Cost Control and Cash Flow in the

Construction Industry
CEX-7108

POST GRADUATE DIPLOMA IN

CONSTRUCTION MANAGEMENT
LEVEL-7
 The Open University of Sri Lanka
P.G. Diploma in Construction Management Programme – Level 7
CEX 7108 –Cost Control and Cash Flow in the Construction Industry
Assignment 1- Academic year 2016
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Q1.
(a) What are the two major items of information required at the pre- tender stage in order to
prepare a cash flow forecast? Explain how these information help in evaluating the Value vs
Time curve.

Required two information are

1. Pretender Construction Program
2. Estimated of Bill of quantities

To prepare Value Vs Time curve, it is necessary pretender construction program because it gives the time
period for each activity to be done. Valve of the activity or cost of the activity also can be taken from the
estimated bill of quantities for each activity.Therefore it is very simple to draw the Time Vs Value curve

(b) The following table gives a Contractor’s budget of a project together with the profit
distribution.
Month No. 1 2 3 4 5 6 7 8 9 10
Value of work 1 1.5 2 4 4.5 4.5 4 2.5 2 1
(‘000,000)
Profit (% of 5 5 5 6 6 6 10 10 10 10
value)

Monthly retention is 10% with half the retention included in the final certificate on completion and
balance released six months later.
Interim measurements are to be made monthly and bill payment to be made one month later.
Assume an average credit facility of one month for cost transactions.

Determine the monthly cash-in and cash-out and indicate on a graph for clarity. State all assumptions
made.
What is the maximum amount of borrowing needed for the project and when is it required?

Assumptions

Advance payment is 20% from the total contract value

Project Value is 22 Mn
Advance payment recovery will be done during 9 months approximately fixed amount
Month No. 1 2 3 4 5 6 7 8 9 10

Value of work 1 1.5 2 4 4.5 4.5 4 2.5 2 1

(‘000,000)

Profit (% of 5 5 5 6 6 6 10 10 10 10
value)

Months 1 2 3 4 5 6 7 8 9 10 11 16

Cumulati 1.0 2.5 4.5 8.5 13.0 17.5 21.5 24.0 26.0 27.0 27 27
ve Value
(M)
2 Cumulati .9 2.25 4.05 7.65 11.7 15.75 19.35 21.6 23.4 24.3 24.3 24.3
ve Value
less
Retention
3 Cum. 4.4 4.4 4.4 4.4 4.4 4.4 4.4 4.4 4.4 4.4 4.4 4.4
Advance
Payment
4 Cum.Rec .5 .9 1.7 2.6 3.5 4.3 4.4 4.4 4.4 4.4 4.4
overy of
Adv.
5 Cum..Ret
ention
Payment
6 Cum.Bill .9 1.75 3.15 5.95 9.1 12.25 15.05 17.2 19 19.9 19.9 19.9
Value (2)-
(4)
7 Cum.Bill .9 1.75 3.15 5.95 9.1 12.25 15.05 17.2 19.0 19.9 19.9
Payments
Received
8 Cum.'Cash 4.4 5.3 6.15 7.55 10.35 13.5 16.65 19.45 21.6 23.4 24.3 27
in' (7+3+5)

9 Cum. Cost .95 2.38 4.28 7.99 12.22 16.45 19.35 21.6 23.4 24.3 24.3 24.3

10 Cum. Cash .95 2.38 4.28 7.99 12.22 16.45 19.35 21.6 23.4 24.3 24.3 24.3
Out'
11 Cumulativ 3.45 2.92 1.87 -.44 -1.87 -2.95 -2.70 -2.15 -1.8 -.9 000 +2.7
e Cash
Flow
(8-10)
 27.5

25

20

15

10

1 2 3 4 5 6 7 8 9 10 11

(40 marks)

Q2.
(a) What are the types of ‘monitoring’ and ‘information’ systems you would implement on a small
construction site to monitor the weekly progress?

Mainly can use Physical progress and Financial progress to evaluate the existing situation of the project.
The tools to indicate or measure, can use Bar Chart and cash flow graph ( S curve)
Cash Flow S-Curves indicating planned project cost based on projected early and late activity
finish dates.
The Bar Chart must be time scaled and generated using an electronic spreadsheet program.
Update the Construction Schedule at weekly intervals or when the schedule has been revised.
The updated schedule must be kept current, reflecting actual activity progress and plan for
completing the remaining work. Submit copies of purchase orders and confirmation of delivery
dates as directed by the Site manager.
Report: Provide with schedule updates. Identify and justify;
(1) Progress made in each area of the project
(2) Critical Path
(3) Date/time constraint(s), other than those required by the contract
(4) Changes in the following; added or deleted activities, original and remaining durations for
activities that have not started, logic, milestones, planned sequence of operations, and critical
path
(5) Status of Contract Completion Date and interim milestones;
(6) Current and anticipated delays (describe cause of delay and corrective actions and mitigation
measures to minimize)
(7) Description of current and future schedule problem areas. Each entry in the narrative report
must cite the respective Activity ID and Activity Description, the date and reason for the change,
and description of the change.
WEEK LOOK AHEAD SCHEDULE
Prepare and issue a 3-Week Look Ahead schedule to provide a more detailed day-to-day plan of
upcoming work identified on the Construction Schedule. Key the work plans to activity numbers
when a NAS is required and update each week to show the planned work for the current and
following two-week period. Additionally, include upcoming outages, closures, preparatory
meetings, and initial meetings. Identify critical path activities on the Three-Week Look Ahead
Schedule. The detail work plans are to be bar chart type schedules, maintained separately from
the Construction Schedule on an electronic spreadsheet program

(b) Discuss the cost cutting measures that can be taken on construction sites and possible effects on
quality.

Cost cutting refers to measures implemented by a company to reduce its expenses and improve
profitability.
During the execution of a project, procedures for project control and record keeping become
indispensable tools to managers and other participants in the construction process. According to
cost control can be achieved by selecting the right man for the right job, the right equipment and
tools for the right work and the right quality of materials, in the right quantity, from the right
source, at the right price and delivered at the right time. Managers are expected to be well
equipped to execute the project, with due consideration to the quality of work, yet within the
estimated cost and limits.
Project Resources and Controls Resource inputs at the project site which produce outputs in
the form of work include: men, materials, machinery and money. The success of a project
depends upon the performance of these input resources when controlling costs The clients
should do everything possible to avoid unnecessary delays as it is one of the leading causes of
cost escalation.
Materials One of the big problems on most building sites is the large amount of
materials wastage due to varying circumstances. This problem requires a supervisor to
constantly be on the lookout for the losses. According to wastage of materials can take place
during the procurement process, storage, and during utilization. Wastage during procurement
can result from one or more of the following causes:
1- buying materials of wrong specifications,
2- buying more than the actual requirements to cater for unrealistic and unforeseen
eventualities, untimely buying of short-life materials,
3- improper and unnecessary handling of materials, and wastage in transportation.
Wastage during storage can occur due to the following reasons: damages and breakages
during handling, deterioration due to incorrect storage, incorrect maintenance and short-shelf
life and losses due to fire, thefts, and exposure to extreme climatic conditions. Other causes
are lack of pre-work preparation and coordination, improper accounting and poor store
keeping, negligent and careless attitude of the supervisor, high rate of deterioration due to
long storage at the place of work, and over-issues from the central stores and failures to
return unused surplus materials to the stores. Some unavoidable wastage are inherent during
utilization, but excessive wastage is of concern to the management as it affects the
productivity adversely, with consequences of extra costs. Most problems relating to material
wastage revolve around requisitioning and ordering, receipt and checking of deliveries from
suppliers, offloading and handling, storing and protecting, and issuing, distributing and use
of materials.
Plant In construction, some tasks are labour intensive, some predominantly employ equipment,
and some use a combination of both. While the actual work and the associated labour is
accounted by the supervisor concerned, the equipment and productivity control is undertaken to
determine its employment time, the output achieved, and its productivity at site. The main
purpose of the control is to minimize wastage in utilization so that the overall project cost is not
affected. Industrializing construction would probably reduce the cost of construction by about
30% .

Q3.
(a) Explain the functions of all parties involved in Cost Control at the Pre-Contract Stage and the
Construction Stage of a medium scale project.

Cost control includes monitoring cost, task completion, and time. Earned value management
(EVM) is an effective technique for tracking costs and examining project expenditures relative to
completed work. Its strength is that it looks at cost, time, and task completion within the scope of
the project simultaneously.
Cost is a resource sacrificed or foregone to achieve a specific objective or something given up in
exchange,Costs are usually measured in monetary units like rupees. Project cost management
includes the processes required to ensure that the project is completed within an approved
budget. Project managers must make sure their projects are well defined, have accurate time and
costs estimates and have a realistic budget that they were involved in approving.
The cost controlling processes can be engaged by Client and Consultant at the pre contract stage
when designing and estimation stage. The biggest role is the role of Quantity surveyor that can
involve at the estimation stage when analyzing the rates by concerning of relevant specification
for the particular item. Client and the consultant should communicate properly to get all
necessary information to avoid the extra works at the construction stage.
Cost controlling can be engaged by the consultant and the contractor at the stage of post contract.
Both parties should communicate in proper time and should take remedial action to control the
cost. Senior management , Project Manager,Finance division, Resident Engineer,sore keeper ans
other staff involve for the cost controlling in this stage.
There are three project cost management processes:
A- Cost estimating: developing an approximation or estimate of the costs of the resources
needed to complete a project
 B- Cost budgeting: allocating the overall cost estimate to individual work items to establish
a baseline for measuring performance
C- Cost control: controlling changes to the project budget
A cost management plan is a document that describes how the organization will manage cost
variance on the project.
For example, how to respond to proposals from suppliers that are higher or lower than estimates
A large percentage of total project costs are often labor costs, so project managers must develop
and track estimates for labor. Many organizations estimate the number of people or hours they
need by department or skill over the life cycle of a project. A project estimate can be sub-divided
into a number of different costs, consider the following:
-- Direct product costs
-- Indirect product costs
-- Period costs
-- Variable costs
-- Fixed costs
-- Semi variable costs
-- Relevant (incremental costs)
-- Sunk costs
-- Opportunity costs

(b) Explain ‘Capital Lock-up’ with the aid of diagrams. Name three factors which can affect capital lock-
up and explain their effect.
.
A lock-up period is a window of time when investors of a hedge fund or another closely held investment
vehicle are not allowed to redeem or sell shares. The lock-up period helps portfolio managers avoid
liquidity problems while capital is put to work in sometimes liquidizer investments.
The Factors can be affected for capital lock up
A) Profit margin
B) Retention
C) Advance payment
D) Claims