Lecture 6- Project Costing and Cash Flow

7/25/2019 Lecture 6- Project Costing and Cash Flow

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Project Costing and CashProject Costing and Cash

FlowFlow

Dr Anis Rahman

G09 1.19

[email protected]
mailto:[email protected]:[email protected]


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!jecti"es!jecti"es

To develop an understanding on

project cost and different levels andtechniques of cost estimation;

cash flow forecasting and cash flowdiagram and

cost control.


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#m$ortant %erminologies#m$ortant %erminologies

Cost& directl' related to an element of wor( including direct o"erheads such assu$er"ision.

%hree t'$es&) *uantit' related +material,

) %ime related +la!our,) Fi-ed costs +$a'ment of su! contractor fi-ed o"erhead etc,

Price& tagged "alue or assigned "alue of goods/ser"ice) eual to the cost $lus mar(2u$3 4 e-$ense 5 $rofit insurance ta-6

) in economics and !usiness the$rice is the$rice is the assigned numericalassigned numericalmonitor' "aluemonitor' "alueof a good ser"ice or assetof a good ser"ice or asset.

7alue& the degree of im$ortance2the mar(et worth or estimated worth of

commodities ser"ices assets or wor(2

8orth& the indi"idual3s su!jecti"e $erce$tion of the "alue for goods and ser"ices


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Pur$oses of stimatesPur$oses of stimates

Project economic a$$raisal

:tudies of the o$timisation of design

im$lementation and o$erationAssessment of ris(s changes and alternati"e

courses of action

sta!lishing !udgets for $roject funding

Pro"iding a !asis for cost control duringim$lementation

Pro"iding the !asis for final cost of $rojections


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#nformation ;eeded For stimating


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=e"els of stimates=e"els of stimates

A$$ro-imate or rder of magnitude +5/2 >0?,

Preliminar' +5/2 0?,

Definiti"e +5/2 10?,

Detailed estimates +5/2 ?,


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A$$ro-imate or rder of BagnitudeA$$ro-imate or rder of Bagnitude

Reuires when it is desired to assess the magnitudeof a $roject $rior to its design

Produced with minimum of $re$aration se unit rates +E/m@, i.e. Commercial construction

costs E000 $er m@

:ound intelligent guess !ased on e-$erience

judgements and the total costs of similar t'$estructures

Accurac' should !e within 2>0?


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Order of Magnitude Estimates


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Preliminar' or lementar' stimatPreliminar' or lementar' stimatee

sed forassessing financial feasi!ilit' of the $ro$osed$roject

assessing and com$aring the relati"e costs ofalternate designs in economic studies

o!taining a more accurate estimation

Gross uantities +m>concrete m>e-ca"ation tons of

reinforcement etc., Accurac' should !e 1020?

Bust !e com$iled with some care since the' form the!asis u$on which the $roceed is made


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Definiti"e stimatDefiniti"e stimatee

& 'efinitive (stimateis prepared from well defineddata, specifications, drawings, etc. and

)sed for *id proposals, *id evaluations, contractchanges, e#tra wor+s, legal claims, permits andgovernment approvals.

%ther terms associated with a 'efinitive (stimateinclude chec+, lump sum, tender, post contractchanges. etc.

&ccuracy- to /
http://www.maxwideman.com/pmglossary/PMG_D01.htmhttp://www.maxwideman.com/pmglossary/PMG_D01.htm


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Detailed stimatesDetailed stimates

0rovides the final assessment of the cost ofproject and compiled with

1or+ing drawings plus specifications andmar+et price)nit rate$ item *y item include the cost of

la*our, material, plant, indirect cost

overheads;2esource cost$ material, la*our etc.&ccuracy within /


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Detailed Estimates: Concrete in Pier Shaft


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Detailed EstimateSummary


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stimating %echniuesstimating %echniues

Glo!al&) Bostl' used in the $reliminar' stages since it does not reuire the detailed

info) rder of magnitude/ rule of thum!/ !all $ar( estimating.

) Relies on the historical data ta(ing into account inflation and mar(etinfluence

) Dangers include different definitions of what costs are included ofmeasurement not com$aring with li(e $roject inflation and mar(et factors

Factorial&) Bainl' used for $rocess $lant not relia!le for site wor() ased on current $rices o!tained from the su$$lier) Doesn3t count for the time limit of $roject) :uccess relies on the accurac' of the estimate for main $lant historical data

relia!ilit' factors used and e-$erience of the estimator


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Ban2hours&) :uita!le for la!our intensi"e wor( where relia!ilit' and $roducti"it'

records are a"aila!le e-am$le design wor(

nit rates&) :uita!le for !uilding re$etiti"e wor(s !ut not for entire ci"il $roject

) Relies on historical data and uotes2 most relia!le !ut time consuming.

) #t is most freuentl' used techniue )

) nit rates are listed in ill of uantities

$erational cost +resource cost,&) %otal cost 4 sum of costs of constituent acti"ities of a $roject de"elo$ed

from a detailed $roject $rogram

) ased on current rates ) most relia!le for ci"il engineering $rojects.

) %ime and resource consuming

stimating %echniuesstimating %echniues


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stimation Processstimation Process

. Study program

3. (stimate 0roject

4. "onstruction method5. 6aterial and su*-contract costs

. !a*our7plant costs

8. 'irect costs9. Indirect costs

:. 2eport


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stimating rrorsstimating rrors

'imensional errors

Transposed figures, decimal points

Time estimates 1age rates on costs

1aste

)nsta*le material prices

Transport rates 1eather, stri+es etc.

0lant charges

Incorrect units of measurement etc.


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Cash Flow asicsCash Flow asics

& cash flow is the transfer of money into or out of a project or acompany.

A cash flow is a financial modelof a project or contract that

provides vital info. to the managers forplanning and controlling ofproject cost.

"ash flow models present the forecasts of all future cash inflowsand outflows in a 0roject7contract

There will *e a time lag or e#ample$ In the Standard >orm of ?uilding "ontract, there is aclause that the (mployer shall effect payment to the "ontractorwithin 5 days upon presentation of the &rchitect@s certificate of

payment.


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Cash FlowCash Flow

:imilarl' there will !e a time lag

!etween !eing committed and ma(ing

a $a'ment and actuall' $a'ing it.

%hese time lags are the credit

arrangements that Contractors ha"e

with their creditors.


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%he #m$ortance of Cash Flow%he #m$ortance of Cash Flow

"er' 'ear man' Contractors go into

!an(ru$tcies. ne of the causes and

$erha$s the most often cause for

!an(ru$tcies is due to inadeuate cashto

meet the $a'ments committed to ma(e

and failure to con"ince the creditors or themone' lenders that this inadeuac' is onl'

tem$orar'.


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8h' Bodel Cash Flow


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Bajor Com$onents of Cash FlowBajor Com$onents of Cash Flow

%here are two major com$onents&

2 Cash recei"ed +re"enue,

2 ut2going cash +e-$enditure,


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Re"enueRe"enue

%he re"enue of a $roject can !e arri"ing from&

a, #nterim $a'ments of wor( done

!, Release of retentionc, Return of o"er2charged accounts

d, Reim!ursements from su!contractors

e, Administration costs for ser"ice $ro"ided tosu!contractors

f, alanced $a'ment u$on agreeing of final account


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-$enditure-$enditure

& "ontractor has a large num*er of payments tomeet, for e#amples$

a= 0ay-roll for staff and wor+ers*= Su*contractors@ payment

c= 0ayments to suppliers

d= Ta# and other Aovernment charges

e= Interest

f= >ees for supporting service e.g. rent, legaladvice, and consulting service from e#perts


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Cash Flow asicsCash Flow asics

#ncome +$ositi"e cash flow, and e-$enditure +negati"ecash flow,

;et income 4 income) expenditure

Cumulati"e cash flow diagramsare commonl' used !' themanagers to estimate and monitor the $roject cash flow

Cash flow defined as one of the following&

) Fi-ed charges

) *uantit' $ro$ortional charges

) %ime2related charges


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:te$s to Formulate a Cash Flow Bodel:te$s to Formulate a Cash Flow Bodel

1. Com$ile !ase2case cash flow2adding costsand re"enues to

each acti"it' on !ar2chart $rogram

. Refine the !ase2case cash flowto account for dela's in

$a'ment/rece$tion

>. Calculate the resultingcost !enefits and in"estment

reuired

. Consider im$acts of ris(s and uncertainties2 ris( anal'sis

should !e made on larger $rojects and sufficient

contingencies allocated in the estimate and the $rogramme.

. -amine im$acts of inflation


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Cash Flow ForecastingCash Flow Forecasting

In compiling the cash flow of a project, thefollowing data is required$

a= & graph of cumulative value versus time*= The measurement and certification

interval

c= The payment delay *etween certificationand the "ontractor receiving the cash

d= The retention conditions and retentionrepayment arrangements


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Cash Flow ForecastingCash Flow Forecasting

e= & graph of cumulative cost versus time

f= The project costs *ro+en down into the

items such as la*our, material, plantsu*contractor payments etc.

g= The delay *etween incurring a costlia*ility under each cost heading and

meeting that lia*ility

l i


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7alue "ersus time7alue "ersus time

C h fl f i l l iC h fl f ti l l ti


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Cash flow forecasting calculationsCash flow forecasting calculations


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Cash2out and cash2in cur"esCash2out and cash2in cur"es


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Sewer Main Extension Utility Data

Activity Path Time (ays! "osts #

Move in $ %& &' $$$

Excavation in shaft ' % &' &$)$

Excavation in tunnel * % & &)) +&$$ait & %&* &+ nil

"lean u- an move out &* %&) inirect

Excavation in shaft %&& $ )'$$

Pi-elayin/ an cncrete in tunnel && %&' &$ &)$$

Excavation in trench & % ) &$ '0$$

Excavation in trench ) %&$ &*$ )$$

ait 1%&$ &+ nil

Metal wor2 %0 &*) ))$

Pi-elayin/ an cncrete in trench %+ &*) &11$$

Indirect cost B8 perday

Bonitoring Cash FlowBonitoring Cash Flow


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Bonitoring Cash FlowBonitoring Cash Flow


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A& -$enditure

& #ncome

Profit

"erdraft

You must have cash reserves or

bank overdraft to meet this

?


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Ca$ital =oc(2u$Ca$ital =oc(2u$

%he negati"e cash flows e-$erienced in

the earl' stages of $rojects re$resentloc(ed u$ ca$ital that is su$$lied from

the com$an'3s cash reser"es or

!orrowed.


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Difficulties in Pre$aring Cash Flow ForecastingDifficulties in Pre$aring Cash Flow Forecasting

%he $roduction of cumulati"e "alue "ersus time

and cost "ersus time figures !ased on $roject

$lans is time-consuming!ecause it reuires e"er'

$roject in the forecast to !e re$resented !' a

networ( or !ar chart.

#t is $ossi!le to use standardcumulati"e "alue"ersus time and cost "ersus time cur"es that

adeuatel' re$resent each $roject t'$e.+Data can be obtained from records of past projects.,


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asic Assum$tionsasic Assum$tions

Cash flow forecasting is the result of

calculations!ased on the information

a"aila!le at the time +time of $re$aration,and assum$tions as to what will ha$$en.

#f the data contained in the information

changes or the assum$tionsalter the forecastwill !e in error and a new forecast is

reuired.


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Forecasting at =e"elsForecasting at =e"els

Contractors who underta(e cash flowforecasting do so at two le"els.

1.at the $roject le"el.for the com$an' as a whole.

Forecasting cash flows at com$an' le"el

in"ol"es aggregating cash flows for all acti"e$rojects and then added to the com$an'3s headoffice cash flows this e-ercise is doneregularl' e"er' uarter or e"er' month.


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Factors Affecting Cash Flow PositionFactors Affecting Cash Flow Position

1, Bargin

, Retentions

>, Claims, "er2measurement

, Dela' in recei"ing $a'ment from client

H, Dela' in $a'ing creditorsI, %he timing of contract starts

J, Front2end rate loading


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-ercise& Cash Flow Diagram-ercise& Cash Flow Diagram

Draw the cash flow diagram for the

following $roject&

Act. Direct Cost #ndirect Cost Duration Pa'ment1 E0000 E10000 1 month EH000

E0000 E10000 1 month E000

> E1J0000 E0000 1 month E00000

EH0000 E0000 1 month E>0000

E0000 E10000 1 month E0000H EH0000 E10000 1 month EJ0000

Pa'ment is made 1 month after com$letion

of the wor( in a lum$ sum


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-ercise +continued,-ercise +continued,

Determine the following&

)-$enditure and income cur"es

)Profit e-$ressed as a E and ? $rofit

)Ba-imum o"erdraft

)A"erage o"erdraft


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-ercise& cash flow diagram-ercise& cash flow diagram

1

Bonth

0 > H I

100

H00

I00

J00

00

>00

00

00

I0H90

#ncome

-$enditure

Profit Bargin4 I0 ) H90 4 I.?

H90

Ba- o"erdraft


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Project Cost ControlProject Cost Control

Cost control forms$art of the $rocess of

managing in"estmentin the $roject

ta(ing actions to a"oid cost "ariance%his management $rocess must ta(e into

account !oth theo!jecti"es and

reuirementsof the $rojectA cost control s'stem must !e sim$le

andmust not reuire e-cessi"e resources


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8hat #ndirect Costs8hat #ndirect Costs

Insurances pu*lic lia*ility

"osts incurred from your supervision

staff >oreman and project manager%verheads office, car etc.

"ontingency for ris+ and uncertainty

Safety induction%thersCCCCCC


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ase2case Cash Flowase2case Cash Flow

Cost and re"enues assigned to !ase3 orreference3 date

suall' date of first cash flow

#gnoreother factors such as inflation etc. fornow

A$$ro$riate time $eriods for adding of Cashflows at different stages of $roject

) Annual cash flow ) $roject e"aluation

) Bonthl' cash flow ) throughout $roject

) 8ee(l' cash flow ) short duration contracts

Lecture 6- Project Costing and Cash Flow

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Transcript of Lecture 6- Project Costing and Cash Flow