Managing Cash Flow Control In Construction Projects

Identify and classify project costs

Discuss about the Managing Cash Flow Control in Construction Projects.

The roofing estimate comprises of costs for materials, labour, plant and subcontractors used to do the roofing work. The estimates are as provided in the table below:

GST (goods and services tax) is taken to be 10%

No.	Description Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	Unit	Quantity	Price ($)	Total ($)	GST 10%	Total
1	Rafters	m	250	20	5,000	500	5,500
2	Ridge board	m	90	15	1,350	135	1,485
3	Hanging beam	m	300	100	30,000	3,000	33,000
4	Under purlin	m	750	20	15,000	1,500	16,500
5	Buttons	m	1,000	10	10,000	1,000	11,000
6	Colour bond	nos.	600	100	60,000	6,000	66,000
7	Fascia board	m	300	20	6,000	600	6,600
8	Down pipes	m	200	25	5,000	500	5,500
9	Gutters	m	300	50	15,000	1,500	16,500
10	Girth ridge capping	m	300	5	1,500	150	1,650
11	Fasteners and washers	boxes	350	10	3,500	350	3,850
12	Rockwool insulation	m2	350	15	5,250	525	5,775
13	Roofing sheets	m2	350	12	4,200	420	4,620
14	Equipment	Item	1	10,000	10,000	–	10,000
15	Labour	Item	1	75,000	75,000	–	75,000
	TOTAL	262,980

Examples of cost related risks relevant to this project are as follows:

If prices of roofing materials or labour increase abruptly, it means that the estimated cost will not be adequate to complete the roofing work. As a result, more funding will be needed, which can delay the project or result to low quality work (Ojo & Odediran, 2015).

This is also a cost related risks because if the cost of materials, equipment and labour for the roofing work has been underestimated, it means that there will be less funds available for the project. The contractor will have to ask for more funding from the client, which can lead to contractual disputes and delays and low quality work.  

If there is any change in local taxes policy after cost estimation, the estimated cost may not be adequate to complete the project. For example, if the GST changes from 10% to 15%, it means that the estimated cost will be less than the cost required to complete the roofing work (Riddell, 2017). This may result to low quality work or extended project duration.

The impact of estimated risk on estimated costs in this project is very huge. These is because any of the cost related risks discussed above can delay the project significantly, cause conflicts and disputes between the client and contractor, or result to low quality work due to insufficient funds. However, the probability of the above three risks occurring is relatively low. The table below shows the estimated risk value. The estimated risk value is found by multiplying probability of risk with estimated impact (Ghorbani, 2017).

Risk	Probability	Estimated Impact ($)	Expected value ($)
#1	5%	-13,149	-657.45
#2	20%	-52,596	-10,519.20
#3	2%	-5,259.60	-105.20
	Total expected value	-11,281.85

In this case, $11,281.85 should be added to the estimated cost of the project as a contingency so as to cover for the above three identified risks.

It is therefore important to conduct cost risk analyses so as to reduce the discrepancy between estimated costs and actual costs of the project. These analyses take into account cost related risks, such as the ones mentioned above, when estimating costs of the project (Okmen & Oztas, 2010).

Pessimistic cash flow projections takes into account the costs of risks associated with the project (Hulett, 2011). The roofing work is estimated to take 8 weeks. The weekly cash flow projects for the roofing, including contingency, are as provided in the table below

Week	Estimated cost ($)	Contingency ($)	Total Cost ($)
1	12,412	532.50	12,944.50
2	20,805	892.55	21,697.55
3	33,345	1,430.55	34,775.55
4	71,060	3,048.55	74,108.55
5	62,605	2,685.80	65,290.80
6	30,210	1,296.05	31,506.05
7	19,095	819.20	19,914.20
8	13,448.20	576.95	14,025.15
Total	262,980.20	11,282.15	274,262.40

Roofing work estimate

The S-curve shows the weekly cumulative costs of the roofing project. It is plotted as total cumulative cost of the project (estimated project cost plus contingency) against time (weeks). The cumulative weekly cash flow projects are as provided in the table below

Week	Estimated Cumulative cost ($)	Cumulative contingency ($)	Total Cumulative Cost ($)
0	0	0	0
1	12412	532.50	12,944.5
2	33,217	1,425.05	34,642.05
3	66,562	2,855.60	69,417.60
4	137,622	5,904.15	143,526.20
5	200,227	8,589.95	208,817
6	230,437	9,886	240,323
7	249,532	10,705.20	260,237.20
8	262,980.20	11,282.15	274,262.40

The S-curve is created by plotting total cumulative cost ($) vs. time (weeks). The curve was created in Excel and is as shown in Figure 1 below

Figure 1: S-curve of roofing work

As stated before, the roofing work is expected to take 8 weeks (approximately two months). Therefore spending will be monitored on a weekly basis. It must be remembered that the client and contractor have agreed for payments to be made monthly ($166,666 per month). The spending schedule of the roofing work is as follows:

Week	Money spent (Cash outflows)($)	Money Received (Cash inflows) ($)	Bal. c/f
1	(13,250)	–
2	(22,600)	–
3	(32,150.50)	–
4	(74,050)	166,666
Total	(142,050.50)	166,666	24,615.50
5	(66,200)	–
6	(29,520)	–
7	22,100	–
8	14,600	166,666
Total	(132,420)	166,666	34,246
Grand Total	(274,470.50)	333,332	58,861.5

From the above table, it shows that in some weeks, the total amount spent exceeded the estimated cost of the work. This s normal in construction projects and that is why estimation should be done accurately and also contingency should be provided so as to reduce the cost risks of underestimation. The table shows that the total amount of money spent on roofing was $274,470.50 while the total amount of money received was $333,332. This means that the contractor made a profit of $58,861.50. This represents about 17.66% of the total cost of roofing, which is reasonable.

Cash flow management is very essential in successful implementation of any construction project. There are several methods that can be used to monitor cash inflows and outflows depending on the type and size of the project. Some of these methods that can be used to monitor cash inflows and outflows of the roofing work include the following:

Invoices and receipts: in this method, invoices show the amount that the company has been paid or is expecting to be paid, and the money that the company has paid is planning to pay out. The two gives an indication on whether the company is operating within the estimated project budget.

Keeping records: this method is where all financial records are kept and evaluated. The records include list and costs of materials purchased, damaged materials, leased equipment, maintenance of equipment, labour, compensation, staffs laid off, new employees, etc. It helps in identifying areas where money is being spent and probably how to avoid or minimize some expenses.

Cash flow status report: this report gives a summary of all cash spent and received within a certain period. The report helps in determining total costs, billings, payables and receivables (Cantoria, 2011). This information is useful in establishing the amount of money getting in and going out of the account.

Cost-related risks

Cost cutting plan: this method entails identifying strategies that can be used to cut costs. The plan has to be comprehensive and it definitely starts by monitoring how money is spent and identifying any opportunities of saving it.

Assigning individual responsibilities: this is where the company assigns individuals in charge of specific departments to prepare daily reports on money spent and received. This report provides a daily update on cash flows thus helping in monitoring cash inflows and outflows.

Projecting cash flow: this entails predicting when the company will spent or receive money, and comparing estimated costs (project budget) and actual costs.

An early start and early finish of the roof work is susceptible to financial challenges and therefore it is very important for the contractor to discuss with the client on how the required funds can be provided earlier than planned. Nevertheless, the likely critical financial phases in cash flow for this project are as follows:

The first phase is spending personal money. Since the company is starting the work early, it has to spend its own money as they wait for the agreed time before the client can make the first payment. It is like the company making a “personal” loan to the work.

The second phase is where the company will have to source funds externally so as to sustain the project. This will be still before the client makes the first pay. Therefore it will be before end of the first month.

The third phase is where the client has made the first payment. The company uses the money to pay suppliers, equipment leased and some casual laborers. However, the money may not be enough to cater for conventional expenses of the company, such as administrative costs. At this point, the company will use some money to repay the money borrowed in the second financial phase.  

The fourth phase is where the company has received another payment from the client and using it to pay for all expenses. At this point, the project is paying off and the company is self-sufficient.

The fifth and last phase is where the company has completed the project and uses the profits gained from early start and early finish to invest in other projects.

Assessment 3(a): Labour cost

The labour cost estimate is as provided in the table below

No	Description	Quantity	Hours	Rate per hour ($)	Total cost ($)
1	Foremen	2	50	28	2,800
2	Metal workers	10	50	25	15,000
3	Welders	5	50	24	6,000
4	Labourers	15	75	18	20,250
	Total	44,050

From the labour cost estimate above, the actual labour cost is $44,050 while the budgeted labour cost is $35,000. This means that the budgeted labour cost has a deficit of $9,050. Due to this, the contractor is likely to claim for a variation.

Variation Document

TO: (OWNER/S): Roulade Rd Education

FROM: Metharom Construction

SITE ADDRESS: Parkville, Melbourne, Victoria.

This variation is required for: Owner/Owner’s Representative (Client)

The change to the Works is: The contractor has to do the framing for the roofing works by himself. The labour for this work was not included in the contract price.

The change is required because: The previously chosen subcontractor to undertake the framing for the roofing works is no longer able to do the work, and it is too late to source another contractor.

The Contractor’s reasonable estimate of the period of delay in the Date for Practical Completion that will result from the variation is: 7 business days.

The variation will change the price payable by the Owner as follows:

Increase the price by $9,050  

Relevant cost centre: Roofing work

The increase or decrease in the Total Price payable by the Owner as a result of the variation will be taken into account by the Contractor as evidenced by the Contractor’s progress claim for the stage: this variation is going to affect different stages of the wok including planning, execution, monitoring and completion date. But once the client accepts to pay for the variation, the contractor will try as much as possible to minimize the effects.

SIGNED: (OWNER)

DATE:

SIGNED: (CONTRACTOR)

DATE:

The following are some of the actions that the site supervisor must take so as to ensure that the project stays on budget:

• Minimize waste: the site supervisor must create awareness among employees on available strategies of minimizing waste on site. This may also require training.
• Hold individuals accountable for resources allocated: some employees tend to misuse resources on site if they are not held responsible. The site supervisor should ensure that individuals are held responsible for proper utilization of allocated resources.
• Monitor and evaluate project progress: this will help the site supervisor to identify loopholes that may be increasing the project cost unnecessarily. This can include preparing weekly budget reports.
• Identify unpredicted risks and manage them.
• Keep all staffs informed about cost reduction efforts put in place and how they will benefit from it.

References

Cantoria, C., 2011. Managing Cash Flow Control in Construction Projects. [Online] Available at: https://www.brighthubpm.com/monitoring-projects/114395-managing-cash-flow-control-in-construction-projects/ [Accessed 20 July 2018].

Ghorbani, S., 2017. How Cost Contingency is Calculated?. [Online]  Available at: https://www.projectcontrolacademy.com/cost-contingency-calculation/ [Accessed 20 July 2018].

Hulett, D., 2011. Integrated cost-schedule risk analysis. 1st ed. Abingdon, UK: Routledge.

Ojo, G. & Odediran, S., 2015. Significance of Construction Cost Estimating Risks in Nigeria. International Journal of Civil Engineering and Construction Science, 2(1), pp. 1-8.

Okmen, O. & Oztas, A., 2010. Construction cost analysis under uncertainty with correlated cost risk analysis model. Construction Management and Economics, 28(2), p. 2030212.

Riddell, T., 2017. The Types of Risks in Construction Projects. [Online]  Available at: https://esub.com/the-types-of-risks-in-construction-projects-to-watch-out-for/[Accessed 20 July 2018].