Project Costing and Cash

Flow

Dr Anis Rahman
G09 1.19
a.rahman@griffith.edu.au

Objectives
To develop

an understanding on

project cost and different levels and

techniques of cost estimation;

cash flow forecasting and cash flow

diagram and
cost control.

Important Terminologies

Cost: directly related to an element of work including direct overheads such as

supervision.
Three types:
Quantity related (material)
Time related (labour)
Fixed costs (payment of sub contractor, fixed overhead etc)

Price: tagged value or assigned value of goods/service

equal to the cost plus mark-up = expense + profit, insurance, tax
in economics and business, the price is the assigned numerical
monitory value of a good, service or asset.
asset

Value: the degree of importance- the market worth or estimated worth of

commodities, services, assets, or work-

Worth: the individuals subjective perception of the value for goods and services

Purposes of Estimates
Project

economic appraisal
Studies of the optimisation of design,
implementation and operation
Assessment of risks, changes and alternative
courses of action
Establishing budgets for project funding
Providing a basis for cost control during
implementation
Providing the basis for final cost of projections

Information Needed For Estimating?

Historical reference information

Time factor
Scale factor - scales, or multiplies, some quantity.
In the equation y = Cx, C is the scale factor for x
Location
Currency exchange rate
Inflation: refers to a persistent rise in the general
price level, as measured against a standard level of
purchasing power
Contingency and allowances
Others

The more information you have, the more accurate

the estimation will be.

Levels of Estimates
Approximate
Preliminary
Definitive
Detailed

or Order of magnitude (+/- 30%)

(+/- 20%)

(+/- 10%)

estimates (+/- 5%)

Approximate or Order of Magnitude

Requires when it is desired to assess the magnitude

of a project prior to its design;

Produced with minimum of preparation;

Use unit rates ($/m2) i.e. Commercial construction

costs $5000 per m2

Sound intelligent guess based on experience,

judgements and the total costs of similar type
structures;

Accuracy should be within 25-30%

Order of Magnitude Estimates

Preliminary or Elementary Estimate

Used for
assessing financial feasibility of the proposed
project;
assessing and comparing the relative costs of
alternate designs in economic studies
obtaining a more accurate estimation
Gross quantities (m3 concrete, m3 excavation, tons of
reinforcement etc.)
Accuracy should be 10-20%
Must be compiled with some care since they form the
basis upon which the proceed is made

Definitive Estimate

A Definitive Estimate is prepared from well defined

data, specifications, drawings, etc. and

Used for bid proposals, bid evaluations, contract

changes, extra works, legal claims, permits and
government approvals.

Other terms associated with a Definitive Estimate

include check, lump sum, tender, post contract
changes. etc.

Accuracy- 5 to 10%

Detailed Estimates
Provides

the final assessment of the cost of

project and compiled with
Working drawings plus specifications and
market price

Unit

rate: item by item include the cost of

labour, material, plant, indirect cost
overheads;
Resource cost: material, labour etc.
Accuracy within 5%

Detailed Estimates: Concrete in Pier Shaft

Detailed Estimate Summary

Estimating Techniques

Global:
Mostly used in the preliminary stages since it does not require the detailed
info
Order of magnitude/ rule of thumb/ ball park estimating.
Relies on the historical data taking into account inflation and market
influence
Dangers include different definitions of what costs are included, of
measurement, not comparing with like project, inflation and market factors

Factorial:
Mainly used for process plant, not reliable for site work;
Based on current prices obtained from the supplier;
Doesnt count for the time limit of project
Success relies on the accuracy of the estimate for main plant, historical data,
reliability factors used and experience of the estimator

Estimating Techniques

Man-hours:
Suitable for labour intensive work where reliability and productivity
records are available, example design work

Unit rates:

Suitable for building, repetitive works but not for entire civil project
Relies on historical data and quotes- most reliable but time consuming.
It is most frequently used technique
Unit rates are listed in Bill of quantities

Operational cost (resource cost):

Total cost = sum of costs of constituent activities of a project, developed
from a detailed project program
Based on current rates most reliable for civil engineering projects.
Time and resource consuming

Estimation Process
1.
2.
3.
4.
5.
6.
7.
8.

Study program
Estimate Project
Construction method
Material and sub-contract costs
Labour/plant costs
Direct costs
Indirect costs
Report

Estimating Errors

Dimensional errors

Transposed figures, decimal points

Time estimates

Wage rates on costs

Waste

Unstable material prices

Transport rates

Weather, strikes etc.

Plant charges

Incorrect units of measurement etc.

Cash Flow Basics

A cash flow is the transfer of money into or out of a project or a

company.

A cash flow is a financial model of a project or contract that

provides vital info. to the managers for planning and controlling of
project cost.

Cash flow models present the forecasts of all future cash inflows
and outflows in a Project/contract

There will be a time lag (fail to maintain a desired pace or to keep

up ) between the entitlement to receive a cash payment and
actually receiving it.

For example: In the Standard Form of Building Contract, there is a

clause that the Employer shall effect payment to the Contractor
within 14 days upon presentation of the Architects certificate of
payment.

Cash Flow
Similarly, there

will be a time lag

between being committed and making
a payment, and actually paying it.

These

time lags are the credit

arrangements that Contractors have
with their creditors.

The Importance of Cash Flow

Every

year, many Contractors go into

bankruptcies. One of the causes, and
perhaps the most often cause, for
bankruptcies is due to inadequate cash to
meet the payments committed to make,
and failure to convince the creditors or the
money lenders that this inadequacy is only
temporary.

Why Model Cash Flow?

The need to forecast cash requirements

is making provisions to cover all financial

obligations with a view to avoid the company to go
into financial difficulties.

to evaluate the state or performance of a project.

to determine problems with liquidity. Being

profitable does not necessarily mean being liquid.
A project can fail because of a shortage of cash,
even while profitable.

to generate project rate of return.

Major Components of Cash Flow

There are two major components:
- Cash received (revenue)

- Out-going cash (expenditure)

Revenue
The revenue of a project can be arriving from:
a) Interim payments of work done
b) Release of retention
c) Return of over-charged accounts
d) Reimbursements from subcontractors
e) Administration costs for service provided to
subcontractors
f) Balanced payment upon agreeing of final account

Expenditure
A Contractor has a large number of payments to
meet, for examples:
a)

Pay-roll for staff and workers

b)

Subcontractors payment

c)

Payments to suppliers

d)

Tax and other Government charges

e)

Interest

f)

Fees for supporting service e.g. rent, legal

advice, and consulting service from experts

Cash Flow Basics

Income (positive cash flow) and expenditure (negative

cash flow)

Net income = income expenditure

Cumulative cash flow diagrams are commonly used by the

managers to estimate and monitor the project cash flow

Cash flow defined as one of the following:

Fixed charges
Quantity proportional charges
Time-related charges

Steps to Formulate a Cash Flow Model

1.
2.
3.
4.

5.

Compile base-case cash flow -adding costs and revenues to

each activity on bar-chart program
Refine the base-case cash flow to account for delays in
payment/reception
Calculate the resulting cost, benefits and investment
required
Consider impacts of risks and uncertainties - risk analysis
should be made on larger projects and sufficient
contingencies allocated in the estimate and the programme.
Examine impacts of inflation

Cash Flow Forecasting

In compiling the cash flow of a project, the
following data is required:
a) A graph of cumulative value versus time
b) The measurement and certification
interval
c) The payment delay between certification
and the Contractor receiving the cash
d) The retention conditions and retention
repayment arrangements

Cash Flow Forecasting

e) A graph of cumulative cost versus time
f) The project costs broken down into the
items such as labour, material, plant
subcontractor payments etc.
g) The delay between incurring a cost
liability under each cost heading and
meeting that liability

Value versus time

Cash flow forecasting calculations

Cash-out and cash-in curves

Monitoring Cash Flow

Sewer Main Extension Utility Data
Activity

Path

Move in

0 -1

12

3000

Excavation in shaft

2-3

12

1050

Excavation in tunnel

4 - 13

155

38100

Wait

13 -14

Clean up and move out

14 -15

Excavation in shaft

3 -11

60

5200

Pipelaying and cncrete in tunnel

11 -12

106

16500

Excavation in trench

1-5

10

2700

Excavation in trench

5 -10

140

36500

Wait

9-10

Metal work

6 -7

145

5650

Pipelaying and cncrete in trench

6 -8

145

19900

Indirect cost $160 perday

Time (days)

Costs $

18 nil
6 indirect

18 nil

Monitoring Cash Flow

A: Expenditure

Profit

B: Income

Overdraft
You must have cash reserves or
bank overdraft to meet this

Capital Lock-up
The

negative cash flows experienced in

the early stages of projects represent
locked up capital that is supplied from
the companys cash reserves or
borrowed.

Difficulties in Preparing Cash Flow Forecasting

The

production of cumulative value versus time

and cost versus time figures based on project
plans is time-consuming because it requires every
project in the forecast to be represented by a
network or bar chart.

It

is possible to use standard cumulative value

versus time and cost versus time curves that
adequately represent each project type.
(Data can be obtained from records of past projects.)

Basic Assumptions
Cash

flow forecasting is the result of

calculations based on the information
available at the time (time of preparation)
and assumptions as to what will happen.

If

the data contained in the information

changes or the assumptions alter, the forecast
will be in error and a new forecast is
required.

Forecasting at 2 Levels

Contractors who undertake cash flow

forecasting do so at two levels.
1.at the project level
2.for the company as a whole.

Forecasting cash flows at company level

involves aggregating cash flows for all active
projects and then added to the companys head
office cash flows; this exercise is done
regularly every quarter or every month.

Factors Affecting Cash Flow Position

1)
2)
3)
4)
5)
6)
7)
8)

Margin
Retentions
Claims
Over-measurement
Delay in receiving payment from client
Delay in paying creditors
The timing of contract starts
Front-end rate loading

Exercise: Cash Flow Diagram

Draw

the cash flow diagram for the

following project:

Act.
1
2
3
4
5
6

Direct Cost
$50,000
$20,000
$180,000
$260,000
$40,000
$60,000

Indirect Cost
$10,000
$10,000
$20,000
$20,000
$10,000
$10,000

Duration
1 month
1 month
1 month
1 month
1 month
1 month

Payment
$65,000
$25,000
$200,000
$320,000
$50,000
$80,000

Payment is made 1 month after completion

of the work in a lump sum

Exercise (continued)
Determine

the following:

Expenditure and income curves

Profit expressed as a $ and % profit
Maximum overdraft
Average overdraft

Exercise: cash flow diagram

Profit Margin = 740 690 = 7.2%
690

800
700
600
500
400
300
200
100

690

Max overdraft

740

Income

Expenditure

Month

Project Cost Control

Cost

control forms part of the process of

managing investment in the project,
taking actions to avoid cost variance
This management process must take into
account both the objectives and
requirements of the project
A cost control system must be simple
and must not require excessive resources

What Indirect Costs

Insurances

public liability
Costs incurred from your supervision
staff Foreman and project manager
Overheads office, car etc.
Contingency for risk and uncertainty
Safety induction
Others??????

Base-case Cash Flow

Cost

and revenues assigned to base or

reference date
Usually date of first cash flow
Ignore other factors such as inflation etc. for
now
Appropriate time periods for adding of Cash
flows at different stages of project
Annual cash flow project evaluation
Monthly cash flow throughout project
Weekly cash flow short duration contracts