Money and Network Schedules

Chapter 7

1
Cash Flow EM

• Many construction firms that were undertaking profitable

projects have failed in business simply because of severe
cash-flow problems.
• A Cash flow analysis is an investigation of a project in which
the focus is on the flow of money.
• Positive cash flow
• Negative cash flow

Dr. Chung-Wei Feng©2009 2

Cash Flow EM

• The Time Value of Money

• Opportunity cost
• Inflation
• The delay of receiving money
• Interest Rate
• Capital, source
• Borrowed money, amount, schedule
• Company oriented, judgement call

Dr. Chung-Wei Feng©2009 3

Cash Flow Disbursements EM

• Labor
• Equipment
• Materials
• Subcontracts
• Other

Dr. Chung-Wei Feng©2009 4

Cash Flow Disbursements EM

• Labor
• Substantial, 1/3 of the project cost (depend on type of the
project)
• Periodic payments (daily, weekly, monthly)
• Overtime work
• Equipment
• Owned (a separated company for accounting purpose)
• Leased
• Monthly basis

Dr. Chung-Wei Feng©2009 5

Cash Flow Disbursements EM

• Materials
• Pay suppliers after the materials delivered to the site
• Different agreements on payment
• 2% 10, net 30
• Discount
• In most cases, paid one month from the time of delivery
• Payment schedule agreement

Dr. Chung-Wei Feng©2009 6

Cash Flow Disbursements EM

• Subcontracts
• Usually paid on a monthly basis
• Pay when paid (in contract provision)
• “payments will be made to the subcontractors only after
the general contractor has received payment for that work
from the owner”
• Retainage rate
• typically same as the one withheld from the general
contractor by the owner

Dr. Chung-Wei Feng©2009 7

Cash Flow Disbursements EM

• Other
• Insurance premiums
• Surety fees
• Permits
• Mobilization
• Home-office overhead

Dr. Chung-Wei Feng©2009 8

Contract Provisions That Impact Cash Flow EM

• Payment Schedule
• Contract types
• Unit cost, pay items are enumerated
• Mobilization cost vs. Demobilization cost
• Not pay items
• Scaffolding
• Across the board, carefully allocate costs

Dr. Chung-Wei Feng©2009 9

Contract Provisions That Impact Cash Flow (Payment
Schedule) EM

• Lump-sum
• Submit payment schedule for approval
• Front-end loading

• A risk to the owner in the event that the contractor defaults

on the project.
• Minimized by employing prequalifying bidders,
performance bond

Dr. Chung-Wei Feng©2009 10

Contract Provisions That Impact Cash Flow EM

• Retainage: The owner withhold a stated percentage of the

funds earned by the contractor, 5%~20%, most likely 10%
• Public owner may reduce retainage if the contractors makes
satisfactory progress
• Adverse impact on the contractor’s cash flow
• Example:
• Cost:$1,000,00, bid price: $1,080,000, 8% profit
• Retainage 10%, $1,080,000*10% = $108,000, at the
completion: $1080000-$108000=972,000, must finance a
portion of the project

Dr. Chung-Wei Feng©2009 11

Contract Provisions That Impact Cash Flow EM

• Materials
• Purchased early but installed later, Long-lead-time
procurement
• The storage of material
• space, security
• Mobilization, Monthly payments
• Final payments
• One~three months after substantial completion, Punch list
• Release retainage

Dr. Chung-Wei Feng©2009 12

The Cash Flow Analysis EM

• Purposes
[Link] if surplus funds are available during a project or if a
negative cash flow will occur during construction
[Link] the appropriate markup to apply on a bid
• Income (usually, but could vary)
• A step curve
• Disbursement
• S curve

Dr. Chung-Wei Feng©2009 13

OR = OVERHEAD RATE = TOTAL OVERHEAD/(TOTAL DIRECT COST +TOTAL SUB)
DCm= DIRECT COST = MATERIAL COSTm+LABOR COSTm+EQUIPMENT COSTm
SUBm= SUBCONTRACTOR COSTS = SUBCONTRACTOR WORKm
ICm= INDIRECT COST = OR*(DCm+ SUBm)
TCm = TOTAL COST = DCm+ SUBm+ ICm
Mm = MARKUP = ％TC
TWm = TOTAL WORTH, BILLING = TCm+ Mm
CRm= CLIENT RETAINAGE = ％TW
PAYm= PAYMENT DUE = TWm－ CRm
PWDm= PAYMENT WITH DELAY = PAYm-delay (delay normally=2)
SRm = SUB RETAINAGE = ％ SUBm
SP = SUBCONTRACTOR PAYMENT DUE = SUBm-SRm
SPWDm = SUBCONTRACTOR PAY WITH DELAY = SPm-dealy (delay normally=2)
OUTm = CASH OUTFLOW = TCm－SUBm+ SPWDm
COm = CUMULATIVE OUTFLOW = + COm-1 - OUTm (Note Negative)
CPm = CUMULATIVE PAYMENT = + CPm-1 + PWDm
CIm = CUMULATIVE INTEREST = + CIm - INTm-1 (Negative)
OVERm = OVERDRAFT = COm+ CPm+ CIm
INTm = INTEREST COST = ％ OVERm
NOTE: Last P.W.D. (Payment With Delay) includes total C.R.(Client retainage), and the
Subcontractors receive the total S.R.(Subcontractor Retainage) when the contractor receives the C.R.
(Client Retainage).
Cash Flow with Inflation
TC with Inflation = TC without Inflation + MI + LI
Where_MI= Material Inflation (e.g., 0.5％/m = 1.005)
LI = Labor Inflation (normally step increase once per year e.g., 5％ after second month)
Equipment and Subcontracts may also be subject to inflation, normally with rate similar to
material inflation.
 Example

Activity ID Description Cost Duration 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100

a Move on 2000 20

b Survey 1200 10

c Trench 9000 30

d Lay pipe 3000 15

e Concrete 1000 10

f Backfill 500 5

g Move out 500 5

h Fix valves 1000 10

i Put valves 1000 10

j Test 1500 5

Income is due one month after filing for payments

one month : 20 days
 20 40 60 80 100 120 140

Move On 2000 2000

Survey 1200 1200
Trench 3000 6000 9000
Lay Pipe 3000 3000
Concrete 500 500 1000
Backfill 500 500
Move out 500 500
Fix valves 1000 1000
Put valves 1000 1000
Test 1500 1500

Direct cost 2000 4200 6000 5500 3000 20700

Subcontract 0 0 0 0 0
Indirect cost@11.47% 229 482 688 631 344 2374

Total Cost 2229 4682 6688 6131 3344 23074

Markup 5% 111 234 334 307 167 1154

Total Worth 2341 4916 7023 6437 3511 24228

Retainage 10% 234 492 702 644 351 2423

Payment Due 2107 4424 6320 5794 3160 21805

Payment w/ delay 0 0 2107 4424 6320 5794 5583 24228

Subcontract Retainage 10% 0 0 0 0 0 0

Subcontract pay due 0 0 0 0 0 0
Subcontract pay w/ delay 0 0 0 0 0 0 0 0

Cash outflow -2229 -4682 -6688 -6131 -3344 0 0 -23074

Cumulative outflow -2229 -6911 -13599 -19730 -23074 -23074 -23074

Cumulative income 0 0 2107 6531 12851 18645 24228
Cumulative interest 0 -22 -92 -207 -342 -447 -496

0 -2229 -4827 -7160 -7086 -4771 707

Overdraft -2229 -6933 -11584 -13407 -10564 -4876 658
Interest 1% -22 -69 -116 -134 -106 -49
Present Worth of Cash Flow EM

Month 0 1 2 3 4 5 6 7

Expense 0 2229 6911 13599 19730 23074 23074 23074

0 2229 4682 6688 6131 3344 0 0

Income 0 0 0 2107 6531 12851 18645 24228

0 0 0 2107 4424 6320 5794 5583

0 -2229 -4682 -4581 -1707 2976 5794 5583

2.26% 0 -2179.73792 -4477.3375 -4283.93553 -1561.02683 2661.362204 5066.916653 4774.491331

NPW 0.7324

5% 0 -2122.85714 -4246.71202 -3957.24004 -1404.35312 2331.773871 4323.572008 3967.733866

NPW -1,108.0826 2.26%

Dr. Chung-Wei Feng©2009 18

 Example
Activity ID Description Cost Duration 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100
a Move on 2000 20

b Survey 1200 10

sub c Trench 9000 30

sub d Lay pipe 3000 15

sub e Concrete 1000 10

sub f Backfill 500 5

g Move out 500 5

h Fix valves 1000 10

i Put valves 1000 10

j Test 1500 5

Income is due one month after filing for payments

one month : 20 days
 20 40 60 80 95

1 Move On 2000 2000

2 Survey 1200 1200
3 Trench (sub) 3000 6000 9000
4 Lay Pipe (sub) 3000 3000
5 Concrete (sub) 500 500 1000
6 Backfill (sub) 500 500
7 Move out 500 500
8 Fix valves 1000 1000
9 Put valves 1000 1000
10 Test 1500 1500

Direct cost 2000 1200 0 2000 2000 7200

Subcontract 0 3000 6000 3500 1000
Indirect cost@11.47% 229 482 688 631 344 2374

Total Cost 2229 4682 6688 6131 3344 23074

Markup 5% 111 234 334 307 167 1154

Total Worth 2341 4916 7023 6437 3511 24228

Retainage 10% 234 492 702 644 351 2423

Payment Due 2107 4424 6320 5794 3160 21805

Payment w/ delay 0 0 2107 4424 6320 5794 5583 24228

Subcontract Re. 10% 0 300 600 350 100 1350

Subcontract pay due 0 2700 5400 3150 900 12150
Subcontract pay w/ delay 0 0 0 2700 5400 3150 2250 13500

Cash outflow -2229 -1682 -688 -5331 -7744 -3150 -2250 -23074

Cumulative outflow -2229 -3911 -4599 -9930 -17674 -20824 -23074

Cumulative income 0 0 2107 6531 12851 18645 24228
Cumulative interest 0 -22 -62 -87 -122 -171 -195

0 -2229 -1827 1870 2834 849 3232

Overdraft -2229 -3933 -2554 -3486 -4945 -2351 959
Interest 1% -22 -39 -26 -35 -49 -24
Present Worth of Cash Flow EM

Month 0 1 2 3 4 5 6 7

Expense 0 2229 3911 4599 9930 17674 20824 23074

0 2229 1682 688 5331 7744 3150 2250

Income 0 0 0 2107 6531 12851 18645 24228

0 0 0 2107 4424 6320 5794 5583

0 -2229 -1682 1419 -907 -1424 2644 3333

5.33% 0 -2116.20621 -1516.07897 1214.300413 -736.883701 -1098.37229 1936.194338 2317.23844

NPW 0.1920

5% 0 -2122.85714 -1525.62358 1225.785552 -746.191145 -1115.74126 1972.993509 2368.700873

NPW 57.0668 5.33%

Dr. Chung-Wei Feng©2009 22

Supplement

Engineering Economic Review

23
Introduction EM

• Capital
• Refers to wealth in the form of money or property that can
be used to produce more wealth.
• Engineering Economy Focus
• Commitment of capital for extended periods of time.
• Money’s time value.

Dr. Chung-Wei Feng©2009 24

Why Consider Return to Capital EM

• Capital in the form of money for the people, machines,

materials, energy, and other things needed in the operation.
• Equity capital
• Owned by individual
• Invested money or property in a business project to
receive a profit.
• Debt capital
• Obtained from lenders for investment
• Interest->Lender

Dr. Chung-Wei Feng©2009 25

Why Consider Return to Capital EM

• Incentive
• Accumulative capital of savings
• Risk
• Permit another person to use his or her capital
• Opportunity cost

Dr. Chung-Wei Feng©2009 26

The Origins of Interest EM

• Interest has existed in Babylon in 2000 B.C.

• Borrow->repaid

Dr. Chung-Wei Feng©2009 27

Simple Interest EM

• I = (P) (N) (i)

ØP = principal amount lent or borrowed
ØN = number of interest periods (e.g., years)
Ø i = interest rate per interest period
• If $1,000 is loaned for three years at a simple interest rate of
10% per year, the interest earned will be I = $1,000 × 3 ×
0.10 =$300
• The total amount owed at the end of three years would be
$1,000 + $300 =$1,300

Dr. Chung-Wei Feng©2009 28

Compound Interest EM

• Interest charge for any interest period is based

on the remaining principal amount plus any
accumulated interest charges up to the beginning
of that period.
• If $1,000 is loaned for three years at a compound interest
rate of 10% per year

Dr. Chung-Wei Feng©2009 29

Compound Interest EM

Dr. Chung-Wei Feng©2009 30

The Concept of Equivalence EM

• Equivalent basis dependent on

1. the interest rate
2. the amounts of money involved
3. the timing of the monetary receipts and/or expenses
4. the manner in which the interest, or profit are made?
• Example 2 1 3
• Borrow $8,000 and repaid it at 10% in four years
• Different repaid plans
4
Dr. Chung-Wei Feng©2009 31
The Concept of Equivalence EM

• Plan 1
At end of each year you pay $2,000 principal plus interest due.

Dr. Chung-Wei Feng©2009 32

The Concept of Equivalence EM

• Plan 2
Pay interest due at end of each year and principal at end of four years.

Dr. Chung-Wei Feng©2009 33

The Concept of Equivalence EM

• Plan 3
Pay in four equal end-of-year payments.

Dr. Chung-Wei Feng©2009 34

The Concept of Equivalence EM

• Plan 4
Pay principal and interest in one payment at end of four years.

Dr. Chung-Wei Feng©2009 35

The Concept of Equivalence EM

• Are those four plans equivalent?

• Total interest paid
• Plan 1 $2,000
• Plan 2 $3,200
• Plan 3 $2,096
• Plan 4 $3,713
• Yes, at interest rate of 10%

Dr. Chung-Wei Feng©2009 36

The Concept of Equivalence EM

• Equivalence
• The alternatives are equal to the decision maker in terms of
the objective.
Monetary Value
• Economic equivalence
• is established, in general, when we are indifferent between a
future payment, or serious of future payments, and a present
sum of money.
• is established when total interest paid, divided by dollar-
years of borrowing, is a constant ratio among financing
plans.

Dr. Chung-Wei Feng©2009 37

Notation and Cash Flow
Diagram / Tables EM

• i
• Effective interest rate per interest period.

• N
• Number of compounding periods.

• P
• Present sum of money; the equivalent value of one or more cash flows at a reference
point in time called the present.

• F
• Future sum of money; the equivalent value of one or more cash flows at a reference
point in time called the future.

• A
• End-of-period cash flows (or equivalent end-of-period values) in a uniform series
continuing for a specified number of periods, starting at the end of the first period and
continuing through the last period.

Dr. Chung-Wei Feng©2009 38

Notation and Cash Flow
Diagram / Tables EM

Plan 4 Lender’s viewer point

Receipts

Expenses

Dr. Chung-Wei Feng©2009 39

Interest Formulas-P vs. F EM

• P is a present single sum.

• F is a future single sum.
• Separated by N periods with interest at i% per period.

Dr. Chung-Wei Feng©2009 40

Finding F When Given P EM

• F = P(1 + i )N
• F = P(F/P, i%, N)
• (1 + i )N
• Single payment compound amount factor

Dr. Chung-Wei Feng©2009 41

Finding P When Given F EM

N
⎛ 1 ⎞
⎟ = F(1 + i )
−N
• P = F⎜
⎝1+ i ⎠

• P = F(P/F, i%, N)
• (1+i)-N
• Single payment present worth factor

Dr. Chung-Wei Feng©2009 42