Cash Flow Forecasting in Engineering Projects: Income and Expense Analysis, Study notes of Engineering

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Project Cash Flow

 In order to make a workable project plan, the resources needed for the project and their availability must be checked.  Money is one of the most important resources.  Cash flow forecasting is required to determine whether or not the funds to execute the plan are available.  Cash flow forecasting is the forecasting of both cash in and cash out of the project.

 Cash Flow Forecasting

An income is the actual receipt of revenue. It takes into account the delays

between incurring a commitment and making a money transaction.

Cash in (Receipt or Income) and Revenue

Contract revenue and income curves

 The quantities of work done on unit-price contracts are determined by

actual field measurement of the bid items put into place.

 The total quantity accomplished to date on each bid item is multiplied by its

corresponding contract unit price.

 All of the bid items are totaled and the value of materials stored on the site

as well as any prefabrication or pre assembly work that the contractor may

have done at some location other than the job site is then added.

 The prescribed retainage is subtracted from this total.

 The resulting figure represents the entire amount due the contractor for

his work to date. The sum of all prior progress payments that have already been paid is then subtracted, this yielding the net amount of money payable to the contractor for his work that month.

 Payment Request for Unit Price Contract

 Negotiated contracts of the cost-plus variety usually provide for the

contractor's submission of payment vouchers to the owner at specified

intervals during the life of the contract.  The contractor must make periodic accountings to the owner for the cost of the work, either to receive direct payment form the owner or to obtain further advances of funds.  A common provision is weekly reimbursement of payrolls and monthly reimbursement of all other costs, including a proportion of the contractor's fee.

 Payment Request for Negotiated Contract

1. Advanced payment
2. Progress payment
3. Materials stored on the site
4. Final Payment
5. Retention
6. …………  Contract Provision that Impact Cash in

 After the work has been finalized and all deficiencies remedied, the owner makes formal written acceptance of the project and the contractor presents his application for final payment.  Under a lump-sum form of contract, the final payment is the final contract price less the total of all previous payment installments made.  With a unit-price contract, the final total quantities of all payment items are measured and the exact final contract price is determined. Final payment is again equal to the contract price less the sum of all progress payments previously made.  In all cases, final payment by the owner includes all retainage that has been held by him.  Final Payment

 Engineering projects can make substantial demands on a contractor's cash.

 Cash out = payment of costs = expense

 Principal components of cash out

 “ Up-front" costs = initial expenses = start-up costs are costs necessary

to start the project such as costs of moving in workers and equipment; erecting field offices, storage sheds, fences; job layout; installation of temporary electrical, water, telephone, sanitary, and other services; bonds; permits and project insurance.

 Payment of direct job costs. These include costs associated with payrolls,

materials, equipment, and subcontractor payments.

 Payments for filed overhead expense and tax.

 An S-curve (a smooth curve) is used to represent contract cash out.

 Cash out

 The contractor's expense on a project will typically exceed his

monthly progress payment income over an appreciable part of the

construction period.

 The cash shortage on the project must be made up form the

contractor's working capital, or money must be borrowed to

provide the necessary operating funds.

 "Cash flow" refers to a contractor's income and outgo of

cash.

 Cash Flow

 The net cash flow is the difference between cash out and income

at any point in time. A negative net flow means expense are

exceeding income, a normal situation on even a highly profitable

project during the greater part of its duration.

 A determination of the future rates of cash outs and cash income

together with their combined effect on the project cash balance is

called a " cash flow forecast ".

 Net Cash Flow

1. Produce an activity schedule in bar chart or time-scaled form. If adjustments have been made to effect allocation or leveling of resources, the schedule should reflect these adjustments.
2. Determine the value/price of each activity per week.
3. Sum up the activities weekly and then the monthly revenue in case of the admeasurement contract, or sum up the activities weekly and then the periodic revenue in case of lump sum contract.
4. Adjust the revenue for advanced payment and retention.
5. Draw cumulative adjusted revenue versus time curve.
6. Shift the above curve by the lag between submitting payment requests and receiving revenue to get the income curve.  Simplified Approach to Forecast Contract Cash Flow Contract Revenue / Income Curve

 Simplified Approach to Forecast Contract Cash Flow When the mark-up is uniformly spread throughout the contract, the cost/expense curve can be derived as follows:

1. If the mark-up; M , is expressed as a percentage of tender price, then: Cumulative cost = cumulative revenue * ( 1 - M)
2. Draw cumulative cost versus time curve.
3. Group cost headings that have the same payment delay between incurring the cost and making the payment.
4. Calculate the proportion of costs due to each group.
5. Shift the cumulative cost of each group by the specified amount to get its cumulative expense.
6. Sum up contract cumulative expenses.
7. Draw cumulative expense curve. Contract Cost / Expense Curve

 Contract Net Cash Flow

The difference between contract cumulative income and expense curves

can be drawn to represent the contract cumulative net cash flow.

1. Front end rate loading: earlier items in bill of quantities carry a higher mark- up than later items. This reduces negative cash flows in contract early stages.
2. Reduction of delays in receiving revenue.
3. Adjustment of work schedule to late start timing.
4. Coinciding the timing of delivery of large materials orders with the submittal of the contractor's monthly pay estimate.
5. Delay in paying labor, plant hirers, materials suppliers, and subcontractors. This would reduce negative cash flows but undermine commercial confidence in the company.
6. Increasing the mark-up and reducing the retentions.
7. Increasing advance payment.
8. Achievement of maximum production in the field.
9. Quick settlement or claims.  Factors That Minimize Contractor's Negative Cash Flow