1

Construction Cost Analysis

Lt. Col. Dr. Abbas Atef Hassan

2 Cash Flow Analysis

Project Money Flow

Construction
Owner
Lender Main Subcontractors/
OR
(Financial Contractor Suppliers
Developer
Institution)

❑ Contractors typically have to pay costs before payments are received from the owner.
❑ For example, contractors typically perform work for 30 days (& pay costs of labor, material,
equipment, subcon) before their first invoice is sent to the owner. The owner then has 30 days to make
payment, and the owner is often entitled to withhold a portion of that payment (retainage).
❑ During that (60-day) period, the contractor is:
❑ either expected to finance the work
❑ OR the contractor receives an advance payment.

Lt. Col. Dr. Abbas Atef Hassan

3 Cash Flow Analysis
Cash Flow: the difference between a company's total income and its total
expense over a period of time.
Cash flow = Cash in – Cash out = Income - Expense

Whey cash flow is necessary for a construction company?

❑ To ensure that sufficient cash is available to meet the demands.
❑ It shows the contractor the maximum amount of cash required and when it will be
required.
❑ The contractor can made arrangements to secure the required cash.
❑ It ensures that cash resources are fully utilized to the benefit of the owner and investors
in the company.
❑ Bid or No-Bid

Lt. Col. Dr. Abbas Atef Hassan

4 Cash Flow Analysis

Cash flow analysis include:

❑ Expenses/Cash Out(S Curve) represents the aggregate of the payments of the
contractor over a period of time that includes all payments for labor, equipment,
material, and subcontractors.
❑ Income /Cash In(Stair-Step Shape) represents the receipts a contractor will receive
over a period of time for the work has completed.
❑ Payments Period: represents the timing of payments related to the work done by the
contractor (usually monthly).
❑ Retainage: As an incentive to the contractor to complete the contract, the owner often
retains a percentage (e.g.10%) of progress payments to be paid after satisfactory
completion of contract. A similar arrangement is often applied between a contractor and a
subcontractor.

Lt. Col. Dr. Abbas Atef Hassan

5 Cash Flow Analysis
Contractor invoice
Project Financing for work completed

Contractor cost for

work completed Retainage
$ Finance required
for third month
Payment to
contractor
Finance required
for first month Retainage
Finance required
for first two
months

0 1 2 3
Project Duration
Lt. Col. Dr. Abbas Atef Hassan
6 Example 1: Contractor Cash Flow

Pipe line project composed of 10 tasks with a direct cost of $20,700 dollars, an indirect cost ratio of 11.47%, a
markup of 5%, and a 1% monthly interest rate. The client’s payment policies are: 10% of retainage, payment
requests will be submitted at the end of each month of work, and will be paid after 1 month.

Activity Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Total
Move in 2,000 2,000
Survey 1,200 1,200
Trench 3,000 6,000 9,000
Lay Pipe 3,000 3,000
Concrete 500 500 1,000
Backfill 500 500
Move out 500 500
Fix Valves 1,000 1,000
Put Valves 1,000 1,000
Test 1,500 1,500

Lt. Col. Dr. Abbas Atef Hassan

 Survey 1,200 1,200
Activity
Trench Month 1 Month3,000
2 Month 3 6,000 Month 4 Month 5 Month 6 Month 7 Month 8 Total
9,000
7 Example
Move in1: Contractor Cash Flow
2,000 With No Subcontractors 2,000
Lay Pipe
Survey 1,200 3,000 3,000
1,200
Concrete
Trench 3,000 6,000 500 500 1,000
9,000
Lay Pipe
Backfill 3,000 500 3,000
500
Concrete 500 500 1,000
Move out
Backfill
500
500
500
500
Fix
MoveValves
out 1,000 500 1,000
500
Fix Valves
Put Valves 1,000
1,000 1,000
1,000
Put Valves 1,000 1,000
Test
Test
1,500
1,500
1,500
1,500

Direct
Direct Cost
Cost Sum of all cost 2,000
2,000 4,200
4,200 6,000
6,000 5,500
5,500 3,000
3,000 00 00 00 20,700
20,700
Indirect Cost (11.47%) 229 482 688 631 344
Indirect Cost (11.47%) Direct Cost X 11.47% 229 482 688 631 344 00 00 00 2,374
2,374
Total Cost 2,229 4,682 6,688 6,131 3,344 0 23,074
Total
MarkupCost
(5%) Direct Cost + Indirect Cost 2,229
111 4,682
234 6,688
334 6,131
307 3,344
167 0 23,074
1,154
Markup (5%) Total Cost X 5% 111 234 334 307 167 0 1,154
Total Worth 2,341 4,916 7,023 6,437 3,511 0 24,228
Client Retainage (10%) 234 492 702 644 351 0 2,423
Total Worth Total Cost + Markup 2,341 4,916 7,023 6,437 3,511 0 24,228
Payment Due 2,107 4,424 6,320 5,794 3,160
Client Retainage (10%) Total Worth 10% 234 492 702 644 351 00 21,805
2,423
Payment with Delay (Start of Month) 0 0 2,107 4,424 6,320 5,794 5,583 24,228

Payment Due Total Worth - Retainage 2,107 4,424 6,320 5,794 3,160 0 21,805
Cash Outflow
Payment with Delay (Start of Month) 2,2290 4,6820 6,688
2,107 6,131
4,424 3,344
6,320 5,7940 5,5830 24,228
Cumulative Outflow 0 2,229 6,911 13,599 19,730 23,074 23,074 23,074 23,074
Process Paid start of month 3
Cumulative Income 0 time 0 2,107 6,531 12,851 18,645 24,228 24,228

Overdraft
Cash before payment (Start
Outflow of Month)
Total Cost 2,2290 -2,229
4,682 -6,933
6,688 -11,584
6,131 -13,407
3,344 -10,5640 -4,8760 658
Interest (1%) 0 -22 -69 -116 -134 -106 -49
Start of

+ +
Month

Cumulative Cumulative Cash Out

Cumulative Outflow
Interest 00 2,229
-22 6,911
-92 13,599
-207 19,730
-342 23,074
-447 23,074
-496 23,074 23,074
Cumulative Income
Overdraft after Cumulative
payment Client Payment
(Start of Month) 00 -2,2290 2,107
-4,827 6,531
-7,160 12,851
-7,086 18,645
-4,771 Lt. Col.
24,228
707Dr. Abbas Atef Hassan
24,228
658
8 Example 1: Contractor Cash Flow With No Subcontractors
30000

Cum Outflow
24,228
25000 23,074
Cum Income
23,074 23,074

19,730
20000
Dollars

18,645

15000
13,599

12,851
10000

6,911
6,531
5000

2,229
2,107
0
0 0 0 0
0 1 2 3 4 5 6
Lt. Col.7Dr.months 8
Abbas Atef Hassan
 Total Cost 2,229 4,682 6,688 6,131 3,344 0 23,074
10 Example 1: Contractor Cash Flow With No Subcontractors
Markup (5%) 111 234 334 307 167 0 1,154

Overdraft:
Total Worth occurs when withdrawals
2,341 4,916from a bank
7,023account
6,437exceed
3,511the available
0 balance and 24,228
interest
Client is normally charged234based on492the amount 702
Retainage (10%) of outstanding
644 balance. 0
351 2,423

Payment Due 2,107 4,424 6,320 5,794 3,160 0 21,805

Payment with Delay (Start of Month) 0 0 2,107 4,424 6,320 5,794 5,583 24,228

Cash Outflow 2,229 4,682 6,688 6,131 3,344 0 0

Cumulative Outflow 0 2,229 6,911 13,599 19,730 23,074 23,074 23,074 23,074
Cumulative Income 0 0 2,107 6,531 12,851 18,645 24,228 24,228

Overdraft before payment (Start of Month)

C-Incom-C-Out+C-Inter 0 -2,229 -6,933 -11,584 -13,407 -10,564 -4,876 658
Interest (1%) Overdraft X 1% 0 -22 -69 -116 -134 -106 -49
Cumulative Interest 0 -22 -92 -207 -342 -447 -496
Overdraft after payment (Start of Month) 0 -2,229 -4,827 -7,160 -7,086 -4,771 707 658

Lt. Col. Dr. Abbas Atef Hassan

11 Example 1: Contractor Cash Flow With No Subcontractors
30000 Project Price
Cum Outflow 24,228
23,074
25000 23,074 23,074
Cum Income
Overdraft 19,730
20000

18,645 Project Cost

15000 13,599

10000
Dollars

6,911 12,851
6,531
5000
Net-Profit
2,229
0 2,107
0 707 658
0 0 0
0 1 -2,229 2 3 4 5 6 7 8
-4,771 months
-5000 -4,827 -4,876
-7,160 -7,086

-10000 -6,933 -10,564

-11,584
-13,407
-15000
Max Cash out
-20000
Lt. Col. Dr. Abbas Atef Hassan
12 Example 1: Contractor Cash Flow With Subcontractors

Try the original example, but assuming that the main-contractor will subcontract four activities:
Trench; Lay Pipe; Concrete and Backfill. The main-contractor will pay the subcontractor one-
month after billing with retainage (10%).

Activity Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Total
Move in 2,000 2,000
Survey 1,200 1,200
Trench (Sub) 3,000 6,000 9,000
Lay Pipe (Sub) 3,000 3,000
Concrete (Sub) 500 500 1,000
Backfill (Sub) 500 500
Move out 500 500
Fix Valves 1,000 1,000
Put Valves 1,000 1,000
Test 1,500 1,500

Lt. Col. Dr. Abbas Atef Hassan

 Activity Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Total
Move in 2,000 2,000
13 Survey 1,200 1,200
Trench (Sub) 3,000 6,000 9,000
Lay Pipe (Sub) 3,000 3,000
Concrete (Sub) 500 500 1,000
Backfill (Sub) 500 500
Move out 500 500
Fix Valves 1,000 1,000
Put Valves 1,000 1,000
Test 1,500 1,500

Direct Cost 2,000 1,200 0 2,000 2,000 0 7,200

Subcontracts 0 3,000 6,000 3,500 1,000 0 13,500
Indirect Cost (11.47%) 229 482 688 631 344 0 0 0 2,374

Total Cost 2,229 4,682 6,688 6,131 3,344 0 23,074

Markup (5%) 111 234 334 307 167 0 1,154

Total Worth 2,341 4,916 7,023 6,437 3,511 0 24,228

Client Retainage (10%) 234 492 702 644 351 0 2,423

Payment Due 2,107 4,424 6,320 5,794 3,160 0 21,805

Payment with Delay (Start of Month) 0 0 2,107 4,424 6,320 5,794 5,583 24,228

Sub Retainage (10%) 0 300 600 350 100 0 1,350

Subcont Sub Payment Due 0 2,700 5,400 3,150 900 0 12,150
Sub Payment with Delay (Start of Month) 0 0 0 2,700 5,400 3,150 2,250 13,500
Direct Cost + Indirect Cost+
Cash Outflow Sub Payment with Delay 2,229 1,682 688 5,331 7,744 3,150 2,250
Cumulative Outflow 0 2,229 3,911 4,599 9,930 17,674 20,824 23,074 23,074
Cumulative Income 0 0 2,107 6,531 12,851 18,645 24,228 24,228

Overdraft before payment (Start of Month) 0 -2,229 -3,933 -2,554 -3,486 -4,945 -2,351 959
Interest (1%) 0 -22 -39 -26 -35 -49 -24
Cumulative Interest 0 -22 -62 -87 -122 -171 -195
Overdraft after payment (Start of Month) 0 -2,229 -1,827 1,870 2,834 849
Lt. Col. Dr.
3,232 959
Abbas Atef Hassan
14 Example 2: Contractor Cash Flow With Subcontractors
30000

Cum Outflow
Cum Income 24,229
25000
24,229
Overdraft 23,075

18,646 20,825
20000
18,646
Max Cash out= $ 4,945 17,675

15000
12,852
Dollars

12,852

9,931
10000
6,531
6,531
3,911
5000 4,600 3,232 Net-Profit
2,229
2,107 2,834
2,107 1,870
849 959
0 0 0 0
0 1 2 3 4 5 6 7
months 8
-2,229 -1,827 -2,351
-2,555
-3,934 -3,487
-5000 -4,945
Max Cash out

-10000 Lt. Col. Dr. Abbas Atef Hassan

15 Cash Flow
Contractor Cash Flow:

Max Cash out Max Cash out

A-Without Subcontractors B-With Subcontractors

Lt. Col. Dr. Abbas Atef Hassan
16 Cash Flow
As a contractor, how to improve project financing:
❑ Payment terms and conditions:
▪ Advance payment
▪ Reducing time between billing & payment
▪ Reducing retainage amount
❑ Shifts the cost by:
▪ Subcontracting (pay subcontractor after getting paid from owner)
▪ Arrangement with material suppliers (pay later)
❑ Bid unbalancing to increase early income

Lt. Col. Dr. Abbas Atef Hassan