Cash Flow

Project Cash Flows

• Project Cash Flows represent the manner in which
projects are executed.
• It shows the transfer of money from one party to the
other.
• Project cash flows are means for planning for
financing and used as a controlling tool.
• Are prepared
• Client – for budgetary purposes
• Contractor – depicting the manner of execution of
works, cash inflows and outflows for resources and
preparing additional funds for deficits
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 Cash Flow
Procedure to Cash Flow Preparation
1. The gross bill value (contract amount) and its time of
submission (S- curve)
• Direct cost
• The margin
2. The measurement period; it is usual for the
contractors to be paid on a monthly basis. This is
given in contacts in the “Terms of Payment”.
3. Certification time taken allowed for in the contract.
In most cases owner takes about 3-4weeks time to
process the bill and release the payment to the
contractor.
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 Cash Flow
Procedure to Cash Flow Preparation
4. Retention
• Percentage of Retention
• Recovery (repayment) period of retention usually
corresponding to the defects liability period
5. Advance Payments
• Percentage of Advance and mode of payment
• Advance repayment (recovery for the owner)
6. Spontaneous Financing arrangement for Direct
Resources
• Credit for labor, material, & plant
• Subcontractors certification period
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Example: problem statement

• Advance payment of 50(‘00000) Birr, to be recovered in 5 equal

installments from the third Running Account bills onwards.
• The total cost for the contractor to execute a particular item is 90% of
their quoted rates.
• The total cost for a particular item consists of:
• labor (20%),
• material (55%),
• plant and machinery (10%),
• subcontractor cost (10%), and
• project overheads (5%)
• Assume that there is no delay in payment towards labor costs and
overhead costs, but a delay of one month occurs in paying to the
subcontractors, material suppliers, and plant and machinery supplier.
• Retention is 10% of billed amount in every bill. 50% retention
amount is payable after one month of practical completion while the
remaining 50% is payable six month later.
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 Bill of Quantity
No Item description Unit of Quantit Unit Rate Amount
measurement y (Birr) (’00000Birr)
1 Earthwork - All Soils m3 5000 100 5
2 Concrete - PCC & RCC m3 2000 4000 80
3 Centering & Shuttering m2 14000 300 42
4 Reinforcement & Structural kg 250 45000 112.5
steel
5 Brickwork m2 1700 2000 34
6 Plastering - All types m2 20000 75 15
7 Painting - All Types m2 5000 100 5
8 Flooring - All Types m2 LS LS 110
9 Waterproofing works m2 LS LS 12
10 Aluminum work m2 300 4500 13.5
11 Electrical work lm 1 LS 35
12 Sanitary & Plumbing works lm 1 LS 20
13 Road Works m2 LS LS 16
Total 500
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Amount
Schedule of works as %age of total amount of each work
No Item description Duration 1 2 3 4 5 6 7 8 9 10
    5 15 20 25 25 10        
1 Earthwork - All Soils 6                    
        10 20 20 25 15 10      
2 Concrete - PCC & RCC 6                    
        10 20 20 25 15 10      
3 Centering & Shuttering 6                    
        10 20 20 25 15 10      
4 Reinforcement & Structural 6                    
steel
          10 15 20 20 20 10 5  
5 Brickwork 7                    
            10 15 20 20 20 10 5
6 Plastering - All types 7                    
            10 15 20 20 20 10 5
7 Painting - All Types 7                    
            10 15 20 20 20 10 5
8 Flooring - All Types 7                    
                  50 50    
9 Waterproofing works 2                    
              25 25 25 25    
10 Aluminum work 4                    
                25 25 25 15 10
11 Electrical work 5                    
          5 10 15 20 15 15 10 10
12 Sanitary & Plumbing works 8                    
                50 50      
13 Road Works 2                    
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 Schedule of works as percentage of total amount of each work

No Item description Amount M1 M2 M3 M4 M5 M6 M7 M8 M9 M10

1 Earthwork - All Soils 5 0.25 0.75 1 1.25 1.25 0.5        
2 Concrete - PCC & RCC 80   8 16 16 20 12 8      
3 Centering & Shuttering 42   4.2 8.4 8.4 10.5 6.3 4.2      
Reinforcement & Structural
4 steel 112.5   11.3 22.5 22.5 28.125 16.875 11.25      
5 Brickwork 34     3.4 5.1 6.8 6.8 6.8 3.4 1.7  
6 Plastering - All types 15       1.5 2.25 3 3 3 1.5 0.75
7 Painting - All Types 5       0.5 0.75 1 1 1 0.5 0.25
8 Flooring - All Types 110       11 16.5 22 22 22 11 5.5
9 Waterproofing works 12             6 6    
10 Aluminum work 13.5         3.375 3.375 3.375 3.375 0 0
11 Electrical work 35         0 8.75 8.75 8.75 5.25 3.5
12 Sanitary & Plumbing works 20     1 2 3 4 3 3 2 2
13 Road Works 16           8 8      
TOTAL 500 0.25 24.2 52.3 68.25 92.55 92.6 85.38 50.525 21.95 12

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 Monthly and Cumulative invoice

  M1 M2 M3 M4 M5 M6 M7 M8 M9 M10

TOTAL 0.25 24.2 52.3 68.25 92.55 92.6 85.38 50.525 21.95 12

CUM 0.25 24.45 76.75 145 237.55 330.15 415.5 466.05 488 500

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 Cash Inflow

  t=0 M1 M2 M3 M4 M5 M6 M7 M8 M9 M10 M11   M15 M16

Work done by
measurement   0.25 24.2 52.3 68.25 92.55 92.6 85.38 50.525 21.95 12        

Recoveries
towards advance
payment of 50       10 10 10 10 10              

Retention @ 10%
of gross invoice
(0.1* row 1)   0.03 2.42 5.23 6.83 9.26 9.26 8.54 5.05 2.20 1.20        
Payment due (1-3)   0.23 21.78 37.07 51.43 73.30 73.34 66.84 45.47 19.76 10.80        

Cash received
(one month delay)     0.23 21.78 37.07 51.43 73.30 73.34 66.84 45.47 19.76 10.80      

Release of
retention                       25.00     25.00
Total Incomings 50.00 0.00 0.23 21.78 37.07 51.43 73.30 73.34 66.84 45.47 19.76 35.80     25.00

Cumulative
incomings 50.00 50.00 50.23 72.01 109.08 160.50 233.80 307.14 373.97 419.45 439.2 475.00 475 475 500.00

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 Cash Outflow
  t=0 M1 M2 M3 M4 M5 M6 M7 M8 M9M10 M11   M15 M16
439.
Cumulative incomings 50 50 50.225 72.01 109.075 160.5 233.8 307.1 373.97 419.4 2 475 475 475 500
Work done by 12.0
measurement   0.25 24.20 52.30 68.25 92.55 92.60 85.38 50.53 21.95 0        
Total cost (0.9 of total 10.8
bill)   0.23 21.78 47.07 61.43 83.30 83.34 76.84 45.47 19.76 0        
Labor @ 20% of total
cost   0.05 4.36 9.41 12.29 16.66 16.67 15.37 9.09 3.95 2.16        
Material @ 55% of
total cost   0.12 11.98 25.89 33.78 45.81 45.84 42.26 25.01 10.87 5.94        
Subcontractors @
10% of total cost   0.02 2.18 4.71 6.14 8.33 8.33 7.68 4.55 1.98 1.08        
Plant & machinery @
10% of total cost   0.02 2.18 4.71 6.14 8.33 8.33 7.68 4.55 1.98 1.08        
Project overheads @
5% of total cost   0.01 1.09 2.35 3.07 4.16 4.17 3.84 2.27 0.99 0.54        
Labor Payment (no
delay)   0.05 4.36 9.41 12.29 16.66 16.67 15.37 9.09 3.95
2.16        
Material payment (one 10.8
month delay)     0.12 11.98 25.89 33.78 45.81 45.84 42.26 25.01 7 5.94     
Subcontractors
Payment (one month
delay)     0.02 2.18 4.71 6.14 8.33 8.33 7.68 4.55 1.98 1.08     
Plant & machinery
payment (one month
delay)     0.02 2.18 4.71 6.14 8.33 8.33 7.68 4.55 1.98 1.08     
Overhead cost
payment (no delay)   0.01 1.09 2.35 3.07 4.16 4.17 3.84 2.27 0.99
0.54        
17.5
Outgoing Total   0.06 5.61 28.10 50.66 66.89 83.31 81.71 69.00 39.04 2 8.10      
441.
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Cumulative Outgoings   0.06 5.67 33.78 84.44 151.33 234.63 316.35 385.34 424.39 9 450.0 450.0 450.0 450.0
Cash Flow Diagram

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 Factors Affecting Project Cash Flows
• Advances such as Mobilization Advance etc.
• The Margin in a project,
• Retention,
• Extra claims,
• Distribution of margin such as front loading or back
loading;
• Certification type such as over measurement and
under measurement;
• Certification Period;
• Credit Arrangement of the contractor with labor,
material, and plant and equipment suppliers, and
other subcontractors.
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 Gemechis Tamiru

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 Factors Affecting Project Cash Flows
• Advances such as Mobilization Advance etc.
• The Margin in a project,
• Retention,
• Extra claims,
• Distribution of margin such as front loading or back
loading;
• Certification type such as over measurement and
under measurement;
• Certification Period;
• Credit Arrangement of the contractor with labor,
material, and plant and equipment suppliers, and
other subcontractors.
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 Profit Margin
• The margin (profit margin or contribution) is the
excess over costs.
• Thus higher is the margin in a project better it is for
the contractor cash flow.
Exercise
• Assume a fictitious project of 10 months duration.
• It is also assumed that ETB 100 (cost) is incurred
every month and the margin is 10% of the cost.
• The retention amount is 5% of the bill value and the
whole retention money is to be released 6 months
after practical completion (i.e. 10 months).
• Further it is also assumed that owner delays the
payment by one month.
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 Retention
• Retention tends to reduce the margin obtained from a
project.
• In case of very low margins the retention can even
reduce the margin to zero or less.
• Thus retention affects the contractor’s cash flow in a
negative manner. The higher the retention the bigger
is the cash flow problem.
Exercise
• Compute the effect of retention percentage (0% to
5% to 10%) on cash flow for the fictitious problem.

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 Extra Claims

• This is basically to make profit, settlement takes

time, it causes negative impact but it does not
improve the cash flow.
• Claims should be settled as quickly as possible to
benefit company’s cash flow.

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 Distribution of Margin

• Keeping the overall margin amount same, the margin

can be distributed in different items of a project in
either uniform manner or it can be front or back
loaded.
• In case of uniform loading all the items of the project
carry equal margin percent while in the front-end
rate loading the earlier items to be executed early in
the project carry a higher margin than the later items.
• By doing so, the cash flow position of the contractor
improves, even though the overall margin derived
from the project would be same as that obtained in
case of uniform loading.
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 Distribution of Margin (cont’d)

• In the back end rate loading, the items to be executed

later in the project carry higher margin while the
items to be executed early in the project carry lower
margin.
• This has a tendency to increase the negative cash
flow and contractors’ resort to such means in a
market where the inflation rate is higher than the
interest rate. This way the contractors hope to
recover substantial amount on account of price
escalation.

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 Certification type

Over measurement
• Over measurement is the device whereby the amount
of work certified in the early months of a contract is
greater than the amount of work done.
• This is compensated for in later measurements.
• Thus, over measurement has the same effect as front-
end loading;
• It improves the cash flow in the early stages and
reduces the capital lock-up.

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 Certification type
Under Measurement
• Under measurement is the situation whereby the
amount of work certified in the early months of a
contract is less than the amount actually done.
• This has the effect of increasing the negative cash
flow for the contractor in a project.

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 Certification type

Delay in Receiving Payment from Client

• The time between interim measurement, issuing the
certificate and receiving payment is an important
variable in the calculation of cash flows. Any
increase in the delay in receiving this money delays
all the income for the contract with a resulting
increase in the capital lock-up.
Delay in paying Labor, Plant hires, Materials
Suppliers and Sub Contractors
• The time interval between receiving goods or
services and paying for these on credit the contractor
receives from his suppliers. 22
 USING CASH FLOW DIAGRAMS
Determining Capital Lock Up
• The negative cash flow experienced in the early
stages of projects represent locked up capital
• This capital is supplied from the contracting
company’s cash reserves or borrowed.
• If the company borrows the cash it will have to pay
interest charged to the project;
• If the company uses its own cash reserves it is being
deprived of the interest – earning capability of the
cash and should therefore charge the project for this
interest lost.

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 Captim
• A measure of the interest payable is obtained by
calculating area between the cash-out and cash-in.
• The area under the negative cash flow period is used
to calculate the financing charges for the project by
the contractor.
• The total area would have a unit of Birr x Months
and is also known as captim standing for capital x
time.
• Interest on the capital required for the project =
(captim in Birr month x interest charges per
annum)÷12
• For a captim value of 10,000 Birr Month, and the
interest rate = 12% per annum; the interest charges
for financing the project would be Birr 10,000. 24