CONSTRUCTION COST

ENGINEERING
FRANCES LORANE T. CALAPINI
CONTENTS
❑CONTRACT CASH FLOW
❑PROJECT CONSTRUCTION CASH FLOW
❑DISCOUNT CASH FLOW
 amount of cash and cash equivalents
being transferred in and out of a
company. Cash received represents
inflows, while money spent
represents outflows.

CASH FLOW

CONTRACT CASH FLOW

The term cash flow refers to the net

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CONTRACT CASH FLOW
Why is it necessary to forecast the cash flow?
➢ To get an idea about the ability to meet the demands with the cash. ➢ It helps
the contractor to determine the maximum amount of cash required. ➢ Lending
companies consider it as a reliable indicator.

➢ It proves the utilization of resources to gain profits for the owners and investors.
 Three main ingredients in the determination of cash flow
➢ Expenses (Cash out)
➢ Income (Cash in)
➢ Timing of payments

CONTRACT CASH FLOW

CONSTRUCTION PROJECT COSTS

Computing the cost is very important while preparing the cash flow for the project. Use of
the materials, subcontractors and labors lead to the principal components of the
contractor’s costs. Taxes, interests on loans, supervision, support staff and insurances
create the overhead cost. There are three types of classifications of costs that spend on a
particular project. They are fixed cost, time-related cost and quantity-proportional cost.
 Total Project Cost = Project Direct Costs + Project Indirect Costs
CONTRACT CASH FLOW

Project Direct Costs

The costs and expenses that are accountable directly on a facility, function or
product are called as direct costs. In construction projects, the direct costs are the
cost incurred on labor, material, equipment etc. These costs for a construction project
are developed as estimates by means of detailed analysis of the contract activities,
construction method, the site conditions, and resources. Different direct costs in
construction projects are material costs, labor costs, subcontractor costs, and
equipment costs.
 CONTRACT CASH FLOW
Project Indirect Costs
The costs, unlike direct costs, is not directly accountable for a particular facility, product or function.
Indirect costs can be either variable or fixed. The main sections coming under indirect costs are
personnel costs, security costs, and administration costs. These costs do not have a direct
connection with the construction project. The indirect cost can be classified as:
analysis of the site-related activities and their cost.
PROJECT GENERAL
OVERHEAD COSTS OVERHEAD COST

Project overhead costs can either be fixed or time
related costs. Different costs coming under
overhead costs are the costs of stores, safety
facilities, workshops, offices, staffs and parking
facilities. All those plants that are required to
support the working crews will come under this cost.
The overhead cost is estimated by a detailed
The general overhead costs will include the cost of
the design engineers, expenses of head-office, cost
of directors and managers, schedulers etc. The
general overhead expense and cost are found
reasonable through continuous monitoring of the
company expenses.
CONTRACT CASH FLOW
When we are studying about the cash flow, it is essential to get an idea
regarding the dates when the expenditure is going to occur. So, the following
figure shows the difference between the expense and the costs of a
construction project.
 CONTRACT CASH FLOW
The S-Curve
S-Curve is a line that shows the cumulative expenditure of a project direct and indirect cost per
time. As you can see in the below figure, this line gets the S shape. Most of the time, the owners ask
the contractor to present such S-Curve for the lifetime of the project.

The steps to develop a S-Curve

▪ Construct a simple bar chart for all tasks of the
relevant project.
▪ Use the task duration and assign the costs to
each task.
▪ Plot the cumulative amounts of the
expenditure against the time by connecting
the amounts of expenditures over the time.

CONTRACT CASH FLOW

Project Income (Cash-in)
The form of the progress payments is the flow of money from the owner to the relevant contractor. The contractor
makes the estimates of the completed work periodically. The percentage of the total contract completion or the
actual field measurement of the placed quantities are the evaluations that work as bases to estimate them. Usually,
the owner retains 10% from all validated progress payment that was submitted by the contractor. Moreover, the
contractor receives all the accumulated retainage payments with the last payment.

The difference between income and revenue is

that income is calculated by subtracting all the
depreciation, interest, taxes, and other expenses of
a business from its total revenue of that year. And,
Revenue is the sum total of all the earnings of a
business during a financial year.

CONTRACT CASH FLOW

Retention
Retention is the amount that the owner kept from all invoices before paying for the

contractor. Why is it important?

Because it ensures that the contractor will continue the work and any problem won’t
 arise after the completion. Furthermore, this retained amount will be paid to the
contractor at the end of the relevant contract, and it is an amount between 5% to 10%
from all invoices as mentioned above.

Advanced payment
There are mobilization purposes, and this is the amount that paid for such requirements. After that,
advanced payment will be reduced from the contract progress payment. In addition to that, there
are many benefits of this action. It helps to prevent the contractor from loading the price at the start of
the contract.

Most of the time, the projects that use an expensive site preparation apply this strategy.

CONTRACT CASH FLOW

How do we get the construction cash
flow?
Calculating Construction Cash Flow
We can take by plotting the contract expense and the income curves. The difference between those points of
the curves become the cash flow. According to the below figure shows, the hatched area is the difference
between expense and the income curves.
 ▪ The project bar chart
▪ Activities direct and
indirect cost
▪ Contractor’s method of
paying his expenses
▪ Time of payment delay
by owner

CONTRACT CASH FLOW

The steps of calculating the cash flow:

▪ Perform project schedule and decide the project and activities timing ▪
Take the early or late timing as the base and draw the bar chart ▪
Calculate the cost per time period and the cumulative cost
▪ Consider the method of paying the cost to produce the expense and adjust
it
 ▪ To determine the income, take the retention and delay of the owner
payment as the base to adjust the revenue
▪ Calculate the cash flow at the contract different times.

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CONTRACT CASH FLOW
Minimizing Contractor Negative Cash Flow

The actions follow to minimize the negative cash flows

▪ Adjust the work schedule to late start timing to delay payments. ▪
Reduce the delays in receiving revenues
▪ Requesting for advanced or mobilization payments
▪ Decrease the retention and increase the markup
Cost of Borrowing (Return on Investment)

✓They can borrow money

✓Use the reserved funds.

Cost of borrowing= net area x interest rate

END OF
PRESENTATION