertisements, etc.
• Contingencies and profit
26/ JOURNAL OF CONSTRUCTION ENGINEERING AND MANAGEMENT / MARCH 1996
FIG. 2. Main Menu
Time lagb
(5)
For each of the cost items it gives the range of values (column
I 2), based on the literature survey, and the default value
5 adopted for the model (column 3). The table also indicates if
8
the cost item is time-dependent (variable), meaning that the
total cost of this item depends on the duration of the project
or is fixed (column 4). Column 5 specifies whether the cost
item refers to the site or the company level.
Table 3 gives the breakdown of costs in LD projects into
components, and their associated time lags. The data in the
table is based on the following sources: Ferry and Brandon
(1988), Harris and McCaffer (1990), Peer (1975), Kaka and
Price (1991), and Warszawski (1983).
COMPUTER PROGRAM
The model presented in the third section was implemented
in a computer program, which was developed in two stages:
first, the general framework of the model was developed to-
gether with the cost-flow generator, the inflation-adjustment
function, the company cost-flow generator, the updating func-
tion, the tabular and graphic outputs at the project and com-
pany levels, and the control mechanism and its output (Navon
1985). At the second development stage, an expense-flow gen-
erator for detailed projects, an income-flow generator, and a
project cash-flow generator were developed. Finally the two
parts were integrated searnlessly into a program.
The software package was written in Turbo-Pascal for an
IBM PC. It comprises 16 subprograms with more than 8,000
lines altogether. The program is interactive and has a help
facility for all the important functions so that, although it is
not a commercial software, it is very user-friendly and easy to
handle, because it leads the user in all stages. Theoretically it
is integrated with all the company's construction management
databases, as explained in the third section, but this integration
was not implemented in practice. Instead it is left to the user
to build the relevant files (BOQ. resources, schedule, etc.) ex-
actly as they would be in the company's database. The pack-
age performs logical and integrity tests to ensure that data
input is consistent.
The package has hierarchical structure. At the top is the
main menu (Fig. 2), which breaks down into submenus, for
different modules, at varying levels, as shown in Fig. 3. The
submenu structure has 3-6 levels. The submenus are shown
in Fig. 4.
The main menu has seven submenus. The first-Calendar,
Inflation & General Data-comprises seven modules, as
follows:
1. Enter New Calendar & Inflation Data. This module en-

J. Constr. Eng. Manage., 1996, 122(1): 22-29

 l.ewIl1----~\~
l.ewIl2 - - - - 1
-x it a 4 I • 7
The third submenu-Cash-Flow Display-displays cash
flows at the project and the company levels. The cash flows
are presented either in tabular form or as a chart, for a selected
period. Fig. 5 shows a tabular and a graphical representation
of a company cash flow. The vertical axis is the time, the
l.ewIl3
~~~~~/\I
- 1 . 1 1.2 1.5 "'41.1 1.1 1.7 1.1 U U 1.1 U 4.14..4.' .. , U &.
$.I .... &A1.1 U 7.1
horizontal axis is the company's cash flow in thousands of
l.ewIl'-~~~~~~~~~~~~~~~~~~~~~~~~ dollars.
The fourth submenu-Cash Flow Control-comprises of
FIG. 3. Structure of Computer Program
three modules, as follows:

1. Progress report. If nothing is reported regarding a proj-

ect, it is assumed that the project progresses according
to plan. The progress report can be made in two
Downloaded from ascelibrary.org by Technion Israel Institute Of Technology on 03/22/21. Copyright ASCE. For personal use only; all rights reserved.

ways-one is generic, the other detailed. In the generic

type, changes in the total cost and the project duration
are reported on first, and then the periodic expenses and
incomes to date are reported. The actual cumulative ex-
pense flow and the actual cumulative income flows are
compared with the ones forecasted. If deviations are de-
tected between the forecast and the actual values, they
are distributed over the residual construction period. Two
algorithms were developed for this purpose, as described
in Navon (1990). The progress report can also be made
on a detailed level. The program scans all the activities.
If according to the plan the activity should have been
finished or be in progress, the user is asked to enter the
actual progress made. In addition, the user has to report
activities that are actually in progress but have not yet
been planned to start. Here, too, the discrepancy between
planned and actual work is distributed over the residual
period.
2. Company Forecast-vs.-Actual report in tabular form.
3. Project Forecast-vs.-Actual report in tabular form.

The forecast and the actual cash flows at the project and
company levels are presented in comparative tables, which in-
clude the deviations on a month-by-month basis and in a cu-
mulative form. Like the cash-flow tables and charts, the com-

cash now Display --> Cooopany cash Plow prin1:1ng c1a1:.: 23/06/94

.....................................
'rO'l'AL CJlSlI PLOW FORECAST ("cc.pany"):

(Thouaand • 1iDked 1:0 04/94)

Project: I I I I I I I :
FIG. 4. Submenus Nuaber IProjec1: O8a.101/94102/94103/94104/94105/94106/941
--------+------------+-----+-----+-----+-----+-----+-----+
11111111IHouaiDg Prj. 1 -1161 -2611 -5161 -7111 -8581 -7911
abIes various calendars to be built, as explained in the --------+------------+-----+-----+-----+-----+-----+-----+
111111221eo... Ctr. I 01 -2861 -81 551 -921 -801
third section. Each calendar has an identifier and speci- --------+------------+-----+-----+-----+-----+-----+-----+
Forecaa't I -1161 -5471 -5~41 -6561 -9501 -8711
fies the number of working days for each month. Infla- ---------------------+-----+-----+-----+-----+-----+-----+
Projec"t I 1 I 1 1 1 1
tion data is in the form of various indices. NUliber I Project: De•• 101/94108/94: 09/94110/94111/941
2. Add data, which enables the existing calendars and index --------+------------+-----+-----+-----+-----+-----+
11111111IHouaiDg Prj.: -2601 6UI 1221 9Ul 16301
tables to be extended --------+------------+-----+-----+-----+-----+-----+
11111l2~:ee-. C1:r. 1 -271 781 .431 61 3091
3. Change data-to change selected data from the calendar --------+------------+-----+-----+-----+-----+-----+
Poreca.'t 1 -2811 6921 1651 9201 19391
or the index tables
4. Erase data-to erase selected data Pre..
---------------------+-----+-----+-----+-----+-----+
<en'ter> 'to coD'tiDue

5. Display data-display the "calendars" and the index caab Plow Diap1ay --> caab Plow Cbar1: prin1:iDg 4&1:.: 23/08/94
tables
6. Maximum permissible deviation. For the integrity tests
11/941 : •••••••••••**......... (1939)
the user is free to select the level of accuracy, above 10/941 I........... ( 9~0)
which the program will issue a warning. The default 09/941
08/94\
I"
1**"""
( 165)
( 692)
value is 1%. 07/941
06/941
***1
•••••••••• :
( -287)
( -871)
7. PRF (profit, risk, and finance) allocation 05/94: **·***.****1 ( -950)

The second submenu-Project Database Management-

04/941
03/941
02/941
01/941
*···..
*.*••••• :
•• *••*:
*1
1
( -656)
((-5~4)
-547)
( -116)
consists of three modules. The first lists all the projects in the +---------+---------+---------+---------+---------+---------+--
-2610 -1740 -870 0 870 1740 2610
database; the second permits entering data other than detailed
or limited ones, for projects or other cost centers of the com- 'l'OTAL CASH-PLOW FORECAST ("ca.pany·)

pany. In this second case, the data is entered on a monthly (Thousand $ linked 1:0 04/94)
basis. The third module enables changes to be made in data FIG. 5. Company Cash Flow In Tabular and Graphical Rep-
of individual projects. resentation

JOURNAL OF CONSTRUCTION ENGINEERING AND MANAGEMENT / MARCH 1996/27

J. Constr. Eng. Manage., 1996, 122(1): 22-29

 pany level progress reports are also available in various se-
lected groups.
The fifth submenu-Cost-Schedule-Based Cash-Flow
Generator-generates cash flows for detailed projects. It has
the four following modules:
1. GRAAD (General Resource/Activity Allocation Data-
base) Management, which in turn is divided into four
submodules. The GRAAD management module builds
and maintains the non-project-specific database for de-
tailed projects, as mentioned in the third section. Nor-
mally the use of this module is to browse in or print the
database rather than to build or update it. It is necessary
Downloaded from ascelibrary.org by Technion Israel Institute Of Technology on 03/22/21. Copyright ASCE. For personal use only; all rights reserved.
to use it when entering a new project.
2. Cash Flow Generator (new project). When this option is
selected, the program scans the database and displays all
the projects that have detailed data and are consequently
potential files for cash-flow generation by this model.
When a project is selected, the user is prompted to enter
the following data:
• Data regarding the project's identification
• Default values, such as overhead expenses, PRF, bill-
ing period, and retention
• Parameters referring to the income-flow calculations
• Calendar identifier
• Index for inflation adjustments calculation
When all these data have been entered, the cash-flow
generator computes the project's cash flow as explained
in the third section.
3. Default Value Manager, which has three submodules
• Time-lags manager, which enables changes to be made
in the global default values for the specific project
• Overhead data manager, likewise for making changes
in global default values of overhead markup factors for
the specific project
• Default values, referring to the material supply policy
of the project
4. Network analysis. This module was added for instruc-
tional purposes and is not necessary in a commercial
package.
The sixth submenu-Mathematical-Model-Based Cash-
Flow Generator-generates cash flow for LD projects. It has
two submodules
1. Default Value Manager, which has two subsidiary sulr
modules:
• Time lags manager, which enables changes to be made
in the global default values for a given project
• Overhead data manager
2. Cash Flow Generator (new project). Entering a new proj-
ect requires entering of the following data:
• Total cost
• Duration
• Data regarding the project's identification
• Default values, such as overhead costs, PRF, billing
period, and retention (optional)
• Calendar identifier
• Index for calculating inflation adjustments
• Selection of the mathematical model for the cost-flow
generation either from given formulas or by entering a
customized formula
When all this data has been entered, the cash-flow gen-
erator computes the project's cash flow as explained in
the third section.
The seventh and final submenu selects the active projects.
This is necessary especially for updating project data and for
the progress report.
28/ JOURNAL OF CONSTRUCTION ENGINEERING AND MANAGEMENT / MARCH 1996
J. Constr. Eng. Manage., 1996, 122(1): 22-29
COMMENTS AND CONCLUSIONS
This paper discusses the topic of cash-flow management in
construction. It begins with a background description, which
defines cash-flow-related terms and presents the state of the
art. The paper then describes the development of a company-
level cash-flow management model and the computer program
based on this model.
The literature very extensively discusses the importance of,
and the need for, cash-flow management. It seems that the
industry, at any rate that in Israel, appears to agree with re-
searchers about this point, a conclusion that is based on the
fact that all the construction companies taking part in the sur-
vey, as described earlier, prepare cash flows at the company
level. Both the literature survey and the survey among the
companies indicate, in different ways, the difficulties in
achieving automatic cash flows. The solutions, among practi-
tioners and researchers alike, are all at the project level. Most
of the solutions require substantial manual work, and all of
them are inaccurate, either because they are not sufficiently
detailed (even when detailed data are available) or, certainly,
because they do not take time lags of any kind into account.
Time lags and billing periods shift actual payments by a few
weeks to two months and more.
This paper describes a unique cash-flow management sys-
tem. Its uniqueness is due to the following points:
• It is a company-level cash-flow management system.
• It is flexible. It can accept data at varying levels of detail,
from very detailed (computerized schedule, computerized
resource-based estimate, etc.) to very limited (total cost
and duration).
• It is comprehensive, being able, due to its flexibility, to
include all the projects and other cost centers (workshops,
loans, sale/purchase of capital equipment, etc.) of the
company.
• It is automatic-no human involvement is needed in the
cash-flow generation. It takes about two minutes to pre-
pare the cash flow for a project, with or without available
detailed data. This is true on the assumption that for the
detailed project the schedule, the estimate, and the bill of
quantities already exist beforehand, having been prepared
for other purposes of construction management, such as
bidding, planning and control, procurement, etc.
• The accuracy of the cash flows depends, of course, on the
data detail level. When detailed data are available, the
system generates accurate cash flows thanks to the follow-
ing. First, it is resource based, resources being the most
fundamental cost element. Second, it incorporates time
lags, and thus the costs are projected according to their
payment time (which is what cash flow is all about) and
not according to the time the resource was used on site,
or a service was given. Third, it takes account of actual
working days for each project, which depend on site lo-
cation, type of work, ethnic composition of the crews, etc.
Fourth, some materials, such as ready-mixed concrete, are
supplied to the site and are used immediately; others, e.g.,
bulk materials or reinforcement, are supplied from stock.
In many cases this is not reflected in the schedule. To
overcome this problem, the system takes account of the
material supply methods. And finally, it is a management
tool first and foremost, because it not only forecasts cash
flows but also serves for control purposes by comparing
the forecast with the actual cash flows and showing the
difference between them. Additionally, the ease and speed
of achieving the cash flow for different categories enable
the management to obtain, as often as desired, cash-flow
forecasts for all its purposes (some of which are men-
tioned below) and for a "what if" analysis.
 The cash-flow management system can be used at the com-
pany level and/or at the project level, for a variety of uses, at
different stages of the construction process. Periodic use of
such a system and presentation of its output to potential
sources of finance will increase the company's credibility. It
will convince them that their risk is lower than it would be if
the company did not use such a system on a regular basis, and
they will consequently be more ready to lend the money, be-
cause they will see that the need for cash is transient and that
positive cash flows are expected. Thus, failures due to liquidity
problems are less likely for companies with a good cash-flow
management system.
The system can, and should, be introduced as early as the
Downloaded from ascelibrary.org by Technion Israel Institute Of Technology on 03/22/21. Copyright ASCE. For personal use only; all rights reserved.
bidding stage. Its first and obvious use is to compute the ex-
pected capital cost and to determine the need for loans. Ad-
ditionally, according to the company's need for cash, different
balancing and o~erhead markup strategies can be adopted. Fur-
thermore, every company has an optimal production-volume
potential, which can be expressed in financial terms. Thus,
when a company contemplates bidding for a project (or at
what conditions), it may consider the influence of the pro-
spective project on the company's cash flow and check if, and
for what lengths of time, the project is liable to cause produc-
tion-volume-potential overflow, or if it covers gaps in the pro-
duction volume potential.
The system can be used as a component in a general control
system. The objective of a control system is to identify devi-
ations and to allow corrective measures to be taken. It is de-
sirable that, when such measures are considered, their influ-
ence on the project's and the company's cash flows will also
be taken into account. This is true for all construction-related
issues, because in most cases actions are expressed in mone-
tary terms. Moreover, the system permits control of the cash
flow itself, as explained in the paper.
ACKNOWLEDGMENTS
This research was supported by the Fund for the Promotion of Re-
search at the Technion. This support is gratefully acknowledged. The
writer wishes to thank Eng. E. Katz for his input. He would also like to
thank the companies that were included in the survey for agreeing to take
part in it. and for their openness.
APPENDIX. REFERENCES
Abudayyeh. O. Y.• and Rasdorf. W. J. (1993). "Prototype integrated cost
and schedule control system." J. Compo in Civ. Engrg., ASCE, 7(2),
181-199.
Ashley. D. B.• and Teicholz. P. M. (1977). "Pre-estimate cash flow anal-
ysis." J. Constr. Div., ASCE, 102(3), 369-379.
Bathurst. P. E., and Buttler. D. A. (1980). Building cost control: tech-
niques and economics, 2nd Ed., Heineman, London, U.K.
JOURNAL OF CONSTRUCTION ENGINEERING AND MANAGEMENT / MARCH 1996 /29
View publication stats J. Constr. Eng. Manage., 1996, 122(1): 22-29
Booth, J., Askew, W. H., and Mawdesley, M. J. (1991). "Automated
budgeting for construction." Proc., 8th Int. Symp. on Automation and
Robotics in Constr., ISARC, Stuttgart, Germany, 529-538.
Carr, R. I. (1993). "Cost, schedule and time variances and integration,"
J. Constr. Engrg. and Mgmt., ASCE, 119(2),245-265.
Cook, A. E. (1991). Construction tendering. Batsford, London, U.K.
Ferry, D. J., and Brandon, P. S. (1988). Cost planning of building. BSP
Professional Books, Oxford, U.K.
Gates, M., and Scarpa, A. (1979). "Preliminary cumulative cash flow
analysis." Cost. Engrg., 21(6), 243-249.
Hackney, J. W. (1992). Control and management of capital projects, 2nd
Ed., McGraw-Hill, New York, N.Y.
Harris, F., and McCaffer, R. (1990). Modem construction management,
300 Ed., BSP Professional Books, Oxford, U.K.
Kaka, A., and Price, A. D. F. (1991). "Net cash flow models: are they
reliable?" Constr. Mgmt. and Economics, 9, 291-308.
Laufer, A., Warszawski, A., Rosenfeld, Y., and Navon, R. (1993). Con-
struction planning handbook. Nat Build. Res. Inst., Technion, Haifa,
Israel (in Hebrew).
Mawdesley, M. J., Askew, W. H., and Taylor, J. (1989). "Using com-
puters to aid integration of some construction management tasks,"
Proc., 4th Int. Conf. on Civ. and Struct. Engrg. Comp.-CIVIL-COMP,
Scotland, 63-68.
Means site work cost data. (1991). R. S. Means Co., Kensington, Mass.
Navon, R. (1985). "A model for cost flow forecasting and updating in a
construction company," MS thesis, Technion-Israel Inst of Technol.,
Haifa, Israel (in Hebrew).
Navon, R. (1990). "Financial planning in a project oriented industry,"
Proj. Mgmt. J., 21(1), 43-48.
Navon, R. (1994). "Cost-schedule integration for cash-flow forecasting,"
Proc., 1st Congr. on Compo in Civ. Engrg., ASCE, New York, N.Y.,
1536-1539.
Peer, S. (1975). The influence of changes in cost elements on the eco-
nomics of various construction methods. Nat Build. Res. Station, Tech-
nion, Haifa, Israel (in Hebrew).
Peer, S., and Rosental, H. (1982). Development of cost flow model for
industrialized housing. Nat Build. Res. Station, Technion, Haifa, Israel
(in Hebrew).
Peer, S., and Warszawski, A. (1972). "Economic analysis of housing
construction methods," J. Constr. Div., ASCE, 98(2), 287 - 294.
Sears, G. A. (1981). "CPM/COST: An integrated approach," J. Constr.
Div., ASCE, 107(2),227-238.
Siddens, R. S. (ed.) (1989). The Walkers building estimator's reference
book, 23 Ed., Walker, Lisle, III.
Singh, S., and Lakanathan, G. (1992). "Computer-based cash flow
model." Proc., 36th Annu. Trans., Am. Assoc. of Cost Engrs., Mor-
gantown, W. Va., R.5.1-R.5.14.
Teicholz, P. M. (1987). "Current needs for cost control systems." Project
controls: needs and solutions, C. W. Ibbs and D. B. Ashrey, eds.,
ASCE, New York, N.Y., 47-57.
Warszawski, A. (1983). Estimating and contracting under inflation for
construction projects. Nat Build. Res. Station, Technion, Haifa, Israel
(in Hebrew).
Warszawski, A. (1992). Economic analysis of engineering projects. Nat
Build. Res. Inst., Technion, Haifa, Israel (in Hebrew).