Cash Flow and the Schedule

"My impression is that she wants to learn about scheduling."

If that's true, Raul, it's a great opportunity!  It's wonderful that a finance person would actually want to understand project scheduling!

The relationship between cash flow and schedule is tangential but important, enough to cause distortions.  One of these is called the  Disbursement Delay Distortion.  This is the fact that costs and earned value are usually planned as accruing at the time the work is scheduled.  But they may have to be paid in advance or, more often, they are paid later.  In the 70s and early 80s, many DoD contractors deliberately used this delay to distort the cost and EV metrics:  the BCWS and BCWP, based on the work scheduled and performed through 30 June, would be $10M; but the ACWP, tracked out of the finance disbursement system, would only be $9.8M, and thus the CPI would be > 1.0.  However, there might be $1M worth of bills for work already performed that had not yet been captured by the finance system.  Frequently, a project would seem to "end" $0.5M under budget on 30 September, only to go over budget two months later when all the bills were paid.

Moral of story: compare apples with apples.  If a contractor plans cost and EV as accruing on a work performance basis, they must NOT track actuals out of a disbursement system.

There's one other cash flow aspect: progress payments and revenue recognition.  In my humble opinion, progress payments should NOT be recognized as revenue UNLESS there is ZERO danger that the payment would have to be returned if the contractor does not, for any reason, complete the project.

In general, I believe that both planned disbursement dates and planned progress revenue dates should be input to the master schedule as milestones, with specific lags (or leads, for resources that must be paid for in advance) from the predecessor work activities.

Fraternally in project management,

Steve the Bajan

Hi Raul,

if the schedule is cost loaded it produces reports on the cash requirements at any time period.

If to add expected payments and revenues the schedule will show project (portfolio) cash flow.

The schedule model shall serve to all project stakeholders and cash flow plan shall be certainly based on the project schedule. The same model shall be used for any project decision.

Best Regards,

Vladimir

Dear Raul,

Usually the finance guys want to see a number each month. This is a requirement of the lending banks. You can identify the capital cost and the operating cost for her.  That is, when you are doing to pay for the approved materials and how much money you need each month to operate the project.

With kind regards,

Samer

Your company need to forecqast cash flow to estimate future needs of chash and use of credit. Also a Surety Company will require contractors to submit quarterly a schedule of work in progress along with a Cash Flow Statement. This statement will include all work done by the Contractor without exception; work not covered under a bond shall also be included.

Keep in mind one of the basic rules for determining bonding capacity is Working Capital, a bonding company usually set a ratio from 10 to 20 for your bonding capacity and how much bonding capacity is available will depend on the progress of the jobs. Cash flow can be used to forecast variations in Bonding Capacity.

http://www.sio.org/html/studyguide.html

Financial Strength- typically includes analysis of:

Detailed financial statements for the past 3-5 years. Accounting methods should comply with Generally Accepted Accounting Principles (GAAP). Financial statements should include: Balance Sheet, Statement of Earnings, Statement of Changes in Owner’s Equity, Statement of Cash Flow, Notes to Financial Statements, and Contract Schedules. The surety may ask for interim financial statements. Requirements for interim statements vary, but a six-month statement usually is the minimum.

Contract schedules that typically include a summary of completed contracts and contracts in progress. Sureties also will require a schedule of work in progress (usually quarterly). This schedule should list each job by name and indicate the total contract price including: change orders, amount billed to date, cost incurred to date, revised estimate of the cost to complete, estimated gross profit, and the anticipated completion date.

How to estimate Cash Flow

Cash flow is composed of two main elements of cash:

Income:

The income element can be forecasted by matching your BOQ (on this side of the pond we know it as Breakdown for Payment) with the construction activities matched and adjusted to the lag in payment receipts. Also retainage must be considered in the forecast.

In our practice, we have a 10% retainage payable 30 days after substantial completion.

Regular monthly payments payable 30 days after payment request of work performed prior month. Regular monthly payments might include materials on site.

Expenses:

The expense element can be forecasted by matching your expenditures with the construction activities and adjusted to the lag in payment done.

In our practice we have the following payment lags;

Payroll = paid weekly, one week lag

Subcontracts = paid one week after payment from Owner is received ("Pay when paid" a controversial issue). In our case, this adds as follows at the end of the month 1 week negotiating Payment Application an submitting of Request, 30 days to receive payment from Owner plus 1 week to pay Subcontractor, this makes up a 6 weeks average lag.

Materials = paid 30 days after material delivery

Materials from abroad = paid with an irrevocable letter of credit usually 50% before manufacturing and 50% upon shipping.

For both income and expenses going into the granularity of activity per activity does not makes sense as projected schedule used is generally the Early Date Schedules, this we know is optimistic and most probably will never happen. One approach is to use a higher level in your WBS and adjust the occurrence to an intermediate range, somewhere between Early and Late Projections.

Do not lose perspective this are just projections, too much granularity is a waste of time. It would be like estimating concrete / earth-work quantities to the cubic centimeter.

When an activity or group of activities span several payment periods it is convenient to create a Hammock or Summary Activity with a working calendar setup for expected payment dates if you want your model to predict payments to occur on a single payment at regular periods instead of continuous. With Spider Project, it is easy to model even when your group of activities consist of a single activity and you need the Summary activity to model the lag as well as the effect of any duration cahnges in the activity to match the hammock duration, a schedule is dynamic and so activity durations. Ah, now we are talking about scheduling.

Make sure you hide your cash flow activities under your working WBS only main WBS must contain all activities, using only Main WBS can create a mess. Show cash flow hammock activities only when needed, every quarter or every 6 months, and only for your cash flow reports. Because they are hammock you are in no need to update them, is authomatic.

In Summary

Construction companies doing bonded work will always be required to submit Cash Flow Statements, not only to their Surety but also to their Stockholders and Banks.

It is important to understand it and to know what adjustments must be done for it to be a reasonable prediction.

Best Regards,

Rafael

Raul,

You are one lucky guy! I used to do both programme and cash flow with a basket of different currencies.

The cash flow will depend a lot on the contract and the agreed terms of payment and this may vary from one country to another. Sometimes, one project with multiple packages has different payment terms and different currencies as well.

So it is absolutely necessary to read each contract terms of payment in order to prepare a cash flow.

You also need to consider advance payments and retentions, again this will vary from one contract to another contract. Usually, material and/or equipment suppliers or manufacturers have different terms of payments as compared with contractors. 

So the moral of the story is read the contract!