Managing Project Cash Flow

Question 1

Define Cash Flow

Answer 1

The transfer or flow of money in and out of the project or company

Question 2

Key Issues with Cash Flow

Answer 2

-Timing
-Time Lags
o Entitlement to receive cash payment vs actually receiving it
o Commitment to making payment vs actually making it
-Credit Arrangements

Question 3

What is an S-curve

Answer 3

A method of visualising the forecasted and actual progression of a construction project

Question 4

How do costs and time correlate in an s-curve (i.e first 1/3 etc.)

Answer 4

• During the first 1/3 of the duration, the cost accumulates in a parabolic pattern and =1/4 costs
• Middle 1/3, cost accumulates in a linear fashion =1/2 costs
• Final 1/3 is a mirror image of the first 1/3 = ¼ costs

Question 5

Purpose of Cash Flow Forecasting

Answer 5

• Bank loans and monitoring- if banks are funding projects, they will want to know their drawdowns
• Contractor progress monitoring
• Stakeholder Management- shareholders and guarantor

Question 6

Possible actions as a result of cash forecasting

Answer 6

• Early warning to predict insolvency
• Deciding whether to take on a new contract
• Renegotiation of overdraft limits supported by reliable forecasts
• Adjustment of work schedules of existing contracts
• Negotiation of extended credit with some suppliers
• Accepting suppliers full credit facilities even if it means temporarily losing some discounts

Question 7

Reasons actual cash flow may be above/below forecast

Answer 7

• Site/weather conditions
• Re-sequencing of works
• Materials on/off site
• Project progress
• Front-end loading rate
• Inaccurate cash flow in the first place
• Variations
• Distressed contractor

Question 8

What is capital lock-up and how can it be financed

Answer 8

Negative cash flows at early stages of the project

2 methods of financing:

-Company cash reserves- deprived of interest earning capability of cash. Interest lost charged to project

-Borrowed- interest charged to project

Question 9

Factors influencing the amount of capital lock-up

Answer 9

-Profit Margin

-Loss/Expenses Claim

-Retention

-Front end loading

-Overmeasurement

-Back end rate loading and undermeasurement

-Delay in receiving payments from client

-Delay in paying labour, suppliers and sub-contractors

Question 10

Cumulative Cash Flow calculations / S-curve calcs row names

Answer 10

Value
Cumulative Value
Cumulative value less retention
Cumulative Certificates
Retention Release
Cumulative Retention Release
Cumulative payment received
Profit
Cumulative Profit
Cumulative Cost
Cumulative cash Out
Cumulative Cash Flow