Construction financial planning

1. MANAGEMENT:CIVIL II_ MCIV 2/0
MODULE SIX(6): FINANCIAL PLANNING
JB NARTEY

2. INCOME STATEMENT
• CASH INFLOWS/REVENUES
• CASH OUTFLOWS/EXPENSES
• CASH REQUIREMENTS

3. Assumptions
50% of the costs is for Labour
50% of the costs is for materials payable in 30 days
PerformanceSurety
Where the SMME service provider could not be able to arrange sureties prior
to awarding of the contract, surety amounts shall be deducted fromthe first
progress payment certificate based on work certified.
Retention Guarantee
Retention will continue to be deducted frompayment
claims until the Retention guarantee is in place
CASHFLOWM&E(NEGATIVEVARIANCES/DEVIATIONS)
MinorCashoutflownegativeVariances,revisecashflowstoreflectactualtrend
ContinuouslySignificantCashoutflownegativeVariances(>20%ofthetarget),Investigateandprovidereasonsandintroducemeasurestocontrolit
Ifitcannotbecontrolled(externalcauses),revisecashoutflowstoreflecttheactualtrend
TOOLOWISNOTGOOD,LATECOMPLETIONANDPENALTIES
TOOHIGHISNOTGOODFORPROFITABILITY

4. CASH INFLOWS/REVENUESCOMPANY NAME XYZCompany
PROJECTNAME Construction of apump house
CONTRACTSUM/VALUE 38130
CONTRACTPERIOD 17 Months
RETENTION 10% of the Contractclaims
RETENTION LIMIT(5%) 1906.5
DEFECTSLIABILITY PERIOD 3 MONTHS
PROFITMARGIN /MARK-UP 14%
PERFORMANCESURETY 5% of the ContractSum
PENALTIES 0.10% of Contract amount/day
WORKPROGRAMRELATEDCASHFLOW ANALYSIS
ACTIVITY WORKVALUE 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Mob+Site Establishment- P&Gs 5200 5200
Excavation 2000 500 500 500 500
Concrete work 3000 750 750 750 750
Brickwork 8000 2000 2000 2000 2000
Roof 6000 6000
Plumbing 6000 1000 1000 1000 1000 1000 1000
Electrical 3000 750 750 750 750
Finishes 4000 800 800 800 800 800
Value of Workdone(Planned) 37200 5200 500 500 500 1250 750 750 2750 2000 3000 3000 7000 1000 2550 2550 1550 1550 800 0 0 0
Value of Workdone(Planned)-Cumulative 5200 5700 6200 6700 7950 8700 9450 12200 14200 17200 20200 27200 28200 30750 33300 34850 36400 37200 37200 37200 37200
Plus Variationorders/additional works
Plus Dayworks
Plus ContractPrice Adjustments
AmountDue-Subtotal 5200 5700 6200 6700 7950 8700 9450 12200 14200 17200 20200 27200 28200 30750 33300 34850 36400 37200 37200 37200 37200
Less 10% Retention-Cum 520 570 620 670 795 870 945 1220 1420 1720 1906.5 0 0 0 0 0 0 0 0 0 0
Less otherdeductions(Penalties)-cum
AmountDue-Subtotal 5173 5673 6173 6673 7923 8673 9423 12173 14173 17173 20173 27173 28173 30723 33273 34823 36373 37173 37173 37173 37173
Plus 85% Materials OnSite-Cum
Plus RetentionRelease(50%) 953.25 953.25
Plus SuretyRelease 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1906.5 0 0
Final AmountDue- Cum-planned 5173 5673 6173 6673 7923 8673 9423 12173 14173 17173 20173 27173 28173 30723 33273 34823 36373 37173 40032.75 37173 38126.25
MonthlyClaims-planned 38126 5173 500 500 500 1250 750 750 2750 2000 3000 3000 7000 1000 2550 2550 1550 1550 800 2859.75 -2859.75 953.25
MonthlyClaims(Actual) 38126 0 0 6173 0 1750 0 1500 0 4750 0 6000 0 8000 0 5100 0 3100 0 3659.75 0 -1906.5
MonthlyClaims(Actual)-Cum 0 0 6173 6173 7923 7923 9423 9423 14173 14173 20173 20173 28173 28173 33273 33273 36373 36373 40032.75 40032.75 38126.25
Assumptions
QS valuations starting from end of month 1
Payments received 1 month after valuation
DURATION(MONTHS) DEFECTSLIABILITY PERIOD

5. CASH OUTFLOWS/EXPENSES
COMPANYNAME XYZCompany
PROJECTNAME Constructionofapumphouse
CONTRACTSUM/VALUE 38130
CONTRACTPERIOD 17 Months
RETENTION 10% oftheContractClaims
RETENTIONLIMIT(5%) 1906.5
DEFECTSLIABILITYPERIOD 3 MONTHS
PROFITMARGIN/MARK-UP 14%
PERFORMANCESURETY 5% oftheContractSum
PENALTIES 0.10% of Contract amount/day
CASHFLOWANALYSIS-PROJECTEXPENDITURECURVE
ACTIVITY
COSTBUDGET=WORK
VALUE/114% 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Mob.+SiteEstablishment 4561 4561
Excavation 1754 439 439 439 439
Concretework 2632 658 658 658 658
Brickwork 7018 1754 1754 1754 1754
Roof 5263 5263
Plumbing 5263 877 877 877 877 877 877
Electrical 2632 658 658 658 658
Finishes 3509 702 702 702 702 702
MonthlyCostofWorks(Planned) 32632 4561 439 439 439 1096 658 658 2412 1754 2632 2632 6140 877 2237 2237 1360 1360 702 0 0 0
CumCostofWorks(Planned) 4561 5000 5439 5877 6974 7632 8289 10702 12456 15088 17719 23860 24737 26974 29211 30570 31930 32632 32632 32632 32632
MonthlyCost-Actual
Labourpayments(50%) 2281 219 219 219 548 329 329 1206 877 1316 1316 3070 439 1118 1118 680 680 351 0 0 0
Materials(50%)-30 day credit 0 2281 219 219 219 548 329 329 1206 877 1316 1316 3070 439 1118 1118 680 680 351 0 0
Performance Surety 1906.5 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Monthly Cost-Actual 34538 4187 2500 439 439 768 877 658 1535 2083 2193 2632 4386 3509 1557 2237 1798 1360 1031 351 0 0
Cum Actual Monthly cost 4187 6687 7126 7564 8332 9209 9867 11402 13485 15678 18310 22696 26205 27762 29999 31797 33157 34187 34538 34538 34538
DURATION(MONTHS) DEFECTSLIABILITYPERIOD

6. COMPANYNAME XYZCompany
PROJECTNAME Constructionofapumphouse
CONTRACTSUM 38130
CONTRACTPERIOD 17 Months
RETENTION 10% oftheContractClaims
RETENTIONLIMIT(5%) 1906.5
DEFECTSLIABILITYPERIOD 3 MONTHS
PROFITMARGIN/PROFITMARK-UP 14%
PERFORMANCESURETY 5% oftheContractSum
PENALTIES 0.10% ofthecontractsum/day
ACTIVITY SUM 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
CASHINFLOWS
ValueofWorkdone(Planned) 37200 5200 500 500 500 1250 750 750 2750 2000 3000 3000 7000 1000 2550 2550 1550 1550 800 0 0 0
ValueofWorkdone(Planned)-Cumulative 0 5200 5700 6200 6700 7950 8700 9450 12200 14200 17200 20200 27200 28200 30750 33300 34850 36400 37200 37200 37200 37200
PlusVariationorders/additionalworks 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
PlusDayworks 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
PlusContractPriceAdjustments 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
AmountDue-Subtotal 0 5200 5700 6200 6700 7950 8700 9450 12200 14200 17200 20200 27200 28200 30750 33300 34850 36400 37200 37200 37200 37200
Less10%Retention-Cum 0 520 570 620 670 795 870 945 1220 1420 1720 1907 0 0 0 0 0 0 0 0 0 0
Lessotherdeductions(Penalties)-cum 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
AmountDue-Subtotal 0 5173 5673 6173 6673 7923 8673 9423 12173 14173 17173 20173 27173 28173 30723 33273 34823 36373 37173 37173 37173 37173
Plus85%MaterialsOnSite-Cum 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
PlusRetentionRelease(50%) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 953 0 953
PlusSuretyRelease 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1907 0 0
FinalAmountDue-Cum-planned 0 5173 5673 6173 6673 7923 8673 9423 12173 14173 17173 20173 27173 28173 30723 33273 34823 36373 37173 40033 37173 38126
MonthlyClaims-planned 38126 5173 500 500 500 1250 750 750 2750 2000 3000 3000 7000 1000 2550 2550 1550 1550 800 2859.75 -2859.75 953.25
MonthlyClaims(Actual) 38126 0 0 6173 0 1750 0 1500 0 4750 0 6000 0 8000 0 5100 0 3100 0 3659.75 0 -1906.5
MonthlyClaims(Actual)-Cum 0 0 0 6173 6173 7923 7923 9423 9423 14173 14173 20173 20173 28173 28173 33273 33273 36373 36373 40032.75 40032.75 38126.25
CASHOUTFLOWS
MonthlyCostofWorks(Planned) 32632 4561 439 439 439 1096 658 658 2412 1754 2632 2632 6140 877 2237 2237 1360 1360 702 0 0 0
CumCostofWorks(Planned) 4561 5000 5439 5877 6974 7632 8289 10702 12456 15088 17719 23860 24737 26974 29211 30570 31930 32632 32632 32632 32632
MonthlyCost-Actual 34538 4187 2500 439 439 768 877 658 1535 2083 2193 2632 4386 3509 1557 2237 1798 1360 1031 351 0 0
CumActualMonthlycost 0 4187 6687 7126 7564 8332 9209 9867 11402 13485 15678 18310 22696 26205 27762 29999 31797 33157 34187 34538 34538 34538
MonthlyNetCashflow(Surplus/Deficit)Requirements -4187 -2500 -439 -439 -768 -877 -658 -1535 -2083 -2193 -2632 -4386 -3509 -1557 -2237 -1798 -1360 -1031 -351 0 0
CumNetCashflow(Surplus/Deficit)Requirements -4187 -6687 -953 -1391 -409 -1286 -444 -1979 688 -1505 1863 -2523 1968 411 3274 1476 3217 2186 5495 5495 3588
DURATION(MONTHS) DEFECTSLIABILITYPERIOD
CASH REQUIREMENTS

7. 0
-4187
-2500
-439-439
-768-877
-658
-1535
-2083-2193
-2632
-4386
-3509
-1557
-2237
-1798
-1360
-1031
-351
0 00
-4187
-6687
-953
-1391
-409
-1286
-444
-1979
688
-1505
1863
-2523
1968
411
3274
1476
3217
2186
5495
5495
3588
-10000
-8000
-6000
-4000
-2000
0
2000
4000
6000
8000
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22
Net/Gross Cashflow Requirements
Cum Net Cashflow(Surplus/Deficit)
Requirements
Monthly Net
Cashflow(Surplus/Deficit)
Requirements

8. CONCLUSIONS
•
• Months of Cash deficits /cash required Months 0,1,2,3,4,5,6,7,9,11
•
• Maximum Gross cashflow requirements/Overdraft Limit 6 687.00
•
• Project Becomes Self-sustaining after the 11th month
•
• Profitability
•
• Net Cash Flow = Cash Inflow – Cash Outflow -NCF, Cash Inflow<Cash outflow
• Discounted Net Cash Flow = NCF x Discount Factor
•
• ARR = Summation of Net Cash Flows 3 588.17
• Investment = 32632
• ROI = (ARR / Investment) * 100 % = 11.00% >R B Repo Rate of about 5.75%
•

9. CASHFLOW IMPROVEMENT
• Make sure payment claims are delivered correct,regularly and on
time
• Make sure you receive payments on time
• Take advantage of credit provided by suppliers.(30/90 day credit)
• Provide performance guarantee and retention guarantee from
banks to save the surety deposit and retention deductions
• Determine the final certificate asap to allow the defects liability
period to start and part of the retention released.

10. EXAMPLE
You are working a company (Salute Consulting firm) as a project manager. Your company has
won a tender bid of R 1 000 000.00 for the construction of septic tank for Rural community
hall. The duration of the project is 6 months. You are required to:
(a) Compile an assessment of the expected cash flow requirements of the project based on the
details as set below. Use attached Annexure.
(b) Calculate the maximum over draft facilities that the contractor requires.
Cash flow predictions must be based on the ff. assumptions:
• • The client requires a performance guarantee (surety )of 5% (in cash) at the
commencement date of the contract
• • The cash required as capital will be distributed as follows over the duration of the
project:
• - Cash required at the end of 1st month : 15%
• - Cash required at the end of 2nd month : 25%
• - Cash required at the end of 3rd month : 30%
• - Cash required at the end of 4th month : 15%
• - Cash required at the end of 5th month : 10%
• - Cash required at the end of 6th month : 5%

11. EXAMPLE
• That income will be based on:
• - Value of claim 1st Claim : 10% of the contract value
• - Value of claim 2nd Claim : 15% of the contract value
• - Value of claim 3rd Claim : 25% of the contract value
• - Value of claim 4th Claim : 35% of the contract value
• - Value of claim 5th Claim : 10% of the contract value
• - Value of claim 6th Claim : 5% of the contract value
• -
• • 1st claim will be submitted at the end of month 1 and the actual payment for
the contractor will be at the end of month 2.
• • A profit margin of 25% being achieved on all work completed throughout the
contract).
• • The withholding of 10% retention by the Employer which is reduced to 5%
after month 6.
• • Performance guarantee is returned on the date of issuing Completion
Certificate.
• • Completion is expected to be achieved at the end of the contractual period
• • A defect liability of three months is applicable (from the date of issuing
Completion Certificate).

12. PROJECT CASHFLOWS
750 000
PERIOD(Months) 0 1 2 3 4 5 6 7 8 9
CASH INFLOWS
Value of Work done(%) 10 15 25 35 10 5
Monthly Value of Work done-Planned 100 000 150 000 250 000 350 000 100 000 50 000
Monthly Retention Withheld 10 000 15 000 25 000 - - - - - -
Monthly Value of claim-Planned 90 000 135 000 225 000 350 000 100 000 50 000 - - -
Returned Surety 50 000
Retention Release 25 000 25 000
Monthly Payment-Actuals 0 90 000 135 000 225 000 350 000 100 000 125 000 - 25 000
Cum.Monthly Payment-Actuals - 90 000 225 000 450 000 800 000 900 000 1 025 000 1 025 000 1 050 000
CASH OUTFLOWS
Working Capital/Cost of Works(%) 15 25 30 15 10 5
Working Capital/Cost of Works 112 500 187 500 225 000 112 500 75 000 37 500
Surety 50 000 0 0 0 0 0 0
Monthly Cash Required 50 000 112 500 187 500 225 000 112 500 75 000 37 500
Cum Cash Required 50 000 162 500 350 000 575 000 687 500 762 500 800 000 800 000 800 000 800 000
NET CASHFLOW -50 000 -162 500 -260 000 -350 000 -237 500 37 500 100 000 225 000 225 000 250 000
WORKING CAPITAL/COST OF WORKS Working Capital/cost of works(%)x[contract value-profit margin(25%)xcontract value]
(b) Maximum Overdraft R 350 000
Contract value R 1 000 000.00
Construction period 6 months
Retention (initial) 10%
Retention Limit 5%
Profit margin 25%
Surety 5%