Contractor cash flow estimate and critical stage

Need for cash flow management

Cash flow is the movement of money in (client payments) and out (labour, material, equipment, overhead). A contractor needs to manage it because:

• Expenses are paid before the client pays, so a shortage of cash can stop work.
• Payments come late (bill certification, retention, delays), so the gap must be financed.
• It shows how much working capital or bank overdraft is required, and when.
• Interest on borrowing reduces profit; proper planning lowers it.
• It allows timely payment of workers, suppliers and subcontractors, so the contractor keeps its credit.
• It helps to plan the best time for bidding, purchases and mobilisation.

Typical cash flow estimate

The contractor plots three cumulative curves against time: the contract value of work done (V), the contractor's cost or expenditure (C), and the payments received (P), which lag behind V because of certification and payment delays and the retention. The gap between V and C is the contractor's margin (profit and overhead). The gap between C and P is the cash deficit that the contractor must finance.

 Cumulative Rs
  |                                    VVVVVVVVVVVVVVVVVVVVVVVV
  |                                VVVV     PPPPPPPPPPPPPPP    } margin (V - C)
  |                             VVV   CCCCCCCCCCCCCCCCCCCCCCCCC
  |                          VVV  CCCCPP
  |                        VV CCCC PP
  |                      VV CC  PPP
  |                   VVVCCC  PP
  |                 VVCCC   PP
  |               VVCC   PPP
  |            VVVC    PP
  |         VVVCC   PPP
  |     VVVVC   PPPP
  +----------------------------------------------------------> Time
  Start                ^              End of work
            largest gap C - P = most critical stage

 V = contract value of work done   C = contractor's cost
 P = payments received (lagging; P finally reaches V when
     the retention is released after the defects period)

Most critical stage

The most critical stage is the early-to-middle period of the work, when spending is fastest: the contractor has spent heavily on mobilisation, materials and wages, but the bills are not yet paid and retention (5% in PPR practice) is being deducted. The vertical gap between the cost and payment curves is largest here, so peak borrowing is needed. A mobilisation advance and prompt payment of running bills reduce this peak. Later, P rises above C, and at the end the contractor recovers the full margin.