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Spring 2008, King Saud University Cash Flow Analysis Dr. Khalid Al-Gahtani 1 Payment schedule Materials Mobilization Monthly payments Final Payment Contract Provision that Impact Cash Flow

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Spring 2008, King Saud University Cash Flow Analysis Dr. Khalid Al-Gahtani 2 Contractor Cash Disbursements Labor Equipment Materials Subcontractors Other –Insurance, –Permit and mobilization –Overhead items

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Spring 2008, King Saud University Cash Flow Analysis Dr. Khalid Al-Gahtani 3 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.

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Spring 2008, King Saud University Cash Flow Analysis Dr. Khalid Al-Gahtani 4 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.

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Spring 2008, King Saud University Cash Flow Analysis Dr. Khalid Al-Gahtani 5 The Cash Flow Analysis

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Spring 2008, King Saud University Cash Flow Analysis Dr. Khalid Al-Gahtani 6 The Cash Flow Analysis

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Spring 2008, King Saud University Cash Flow Analysis 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 week's delay. The delay for other submitting is one month. Revenue is received after 4 weeks from submitting invoices.

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Spring 2008, King Saud University Cash Flow Analysis 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 weeks delay.

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Spring 2008, King Saud University Cash Flow Analysis Dr. Khalid Al-Gahtani 9 Table 4.3 Date for example 4.1

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Spring 2008, King Saud University Cash Flow Analysis Dr. Khalid Al-Gahtani 19 Algorithm Calculations 1) calculate the net operating cash flow at the end of period t for t 0 is given by: A t = P t E t –A t is positive for a surplus and negative for a shortfall –E t = the contractor's expenses in period t, and –P t = 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 P t (for t 1) is: F t = N t-1 E t –N t-1 is the cumulative net cash flows from period 0 to period (t-1).

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Spring 2008, King Saud University Cash Flow Analysis Dr. Khalid Al-Gahtani 20 3) calculate the cumulative net operating cash flow after receiving payment Pt at the end of period t (for t 1) is: N t = F t + P t = N t-1 + A t 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: Algorithm Calculations

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Spring 2008, King Saud University Cash Flow Analysis Dr. Khalid Al-Gahtani 23 Considering the time value of money

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Spring 2008, King Saud University Cash Flow Analysis Dr. Khalid Al-Gahtani 24 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: Considering the time value of money 3) calculate the cumulative net cash flow after receiving payment Pt at the end of period t (for t 1) is:

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Spring 2008, King Saud University Cash Flow Analysis Dr. Khalid Al-Gahtani 25 4) calculate the gross operating profit at the end of a n-period project including interest charges is: Considering the time value of money

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Spring 2008, King Saud University Cash Flow Analysis Dr. Khalid Al-Gahtani 26 Example 2

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Spring 2008, King Saud University Cash Flow Analysis Dr. Khalid Al-Gahtani 27 Example 2

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Spring 2008, King Saud University Cash Flow Analysis Dr. Khalid Al-Gahtani 28 Example 2

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Spring 2008, King Saud University Cash Flow Analysis Dr. Khalid Al-Gahtani 30 Example 4: Effects of Work Stoppage at Periods of Inflation

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Spring 2008, King Saud University Cash Flow Analysis Dr. Khalid Al-Gahtani 31 Example 4: Effects of Work Stoppage at Periods of Inflation

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Spring 2008, King Saud University Cash Flow Analysis Dr. Khalid Al-Gahtani 32 Example 4: Effects of Work Stoppage at Periods of Inflation

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