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Cash flow

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  • 1. Contract Provision that Impact Cash Flow• Payment schedule• Materials• Mobilization• Monthly payments• Final PaymentSpring 2008, Cash Flow Analysis 1King Saud University Dr. Khalid Al-Gahtani
  • 2. Contractor Cash Disbursements• Labor• Equipment• Materials• Subcontractors• Other – Insurance, – Permit and mobilization – Overhead itemsSpring 2008, Cash Flow Analysis 2King Saud University Dr. Khalid Al-Gahtani
  • 3. Factors That Minimize Contractors Negative Cash Flow1. 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 contractors monthly pay estimate.Spring 2008, Cash Flow Analysis 3King Saud University Dr. Khalid Al-Gahtani
  • 4. Factors That Minimize Contractors Negative Cash Flow5. 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.Spring 2008, Cash Flow Analysis 4King Saud University Dr. Khalid Al-Gahtani
  • 5. The Cash Flow AnalysisSpring 2008, Cash Flow Analysis 5King Saud University Dr. Khalid Al-Gahtani
  • 6. The Cash Flow AnalysisSpring 2008, Cash Flow Analysis 6King Saud University Dr. Khalid Al-Gahtani
  • 7. 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 weeks delay.• The delay for other submitting is one month.• Revenue is received after 4 weeks from submitting invoices.Spring 2008, Cash Flow Analysis 7King Saud University Dr. Khalid Al-Gahtani
  • 8. 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 week’s delay.Spring 2008, Cash Flow Analysis 8King Saud University Dr. Khalid Al-Gahtani
  • 9. Table 4.3 Date for example 4.1 D uration P recedin g V alue A ctivity O verlap (w eeks) activity (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 w ith G 9000 J 2 H .I 4000Spring 2008, Cash Flow Analysis 9King Saud University Dr. Khalid Al-Gahtani
  • 10. Spring 2008, Cash Flow Analysis 10King Saud University Dr. Khalid Al-Gahtani
  • 11. Spring 2008, Cash Flow Analysis 11King Saud University Dr. Khalid Al-Gahtani
  • 12. Spring 2008, Cash Flow Analysis 12King Saud University Dr. Khalid Al-Gahtani
  • 13. Spring 2008, Cash Flow Analysis 13King Saud University Dr. Khalid Al-Gahtani
  • 14. Spring 2008, Cash Flow Analysis 14King Saud University Dr. Khalid Al-Gahtani
  • 15. Spring 2008, Cash Flow Analysis 15King Saud University Dr. Khalid Al-Gahtani
  • 16. Spring 2008, Cash Flow Analysis 16King Saud University Dr. Khalid Al-Gahtani
  • 17. Spring 2008, Cash Flow Analysis 17King Saud University Dr. Khalid Al-Gahtani
  • 18. Spring 2008, Cash Flow Analysis 18King Saud University Dr. Khalid Al-Gahtani
  • 19. Algorithm Calculations1) calculate the net operating cash flow at the end of period t for t ≥ 0 is given by: At = Pt Et – At is positive for a surplus and negative for a shortfall – Et = the contractors expenses in period t, and – Pt = owners 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 Pt (for t ≥ 1) is: Ft = Nt-1 Et – Nt-1 is the cumulative net cash flows from period 0 to period (t-1). Spring 2008, Cash Flow Analysis 19 King Saud University Dr. Khalid Al-Gahtani
  • 20. Algorithm Calculations3) calculate the cumulative net operating cash flow after receiving payment Pt at the end of period t (for t ≥1) is: Nt = Ft + Pt = Nt-1 + At4) The gross operating profit G for a n- period project is defined as net operating cash flow at t=n and is given by:Spring 2008, Cash Flow Analysis 20King Saud University Dr. Khalid Al-Gahtani
  • 21. E xa m p le 1: C on tractors gro ss p rofit fro m a p rojectT he co ntracto rs expe nses a nd o w ners pa ym e nts fo r a m u lt i - year co nstructio n pro ject areg ive n in C o lu m ns 2 a nd 3, respective ly, o f T a ble 1 . E ach tim e perio d is represe nted by o neyear, and the annu a l interest rate i is fo r bo rro w ing 11% . T he co m putatio n has bee n carriedo ut in T able 1, and the co ntracto rs gro ss pro fit G is fo und to be N 5 = $8.025 m illio n in thela st co lu m n o f the table. T A B L E 1 E xa m p le o f C o ntracto rs E xpe nse s a nd O w ners P a ym e nts ($ M illio n) C o ntracto rs O w ners N et C ash C u m u lat ive C a sh C u m u lat ive N etP erio d E xpe nse s P a ym e nts F lo w B e fo re P a ym e nts C ash t Et Pt At Ft Nt 0 $3.782 $0 -$3.782 -$3.782 -$3.782 1 7.458 6.473 -0.985 -11.240 -4.767 2 10.425 9.334 -1.091 -15.192 -5.858 3 14.736 13.348 -1.388 -20.594 -7.246 4 11.420 16.832 + 5.412 -18.666 -1.834 5 5.679 15.538 + 9.859 -7.513 + 8.025T otal $53.500 $61.525 + $8.025 Spring 2008, Cash Flow Analysis 21 King Saud University Dr. Khalid Al-Gahtani
  • 22. Spring 2008, Cash Flow Analysis 22King Saud University Dr. Khalid Al-Gahtani
  • 23. Considering the time value of money1) Co m pute the interest per perio d - If is negat ive a nd i is the bo rro w ing rate fo r the sho rtfa ll, - If is po sit ive a nd h is the invest m e nt rate fo r the surp lus, Spring 2008, Cash Flow Analysis 23 King Saud University Dr. Khalid Al-Gahtani
  • 24. Considering the time value of money2) 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 afterreceiving payment Pt at the end of period t(for t ≥1) is:Spring 2008, Cash Flow Analysis 24King Saud University Dr. Khalid Al-Gahtani
  • 25. Considering the time value of money4) calculate the gross operating profit at the end of a n-period project including interest charges is: w here is the cu m u lative net cash flo w fo r t = n.Spring 2008, Cash Flow Analysis 25King Saud University Dr. Khalid Al-Gahtani
  • 26. Example 2E xa m p le 2: E ffe cts of C on stru ction F in an cin gT he co m putatio n o f the cu m u lat ive ca sh flo w s inc lud ing interest charges at i = 11% fo rE xa m p le 1 is sho w n in T a ble 2 w ith gro ss pro fit = = $1.384 m illio n. T he resu lts o fco m putatio n are a lso sho w n in F igure 2 .T A B L E 2 E xa m p le C u m u lat ive C a sh F lo w s Inc lu d ing Interests fo r a C o ntractor ($ M illio n) P erio d C o nstructio n O w ners A nnua l C u m u lat ive C u m u lat ive (year) E xpe nse s P a ym e nts Interest B e fo re P a ym e nts N et C ash F lo w t Et Pt 0 $3.782 0 0 -$3.782 -$3.782 1 7.458 $6.473 -$0.826 -12.066 -5.593 2 10.425 9.334 -1.188 -17.206 -7.872 3 14.736 13.348 -1.676 -24.284 -10.936 4 11.420 16.832 -1.831 -24.187 -7.354 5 5.679 15.538 -1.121 -14.154 + 1.384 Spring 2008, Cash Flow Analysis 26 King Saud University Dr. Khalid Al-Gahtani
  • 27. Example 2Spring 2008, Cash Flow Analysis 27King Saud University Dr. Khalid Al-Gahtani
  • 28. Example 2Spring 2008, Cash Flow Analysis 28King Saud University Dr. Khalid Al-Gahtani
  • 29. E xa m p le 3: E ffe cts of In flationS uppo se that both expe nses a nd rece ipts fo r the constructio n pro ject in the E xa m p le 1 areno w expressed in the n -current do llars (w ith a nnua l inflat io n rate o f 4% ) in T able 3 . T hem arket interest rate reflect ing this inflatio n is no w 15% . In co nsidering these e xpe nses a ndrece ipts in then -curre nt do llars a nd using an interest rate o f 15% inc lud ing inflat io n, w e canreco m pute the cu m u lat ive net cash flo w (w ith interest). T hus, the gro ss pro fit le ss fina nc ingco sts beco m es = = $0.4 m illio n. T here w ill be a lo ss rather tha n a pro fit a fter deductingfina nc ing co sts and ad just ing fo r the effects o f inflatio n w ith this pro ject. T A B L E 3 E xa m p le o f O verdra ft F ina nc ing B a sed o n Inflated D o llars ($ M illio n) C u m u lat ive C u m u lat ive P erio d C o nstructio n O w ners A nnua l B e fo re N et C ash (year) E xpe nse s P a ym e nts Interest P a ym e nts F lo w t Et Pt 0 $3.782 0 0 -$3.782 -$3.782 1 7.756 $6.732 -$1.149 -12.687 -5.955 2 11.276 10.096 -1.739 -18.970 -8.874 3 16.576 15.015 -2.5 74 -28.024 -13.009 4 13.360 16.691 -2.953 -29.322 -9.631 5 6.909 18.904 -1.964 -18.504 + 0.400 Spring 2008, Cash Flow Analysis 29 King Saud University Dr. Khalid Al-Gahtani
  • 30. Example 4: Effects of Work Stoppage at Periods of InflationT A B L E 4 E xa m p le o f the E ffects o f W o rk Sto ppage and Inflat io n o n a C o ntracto r ($ Million) C u m u lat ive C u m u lat ive P erio d C o nstructio n O w ners A nnua l B e fo re N et C ash (year) E xpe nse s P a ym e nts Interest P a ym e nts F lo w t Et Pt 0 $3.782 0 0 -$3.782 -$3.782 1 7.756 $6.732 -$1.149 -12.687 -5.955 2 11.276 10.096 -1.739 -18.970 -8.874 3 0 0 -1.331 -10.205 -10.205 4 17.239 15.015 -2.824 -30.268 -15.253 5 13.894 16.691 -3.330 -32.477 -12.786 6 7.1 85 18.904 -2.457 22.428 -3.524 Spring 2008, Cash Flow Analysis 30 King Saud University Dr. Khalid Al-Gahtani
  • 31. Example 4: Effects of Work Stoppage at Periods of InflationSpring 2008, Cash Flow Analysis 31King Saud University Dr. Khalid Al-Gahtani
  • 32. Example 4: Effects of Work Stoppage at Periods of InflationSpring 2008, Cash Flow Analysis 32King Saud University Dr. Khalid Al-Gahtani