Cash Flow -project

Transcript

PROJECT CASH FLOW 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  Contractor’s Expenses and Income Profile  Contractor’s 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 Contractor’s Expenses and Income Profile  To know the Contractor’s sources of Financing Cash Flow Projection • Projection of Income and expenses during the life of the project • Several time scheduling aids used by contractor Project S-Curve S R Duration • 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) Activity A B C D E F Days 2 5 2 7 1 2 Cost ($) 200 500 200 500 100 100 Cost/day 100 100 100 71.4 100 50 Cash Flow Source: Dr. L. K. Gaafar Cash Flow Daily Expenses 180 Days 2 5 2 7 1 2 Cost ($) 200 500 200 500 100 100 Cost/day 100 100 100 71.4 100 50 160 140 120 Cost ($) Activity A B C D E F 100 80 60 40 Activity Cost of day Total cost A 100 100 A 100 200 B 100 300 B 100 400 B 100 500 B 100 600 B 100 700 C,D 171.4 871 C,D 171.4 1043 D,E 171.4 1214 D 71.4 1286 D 71.4 1357 D 71.4 1428 D 71.4 1500 F 50 1550 F 50 1600 20 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 11 12 13 14 15 16 Day Cumulative Expenses 1800 1600 1400 1200 Cost ($) Day 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 1000 800 600 400 200 0 Source: Dr. L. K. Gaafar 1 2 3 4 5 6 7 8 9 10 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 owner’s 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) Sample S Curve Contractor’s Income Profile Stair-step appearance since the progress payments are paid in discrete amounts $ Duration Contractor’s Expenses and Income Profile $ Duration • Clear indication of expenses and income • The difference between Expenses and revenue makes it necessary for the contractor to obtain temporary financing Expenses and Income Profiles Expenses and Income Profiles Contractor’s 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 contractor’s 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