ARE 413

CONSTRUCTION MANAGEMENT
By
MOHAMMED JALALUDDIN
LECTURER
CONSTRUCTION ENGINEERING & MANAGEMENT DEPT
Handout # 11
Presentation Outline

Cash Flow
|Cash Flow Projection / What is Cash Flow Projection
Example Cash Flow of Simple Project
S-Curve
Cash Flow to Contractor
Progress Payment
Contractors Expenses and Income Profile
Contractors Financing
Overdraft
Mobilization Advance Payment

Objectives of Class :
To introduce cash flow concept during the life of a project
and example of cash flow projection of simple project
To draw the Contractors Expenses and Income Profile
To know the Contractors sources of Financing





Projection of Income
and expenses during
the life of the project
Several time scheduling
aids used by contractor
Project S-Curve
Owner requires
contractor to provide an
S curve of estimated
progress and costs
Cumulative costs across
the duration of the
project
A graphical portrayal of
the outflow of monies
(both direct & indirect)
Duration
S
R
Source: Dr. L. K. Gaafar
Activity Days Cost ($) Cost/day
A 2 200 100
B 5 500 100
C 2 200 100
D 7 500 71.4
E 1 100 100
F 2 100 50
Cash Flow
Source: Dr. L. K. Gaafar
Cash Flow
Daily Expenses
0
20
40
60
80
100
120
140
160
180
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Day
C
o
s
t

(
$
)
Cumulative Expenses
0
200
400
600
800
1000
1200
1400
1600
1800
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Day
C
o
s
t

(
$
)
Activity Days Cost ($) Cost/day
A 2 200 100
B 5 500 100
C 2 200 100
D 7 500 71.4
E 1 100 100
F 2 100 50
Day Activity Cost of day Total cost
1 A 100 100
2 A 100 200
3 B 100 300
4 B 100 400
5 B 100 500
6 B 100 600
7 B 100 700
8 C,D 171.4 871
9 C,D 171.4 1043
10 D,E 171.4 1214
11 D 71.4 1286
12 D 71.4 1357
13 D 71.4 1428
14 D 71.4 1500
15 F 50 1550
16 F 50 1600
Cash Flow to the Contractor
Progress Payments - Flow of money from owner to the
contractor
Estimates of work completed by the contractor periodically
and (usually monthly) and verified by owners reps
Evaluation based on type of contract
Lump Sum: Percentage of total contract completion
Unit Price: Actual field measurements of work
completed
Progress Payments
Contractor prepares a monthly progress claim (bill)
usually at the end of each month
The Owner evaluates the bill and pay contractor
within the time period stipulated in the contract
(usually within 30 days)
Owner keeps a retainage of 10% from each payment
(usually until cumulative progress bills reach 50% of
the total contract sum)

Contractors Income Profile
Stair-step
appearance since
the progress
payments are paid
in discrete
amounts
$
Duration
Contractors Expenses and Income
Profile
Clear indication of
expenses and income
The difference
between Expenses and
revenue makes it
necessary for the
contractor to obtain
temporary financing

$
Duration
Expenses and Income Profiles
Expenses and Income Profiles
Contractors Financing
Usually a bank extends a line of credit against
which the contractor can buy materials, make
payments and pay other expenses while waiting for
reimbursement from owner.
Bank charges interest on the outstanding balance
(overdraft)
Good policy to to try to minimize overdraft
Overdraft depends ON
Amount of markup (or profit) applied to
contractors bid
Amount of Retainage withheld by the owner
Delay between billing and payment by the owner
Banks evaluation of
construction contractors
High risky borrowers
If the contractor defaults, the loan is
secured only by some materials inventories
and partially completed construction
Charges very high interest rates on
borrowings
Mobilization Advance Payment
Some contractors offset the overdraft borrowing
requirement by requesting mobilization, money
from owner
Influence of mobilization on payment and income
profiles
Expenses and Income
Profiles (with mobilization
advance)
Mobilization Advance Payment
Some owners issue 20% of the advance payment at the
inception against a bank guarantee submitted by the
contractor
The advance payment recovered in each progress payment
at a rate of 20%.
Since the owners are less risky than the contractors, they
can borrow short-term money at a lower interest rates
Transfer the interim financing requirement from
contractor to the owner
Overall cost savings to owner and the contractor

Overdraft Requirement
The contractor needs to know what is the
maximum overdraft during the construction
project
Uses Income and expenses profiles to asses the
overdraft
Tabulate the expenses and revenues and find
the maximum overdraft
Plot of maximum
overdraft
Composite Overhead Profiles
Comparison of Payment
Schemes
Rate-of-return (ROR) analysis is helpful in
comparing the economic value to a contractor of
varying payment schemes
Examining the economic impact of;
varying retainage policies
delay in payment strategies
payment of mobilization
Evaluate the net present value between Revenue
and Expenses
Summary
Projection of Income and expenses during the life of the
project

The difference between Expenses and revenue makes it
necessary for the contractor to obtain temporary
financing

Usually a bank extends a line of credit against which the
contractor can buy materials, make payments and pay
other expenses while waiting for reimbursement from
owner

References: Janaka Y. Ruwanpura