Modelling of project cash flow on

construction projects in Malang city

Cite as: AIP Conference Proceedings 1887, 020014 (2017); https://doi.org/10.1063/1.5003497
Published Online: 29 September 2017

Bambang Djatmiko

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AIP Conference Proceedings 1887, 020014 (2017); https://doi.org/10.1063/1.5003497 1887, 020014

© 2017 Author(s).
 Modelling of Project Cash Flow on Construction Projects
in Malang City
Bambang Djatmiko 1,a)
1
Department of Civil Engineering, Faculty of Engineering, State University of Malang, Malang, Indonesia
a)
Corresponding author: bambang_djatmiko14@yahoo.co.id

Abstract. Contractors usually prepare a project cash flow (PCF) on construction projects. The flow of cash in and cash out
within a construction project may vary depending on the owner, contract documents, and construction service providers
who have their own authority. Other factors affecting the PCF are down payment, termyn, progress schedule, material
schedule, equipment schedule, manpower schedules, and wages of workers and subcontractors. This study aims to describe
the cash inflow and cash outflow based on the empirical data obtained from contractors, develop a PCF model based on
Halpen & Woodhead’s PCF model, and investigate whether or not there is a significant difference between the Halpen&
Woodhead’s PCF model and the empirical PCF model. Based on the researcher’s observation, the PCF management has
never been implemented by the contractors in Malang in serving their clients (owners). The research setting is in Malang
City because physical development in all field and there are many new construction service providers. The findings in this
current study are summarised as follows: 1) Cash in included current assets (20%), owner’s down payment (20%), termyin
I (5%–25%), termyin II (20%), termyin III (25%), termyin IV (25%) and retention (5%). Cash out included direct cost
(65%), indirect cost (20%), and profit + informal cost(15%), 2)the construction work involving the empirical PCF model
in this study was started with the funds obtained from DP or current assets and 3) The two models bear several similarities
in the upward trends of direct cost, indirect cost, Pro Ic, progress billing, and S-curve. The difference between the two
models is the occurrence of overdraft in the Halpen and Woodhead’s PCF model only

INTRODUCTION
A cost estimate or budget plan is an approximation of the total cost of a construction project, including the costs
of materials and labour, etc. Cost estimating and planning are essential in project management [1,2]. The cost estimate
is used for feasibility studies, design alternatives, and optimal design selection for a project, and thus it should be
accurate, clear, and complete [3,4]. After the construction cost has been carefully estimated, time schedule and S-
curve can be determined according to the construction planning for a project to be completed within the targeted time
frames [5].

According to Wuryanti [6], the purposes of budget planning for construction projects are:1) to determine whether
or not the current assets or funds are sufficient to meet the estimated construction costs, 2) to manage the flow of funds
in the construction process, and 3) to prepare for a competitive construction bidding or negotiation process. A
construction budget is drawn up based on plans and specifications drafted by the owner as well as understood and
agreed by the contractor; it is useful to ensure proper execution of construction works and the contractor can receive
a reasonable profit. After the cost estimate, time schedule and S-curve have been agreed between the owner and the
contractor winning the tender, then the construction work will be carried out in accordance with the contract. In
general, the contractor regularly records the income and expenses during the construction process. This book keeping
process is called the project cash flow (PCF) [1,7].

A PCF plays a role to control the financial positions—positive or negative balance and serves as a basis for the
contractor to make sensible decisions for project continuity and success. Cash in consists of 1) current assets (self-

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funding), 2)loan funds, and 3)down payments and termyn. According to Halpen and Woodhead [8] and Nurdiana A
[9], cash out includes 1) direct costs, 2) indirect costs, 3) contractor’s profit and informal costs (Pro Ic). According to
Soeharto I [10] the components of construction project cost s are presented in Fig. 1.

FIGURE 1. Total Construction Project Costs

Factors affecting the PCF, according to Noldi [11] are: 1) piece work contracts that require down payments and
progress billings, 2). progress schedules, 3) material schedules, 4) equipment schedules, 5) man power schedules and
6) payment to sub-contractor. Purnus et al [12] stated that in order to deal with the increased financial risks, the high
levels of capital expenditures, market competition, and other competitive risks faced by construction companies, a
careful and controlled planning should be prepared for the project's cash flow management.

Sharifi and Baghepor [13] pointed out that the most vital element of a construction project is the PCF conditions,
and therefore the planning and estimating process must be accurate, fast and effective in dealing with risk factors.
Since the accuracy of PCF is highly important, a proper and thorough analysis should be carried out [14]. Purnus et al
[12]) reported that in managing and analysing the PCF, the parameters to be considered are the duration or the start
and finish date of a project, and the payment interval of DP and progress billing. In order to facilitate the
implementation of PCF and the evaluation of results, the S-curve is required [15]. Lu W and Liu [16], further pointed
out that the strategies for successful construction projects are to reduce wasted time, guarantee quality to gain
recognition from the owner, solve problems through negotiation and accelerate progress towards achieving the work
targets.

The conditions of cash in and cash out of the construction service providers in Malang City may vary, depending
on the owner, contract documents, and service providers who have their own authority from the tender process until
the implementation of construction work [17] . Other factors are the availability of funds, the desired quality of
buildings, and the agreement with the contractor [18]. Based on the researcher’s observation, the PCF management
has never been implemented by the contractors in Malang in serving their clients (owners).

This research provides considerable benefits to all parties involved in the construction industry services, such as
owners, planners, supervisors, contractors, and the public. Prior to the bidding/tender phase as well as the project
implementation process, the relevant parties should carefully and thoroughly prepare PCF whereby funds can be
efficiently allocated [19].

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 This study aims to: 1) describe the flow of cash in and cash out of construction projects in Malang based on some
empirical data, 2) develop a PCF model based on the model proposed by Halpen and Woodhead [8], and 3) investigate
whether or not there is a significant difference between the Woodhead’s PCF model and the empirical PCF model
developed in this study.

METHOD
The present study was quantitative descriptive and experimental research. The quantitative data were 30 samples
of construction contracts, budget plans, time schedule/S-curve, supervisor’s reports on progress , and the PCFs of
finished construction projects [20,21]. Moreover, the cash inflows and cash outflows were examined using the
empirical PCF model which was compared to the Halpen & Woodhead’s PCF model.

The research setting, Malang City, was purposively selected with the consideration: 1) Physical development in
all field, mainly regency, bussines place, office building, hotel and other kind of buildings and 2) every year, there are
many new construction service providers which increase in number [17]. The study participants were contractors and
supervisors involved in the construction projects. The primary data in the form of contracts, budget plans, time
schedules and S-curve (plan and progress), cash in, cash out, and PCF were collected through
documentation/observation, whereas the secondary data were obtained from interview/consultation to contractors and
supervisors [17]. The research variables are presented in Table 1.

TABLE 1. PCF Model Variables

Concept Variable Sub variable Indicators
PCF 1.1. Cash in 1) Self-Funding
2) Down Payment
3) Termyn

1.2. Cash out 1.2.1 Indirect 1) Tax and Expense

cost 2) Operational Cost
1.2.2 Direct 1) Material Purchase
cost 2) Wage
3) Equipment Cost + Quality Test
4) Payment to Sub-contractor
5) Unexpected Cost
1.2.3 Pro Ic 1) Profit
2) Informal cost
1.3. Progress Supervisor’s Report

The PCF proposed by Halpen and Woodhead is the model upon which the PCF in this study was modelled (as
shown in Fig. 2).

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 FIGURE 2. Halpen and Woodhead’s PCF Model

Information:
1. Curve 1 = Direct cost
2. Curve 2 = Indirect cost
3. Curve 3 = Pro IC = contractor’s profit and informal cost
4. Curve 4 = Overdraft = cash out > cash in
5. Curve 5 = Termyn = periodic payment plan from owner

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The procedure of PCF is presented in the flow chart in Fig. 3.

FIGURE 3. Flow Chart of Research

Information:
1. TS = Time Schedule
2. SC = S Curve

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 RESULTS AND DISCUSSION
There were 30 samples of each type of data obtained in this study (as shown in Table 2).

TABLE 2. Recapitulation of Data

No Type of Data Total
1. Construction Contract 30
2. Budget Plan 30
3. Cash in & Cash out 30
4. Time Schedule &S-Curve 30

5. Progress 30

Table 2 shows that there are five types of data collected from the study participants: 1) work contract: to determine
when the construction phase begins and whether a down payment is required (if so, the amount/percentage of the DP
is identified), 2) cash in and cash out: to prepare the empirical PCF, 3) time schedule and S-curve: to establish a
timeline for each type of construction work and 4) progress: the report from the supervisor used to evaluate the results
of implementation whether or not they are in accordance with the time schedule agreed, which serves as a prerequisite
for progress billing/ termyn [1]. The data on cash in, cash out, and progress are described in the form of a figure of
the empirical PCF model. See Fig. 4.

FIGURE 4. Empirical PCF Model

Information:
1. Curve 1 = Direct Cost
2. Curve 2 = Indirect Cost
3. Curve 3 = Pro Ic
4. Curve 4 = Termyn
5. Curve 5 = Progress Curve
6. DP = Owner's Down Payment
7. SF = Self-Funding

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 The empirical PCF model (Figure 4) is the result of the modelling of empirical data on cash in, cash out, and
progress, which was applied to a construction project with a budget of IDR 2,500,000,000 [18]. In the initial work
(0%), there were 2 kinds of funding sources, funds from the owner’s DP (20%) and contractor service’s current assets
SF (20%). The amount of progress billing depends on the agreement between the owner and contractor; if the DP is
fully paid(20%), then the 1st progress billing (termyn I) is 5%, and if there are sufficient current assets, then the 1st
progress billing (termyn I) is 25%. In this study, the researcher decided to implement the PCF with DP because 23
out of 30 samples included DP.

For the curve termyn I (Figure 4), 5% of the total cost was received by the contractor. The cash in flow consisted
of 625 million rupiahs obtained from DP and termyn I (20%+5%), while the total cash outflow was 380 million
rupiahs, i.e.138 million rupiahs of direct cost, 63 million rupiahs of indirect cost, and 179 million rupiahs of Pro Ic.
The value of 400 has two meanings, the first of which was the amount of fund of 400 million rupiahs and the second
meaning was the target progress (S-curve) with the amount of progress of (400: 2,500) x 100% = 16%. Based on the
supervisor’s report from of the total amount of progress generated was 15.2%.Thus, the actual progress of the project
minus the target progress (S-curve) was-0.8%. The condition of contractor’s PCF was determined from the result of
subtracting the cash in flow and the cash outflow or 625 million rupiahs minus 380 million rupiahs, i.e. IDR
245,000,000, -; this value indicates a positive cash flow [1,22].

For the curve termyin II (Figure 4), 20% of the total cost was received by the contractor. The cash inflow consisted
of 1.125 billion rupiahs obtained from termyn I and termyn II, whereas the total cash outflow amounted to 1.372
billion rupiahs. The target progress (S-curve) was 60%, and the progress based on the supervisor’s report was 54.88%;
the calculation of the actual progress minus the target progress yielded a negative value (-5.12 %). The condition of
contractor’s PCF determined from the result of subtracting the cash in flow and the cash outflow(1.372 billion rupiahs
- 1.125 billion rupiahs) indicates a negative cash flow (- IDR 247,000,000, -) [18,22].

For the curva termyin III (Figure 4), 25% of the total cost was received by the contractor. The cash inflow amounted
to 1.750 billion rupiahs while the cash out flow was 1.873 billion rupiahs. These values yielded a negative cash flow,
i.e. – IDR 123,000,000. The progress of the project showed a favourable condition (76.4 % - 72% = 4.4%) [22].

For the curve termyin IV (Figure 4), 25% of the total cost was received by the contractor by the project deadline
(on the 6th month). The cash inflow amounted to 2.375 billion rupiahs, where as the cash outflow was 2.500 billion
rupiahs. Thus, the total cash flow was - 125 million rupiahs (-5%). The target progress (S-curve) was 100% and the
actual progress was 100%, indicating the project was finished on time. The remaining (5%) was allocated for a
retention fund [23].

At the end of the maintenance period, the retention of 5% was received by the contractor. The direct cost was 1.625
billion rupiahs (65%), the indirect cost was 500 million rupiahs (20%), and the remaining (profit + informal cost) was
375 million rupiahs (15%). There are a number of similarities and differences between the Halpen and Woodhead’s
PCF model and the empirical PCF model. The two models bear several similarities in the upward trends of direct cost,
indirect cost, Pro Ic, progress billing, and S-curve as shown in the graphs (Figure 1 & 2); the upward trends indicate
the increase of cash in and cash out as well as S-curve over time. According to Iyer and Kumar [22], S –curve is
beneficial to forecast the progress of a project towards completion, thus it must be accurate and reliable.

The first difference between the two models is the occurrence of overdraft in the Halpen and Woodhead’s PCF
model. An overdraft occurs when cash outflow is greater than the cash inflow; it happens because a construction work
is started without any DP and current assets, thus the contractor needs to borrow funds with the owner's guarantee
until the progress billings (termyn I) have been fully paid and the construction work is completed [8]. In the empirical
PCF model (Figure 2), the construction work was started with the funds obtained from DP or current assets. As a
result, an overdraft did not occur, even when there was a positive cash flow of IDR 245,000,000, -;since this balance
was used to fund the continuation of the construction project [15].

In the empirical PCF model, negative cash flows occurred twice (-IDR 247,000,000, - and -IDR 123,000,000, -),
meaning that the cash out was greater cash in but no overdraft occurred. It was because the positive cash flow
amounting to IDR 245,000,000, - was allocated for the most urgent expenses (cash out) i.e. the workers’ wages.

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Another alternative that can be done to avoid overdraft is by borrowing some money to business partners. The loan
will be paid back when the funds obtained from the progress billings ( termyn) are available [24].

Another difference between the two PCF models is that there is S-curve in the PCF model proposed by Halpen
and Woodhead; the model only describes the flow of cash in and out. In the empirical PCF model, there is an S-curve
with which the progress of a project can be tracked, whether or not it achieves the planned progress. The S-curve is
reported by a supervisor to the owner [23]. It also plays an important role in the payment of progress billings from the
owner to the contractor [25]. The results of the present study showed that each progress billing was paid if the actual
progress was at least 5% bigger than the target progress (S-curve); when the actual progress reached 50%, the progress
billing paid was 45% and when the progress reached 100%,the progress billing paid was 95%. The remaining (5%)
was used as a retention guarantee; it was paid when the maintenance deadline was over. In this study, the curve of the
overall progress had ups and downs [26].The first unfavourable condition is when the actual progress was slower than
the S-curve (- 0.8%); however, since it was relatively small, it could be tolerated by the owner and thus the termyn I
was paid. Another example is when there was a bigger negative value of progress i.e. -5.12%, indicating a much
slower actual progress; nevertheless, since the actual progress (54.88%) was bigger than the 50% S-curve, the 45%
progress billing was paid. These results suggest that the performance of the contractor is not disappointing [16].

In the termyn III, the positive value of progress (4.4%) obtained from the actual progress of 74.6% minus the target
progress (S-curve)of 70.2% indicates a faster performance, or according to Ji Lu W and Liu L [16], it was called better
progress. It is expected that a positive progress can encourage a better performance of contractors, resulting in the
acceleration of work completion [27,28].

By the project deadline (on the sixth month), the amount of actual progress was as the same as the target progress
(100%), indicating the project was finished on time. Moreover, the contractor has received a total termyn of 95% and
the remaining (5%) was allocated for a retention fund which was paid back by the owner when the maintenance
deadline was over. When the actual progress reached 50%, the termyn paid was 45% and when the progress reached
100%, the termyn paid was 95%. The results of interview suggest that the retention fund serves as security for the
owner [27].

CONCLUSION
The most important findings in this current study are summarised as follows: 1) The cash inflow consisted of
current assets (20%), owner’s down payment (20%), termyn I (5%–25%), termyin II (20%), termyn III (25%), termyin
IV (25%) and retention (5%). The cash out flow included direct cost (65%), indirect cost (20%), and profit + informal
cost (15%), 2) the construction work involving the empirical PCF model in this study was started with the funds
obtained from DP or current assets, and 3) The two models bear several similarities in the upward trends of direct
cost, indirect cost, Pro Ic, termyn, and S-curve. The difference between the two models is the occurrence of overdraft
in the Halpen and Woodhead’s PCF model only.

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