Construction Project

Cash Flow and

Cost Control

Chapter 9

Question:

What are the financial issues in

Construction Management?

Answer:

Obtaining money

Monitoring costs

Insuring profitability

Cash Flow Definition “the pattern of income and expenditures and

the resulting availability of cash”

HOW DO CONTRACTORS GET PAID?

• General Conditions

Describes mechanism for payment during

construction

Contractor submits monthly payment request

• Unit price contract

Amount paid represents actual construction

work installed during pay period

• Lump sum

Amount paid is based on estimate of project

progress

Project Cost Control

The Original Estimate is the starting

point.

As costs are incurred they are

compared with original budget.

If costs exceed original budget,

problems in field must be addressed.

Computerized

Cost Control Systems

Monitor expenditures: materials,

equipment, labor, overhead

Standardized cost codes are developed

Indicate when costs increase above

original estimate

Source for estimating future projects

Purchase Order

Subcontractor

Monitoring

Cash Flow Problem:

Payments from the Owner lag behind the

Contractor’s expenditures.

Cash Flow Solutions:

Lines of Credit

Overdrafts

Unbalanced Bids

Mobilization Payments

The Cash Flow Projections Month (1) Monthly

expenses

(2)

Cumulative

expenses (3)

Amount

billed (4)

cumulative

billings (5)

Retainage

(6)

Payment

received (7)

Cumulative

payments

received (8)

Overdraft

before

interest

(9)

Interest

(10)

Overdraft

at end of

month

(11)

Overdraft

after

payment

received

(12)

1 16,460 16,460 17,777 17,777 1,778 0 0 16,460 165 16,625 16,625

2 25,540 42,000 27,583 45,360 2,758 15,999 15,999 42,165 422 42,586 26,587

3 10,000 52,000 10,800 56,160 1,080 24,825 40,824 36,587 366 36,953 12,128

4 10,000 62,000 10,800 66,960 1,000 9,720 50,544 22,128 221 22,349 12,629

5 0 62,000 0 66,960 0 16,416 66,960 12,629 0 12,629 3,787

Line of Credit: a flexible loan from the bank which

provides cash on hand before payment from the Owner

is received.

Overdraft: The amount borrowed each month.

“Frontloading” to Reduce Overdrafts

• Unbalanced bids

Unit prices for all line items are calculated and

summed

Some unit prices are increased early, some are

decreased late in the project

• Mobilization payments

Fee paid by Owner at initiation of project

Interest is paid by Owner, not Contractor

The Cash Flow Projections

Table 9.1 Unit prices and item cost including profits

Item (1)

Quantity

(units) (2)

Unit price

($/unit) (3) Total cost (4)

Cost plus

profit (5)

A 1,000 25 25,000 27,000

B 100 120 12,000 12,960

C 1,000 25 25,000 27,000

Totals 62,000 66,960

Frontloading

Table 9.1 Unit prices and item cost including profits

Item (1)

Quantity

(units) (2)

Unit price

($/unit) (3) Total cost (4)

Cost plus

profit (5)

A 1,000 25 25,000 27,000

B 100 120 12,000 12,960

C 1,000 25 25,000 27,000

Totals 62,000 66,960

Summary

Controlling costs

• Insures profitability

• Computerized cost control systems allow cost

tracking and information for future estimating

Problem of cash flow

• Payments lag behind expenditures

• Arrangements are made to insure enough

money to conduct the project while waiting for

payments

THE END