Cash flow

Contract Provision that Impact
Cash Flow
• Payment schedule
• Materials
• Mobilization
• Monthly payments
• Final Payment

Spring 2008, Cash Flow Analysis 1
King Saud University Dr. Khalid Al-Gahtani

Contractor Cash Disbursements
• Labor
• Equipment
• Materials
• Subcontractors
• Other
– Insurance,
– Permit and mobilization
– Overhead items

Factors That Minimize Contractor's
Negative Cash Flow
1. 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
contractor's monthly pay estimate.

Factors That Minimize Contractor's
Negative Cash Flow
5. 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.


The Cash Flow Analysis


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 week's delay.
• The delay for other submitting is one month.
• Revenue is received after 4 weeks from
submitting invoices.

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.

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 4000


Algorithm Calculations
1) 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 contractor's expenses in period t, and
– Pt = owner's 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).

Algorithm Calculations
3) 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 + At
4) The gross operating profit G for a n-
period project is defined as net operating
cash flow at t=n and is given by:


E xa m p le 1: C on tractor's gro ss p rofit fro m a p roject

T he co ntracto r's expe nses a nd o w ner's pa ym e nts fo r a m u lt i - year co nstructio n pro ject are
g 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 ne
year, 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 carried
o ut in T able 1, and the co ntracto r's gro ss pro fit G is fo und to be N 5 = $8.025 m illio n in the
la 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 r's E xpe nse s a nd O w ner's P a ym e nts ($ M illio n)
C o ntracto r's O w ner's N et C ash C u m u lat ive C a sh C u m u lat ive N et
P 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 + 8.025
T otal $53.500 $61.525 + $8.025


Considering the time value of money
1) 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,


2) 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 after
receiving payment Pt at the end of period t
(for t ≥1) is:



4) 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.


Example 2
E xa m p le 2: E ffe cts of C on stru ction F in an cin g

T 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 r
E 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 f
co 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 ner's 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


Example 2


E xa m p le 3: E ffe cts of In flation
S 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 are
no 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 he
m arket interest rate reflect ing this inflatio n is no w 15% . In co nsidering these e xpe nses a nd
rece ipts in then -curre nt do llars a nd using an interest rate o f 15% inc lud ing inflat io n, w e can
reco 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 ing
co 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 deducting
fina 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 ner's 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


Example 4: Effects of Work
Stoppage at Periods of Inflation
T 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 ner's 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


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