Cash Flow Analysis Part 2 King Saud UniversityCE511- Construction Planning & Control 1

King Saud UniversityCE511- Construction Planning & Control 2 Payment schedule Materials Mobilization Monthly payments Final Payment Contract Provision that Impact Cash Flow

King Saud UniversityCE511- Construction Planning & Control 3 Contractor Cash Disbursements Labor Equipment Materials Subcontractors Other –Insurance, –Permit and mobilization –Overhead items

King Saud UniversityCE511- Construction Planning & Control 4 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.

King Saud UniversityCE511- Construction Planning & Control 5 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.

King Saud UniversityCE511- Construction Planning & Control 6 The Cash Flow Analysis

King Saud UniversityCE511- Construction Planning & Control 7 The Cash Flow Analysis

King Saud UniversityCE511- Construction Planning & Control 8 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.

King Saud UniversityCE511- Construction Planning & Control 9 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.

King Saud UniversityCE511- Construction Planning & Control 10 Table 4.3 Date for example 4.1

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King Saud UniversityCE511- Construction Planning & Control 20 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).

King Saud UniversityCE511- Construction Planning & Control 21 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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King Saud UniversityCE511- Construction Planning & Control 24 Considering the time value of money

King Saud UniversityCE511- Construction Planning & Control 25 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:

King Saud UniversityCE511- Construction Planning & Control 26 4) calculate the gross operating profit at the end of a n-period project including interest charges is: Considering the time value of money

King Saud UniversityCE511- Construction Planning & Control 27 Example 2

King Saud UniversityCE511- Construction Planning & Control 28 Example 2

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King Saud UniversityCE511- Construction Planning & Control 31 Example 4: Effects of Work Stoppage at Periods of Inflation

King Saud UniversityCE511- Construction Planning & Control 32 Example 4: Effects of Work Stoppage at Periods of Inflation

King Saud UniversityCE511- Construction Planning & Control 33 Example 4: Effects of Work Stoppage at Periods of Inflation