Cash Flow

Spring 2008,
King Saud University

Cash Flow Analysis
Dr. Khalid Al-Gahtani
1
Payment schedule
Materials
Mobilization
Monthly payments
Final Payment
Contract Provision that Impact
Cash Flow
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Contractor Cash Disbursements
Labor
Equipment
Materials
Subcontractors
Other
Insurance,
Permit and mobilization
Overhead items
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Cash Flow Analysis
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Factors That Minimize Contractor's
Negative Cash Flow
1. Front end rate loading:
earlier items in bill of quantities carry a higher mark-
up than later items early stages.
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.
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Factors That Minimize Contractor's
Negative Cash Flow
5. Delay in paying labour, 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 mobilization and advance payment.
8. Achievement of maximum production in the
field.
9. Quick settlement or claims.
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The Cash Flow Analysis
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The Cash Flow Analysis
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Example 4.1
The mark-up is 10% of tender value and is
assumed to be uniformly distributed over the
contract.
The contractor will receive an advanced
payment of 10% of tender value.
This will be deducted from each monthly revenue.
Retention is 5% and is paid on contract completion.
Labour cost is assumed to be 30% of total
contract cost and is paid after one week's delay.
The delay for other submitting is one month.
Revenue is received after 4 weeks from
submitting invoices.
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Example 4.1
Assuming all the activities are scheduled on their
early start timings, it is required to derive:
revenue and income curves,
cost and expense curves and
contract cash flow curves.
Compare contract net cash flows for revenue
received after 4 and 6 weeks from submitting
invoices.
Determine the effect on contract cash flow of
scheduling the activities on their late start
timings while the revenue is received with 4
weeks delay.
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Table 4.3 Date for example 4.1
Activity
Duration
(weeks)
Preceding
activity
Overlap
Value
(LE)
A 5

30000
B 4 A 20000
C 5 A -1 15000
D 5 A 15000
E 5 B 2 25000
F 4 B,C 16000
G 6 D 18000
H 4 E 1 8000
I 3 F,G 2 with G 9000
J 2 H.I 4000

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Algorithm Calculations
1) calculate the net operating cash flow at the end of
period t for t 0 is given by:
A
t
= P
t
E
t

A
t
is positive for a surplus and negative for a shortfall
E
t
= the contractor's expenses in period t, and
P
t
= owner's payments in period t, for t = 0,1,2,...,n.
2) calculate The cumulative operating cash flow at the
end of period t just before receiving payment P
t
(for
t 1) is:
F
t
= N
t-1
E
t

N
t-1
is the cumulative net cash flows from period 0 to
period (t-1).
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3) calculate the cumulative net operating
cash flow after receiving payment Pt at the
end of period t (for t 1) is:
N
t
= F
t
+ P
t
= N
t-1
+ A
t
4) The gross operating profit G for a n-
period project is defined as net operating
cash flow at t=n and is given by:
Algorithm Calculations
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Example 1: Contractor's gross profit from a project
The contractor's expenses and owner's payments for a multi-year construction project are
given in Columns 2 and 3, respectively, of Table 1. Each time period is represented by one
year, and the annual interest rate i is for borrowing 11%. The computation has been carried
out in Table 1, and the contractor's gross profit G is found to be N
5
= $8.025 million in the
last column of the table.

TABLE 1 Example of Contractor's Expenses and Owner's Payments ($ Million)
Period
t
Contractor's
Expenses
E
t

Owner's
Payments
P
t

Net Cash
Flow
A
t

Cumulative Cash
Before Payments
F
t

Cumulative Net
Cash
N
t

0
1
2
3
4
5
Total
$3.782
7.458
10.425
14.736
11.420
5.679
$53.500
$0
6.473
9.334
13.348
16.832
15.538
$61.525
-$3.782
-0.985
-1.091
-1.388
+5.412
+9.859
+$8.025
-$3.782
-11.240
-15.192
-20.594
-18.666
-7.513
-$3.782
-4.767
-5.858
-7.246
-1.834
+8.025

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Considering the time value of money
1) Compute the interest per period

- If is negative and i is the borrowing rate for the shortfall,

- If is positive and h is the investment rate for the surplus,

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2) calculate the interest accrued in period t,
the cumulative cash flow at the end of
period t just before receiving payment Pt
(for t 1) is:
3) calculate the cumulative net cash flow after
receiving payment Pt at the end of period t
(for t 1) is:
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4) calculate the gross operating profit at the
end of a n-period project including interest
charges is:
where is the cumulative net cash flow for t = n.
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Example 2: Effects of Construction Financing
The computation of the cumulative cash flows including interest charges at i = 11% for
Example 1 is shown in Table 2 with gross profit = = $1.384 million. The results of
computation are also shown in Figure 2.

TABLE 2 Example Cumulative Cash Flows Including Interests for a Contractor ($ Million)
Period
(year)
t
Construction
Expenses
E
t

Owner's
Payments
P
t

Annual
Interest

Cumulative
Before Payments

Cumulative
Net Cash Flow

0
1
2
3
4
5
$3.782
7.458
10.425
14.736
11.420
5.679
0
$6.473
9.334
13.348
16.832
15.538
0
-$0.826
-1.188
-1.676
-1.831
-1.121
-$3.782
-12.066
-17.206
-24.284
-24.187
-14.154
-$3.782
-5.593
-7.872
-10.936
-7.354
+1.384

Example 2
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Example 2
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Example 2
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Example 3: Effects of Inflation
Suppose that both expenses and receipts for the construction project in the Example 1 are
now expressed in then-current dollars (with annual inflation rate of 4%) in Table 3. The
market interest rate reflecting this inflation is now 15%. In considering these expenses and
receipts in then-current dollars and using an interest rate of 15% including inflation, we can
recompute the cumulative net cash flow (with interest). Thus, the gross profit less financing
costs becomes = = $0.4 million. There will be a loss rather than a profit after deducting
financing costs and adjusting for the effects of inflation with this project.

TABLE 3 Example of Overdraft Financing Based on Inflated Dollars ($ Million)
Period
(year)
t
Construction
Expenses
E
t

Owner's
Payments
P
t

Annual
Interest

Cumulative
Before
Payments

Cumulative
Net Cash
Flow

0
1
2
3
4
5
$3.782
7.756
11.276
16.576
13.360
6.909
0
$6.732
10.096
15.015
16.691
18.904
0
-$1.149
-1.739
-2.574
-2.953
-1.964
-$3.782
-12.687
-18.970
-28.024
-29.322
-18.504
-$3.782
-5.955
-8.874
-13.009
-9.631
+0.400

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Example 4: Effects of Work
Stoppage at Periods of Inflation
TABLE 4 Example of the Effects of Work Stoppage and Inflation on a Contractor ($ Million)
Period
(year)
t
Construction
Expenses
E
t

Owner's
Payments
P
t

Annual
Interest

Cumulative
Before
Payments

Cumulative
Net Cash
Flow

0
1
2
3
4
5
6
$3.782
7.756
11.276
0
17.239
13.894
7.185
0
$6.732
10.096
0
15.015
16.691
18.904
0
-$1.149
-1.739
-1.331
-2.824
-3.330
-2.457
-$3.782
-12.687
-18.970
-10.205
-30.268
-32.477
22.428
-$3.782
-5.955
-8.874
-10.205
-15.253
-12.786
-3.524

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Cash Flow

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Spring 2008,

King Saud University

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