Wednesday, 24 March 2010

Cash Flow Planning Application for Construction Projects

Construction industry is experiencing a proportionally greater number of distressed firms than in other industries. Primary causes are inadequate cash resources and the failure to convince creditors and lenders of the temporary nature of such shortage. Apparently, cash flow management is becoming an essential tool for managing, controlling and monitoring construction projects so as to ensure uninterrupted cash flows through the course of project implementation.

Although project cash flow has been studied in several countries in the past, most researches primarily emphasized on developing the cash flow ideal curve and mathematical formula by using past project data to forecast or predict cash flow trends during the tendering stage of construction project. Singh and Lakanathan (1992 cited in Navon, 1996) stated that cash is the most important of the construction company’s resource, because more construction companies fail due to lack of liquidity for supporting their day-to-day activities than because of inadequate management of other resources. Cash flow management is a complex and important problem faced by companies of different sizes usually requiring distinct approaches and proper tools according to the nature and complexity of the operations. Inadequate cash resource and failure to convince creditor and lender are the main reasons why the construction industry usually experiences a proportionally grate number than other industries (Barboza and Pimentel, 2001).

Therefore, the cash flow planning becomes an essential in management of construction project as to ensure uninterrupted cash flow through the course of project implementation. Previous researches of project cash flow were mostly conducted to derive a universally accepted cash flow forecasting model which can be applied to every type of construction projects.

In addition, most of the contractors require the project cash flow plan for preparing the periodic budgets and for monitoring and controlling their project. Therefore, the suitable tools for developing the project cash flow plan should provide timely, accurate and uncomplicated use. In order to efficiently plan and accurately forecast the project cash flow which can be tracked against the project schedule, a proper cash flow planning tool should be integrated with the project cash flow plan and the project schedule.

Mr. Nakorn Nakwarin made a study which main objective was to develop a cash flow planning application prototype for integrating project schedule information and cash flow plan of construction projects. The developed application can be used to assist contractors in reducing the inconvenience in project cash flow planning, monitoring the project financial status and planning proper corrective actions.

In order to achieve the main objective, two sub-objectives were also needed to accomplish as follows:
1. To identify the factors affecting the project cash flow during the construction stage
2. To develop cash flow planning system, which can be used to plan the cash flow and forecast the financial status of a construction project


1. Identification of Factors affecting Project Cash Flow during Construction Stage
The following are a list of key factors affecting project cash flow during construction stage:

Influence Factors in Term of Revenues
Revenue factors consist of progress payment and advanced payment. Each project has different types of work progress payments. For some projects which clients make payments according to the actual work progress, revenue to contractors would be recognized when such payments are made. However, for other projects, contractor would recognize revenue based on the payment period or payment stage. Another factor affecting the project revenue is the advanced payment. Advanced payment is the amount of deposit required from contractors prior to project commencement. Different types of project progress payment and advanced payment are based on the contract details of each project.

Influence Factors in Term of Costs
This research has classified the cost factors into seven key components, including the labor cost, equipment cost, material cost, subcontractor cost, mobilization cost, overhead cost and estimation. In calculating project costs, it undoubtedly involves estimation. Such cost estimation was made by using the estimated quantity of each project resource, the resource cost data, the subcontractor cost, the mobilization cost and the project overhead cost. Estimated costs could materially misstate the actual project costs if contractors employ improper estimation approach or use outdated resource cost data, subcontractor cost data, mobilization cost and overhead cost data.

Influence Factors in Term of Time
According to the research, time variable is another important factor affecting project cash flow planning. There are altogether four sub-factors of the time variable, including the project schedule, the project calendar, the payment term and time lags. During construction phase, project schedule constantly changes. Causes of change are changes in construction techniques, construction delay, or the pushing pressure from contractors to expedite construction process. Calendar assigns working day, non-working day and holiday of each project. Whenever Project Schedule and Calendar change, they will also cause changes in the project cash flow plan. Finally, both payment term and time lags affect the cash flow project planning with respect to the payment date of both revenue and cost.

Influence Factors in Term of Contract
There are four factors related to project contracts, including the retention, the performance and payment bonds, the unbalanced bids and the tendering BOQ. The retention amount would be charged when contractor receives progress payments and would be repaid to contractors upon project completion. The performance and payment bonds are guaranteed deposits required from contractors prior to commencing the project. The unbalanced bids arise when contractors raise the price on certain bid items and reduce the price of the other in order to accumulate more proceeds at the initial stages of the construction project. The details of tendering BOQ are stated as a part of project contracts for payment to contractors.

Other factors
Other factors impacting the project cash flow planning are material-related variables and inflation rate. Material storage policy or material warehouse policy, lead time of material ordering material payment and credit term, down payments and material discount rate are examples of material-related variables affecting project cash flow planning. Inflation rate is another factor which is relevant to project cash flow planning for construction projects spanning over one year. Inflation rate is applied to calculating and planning cash flows in order to take into account the increase or decrease in the value of money over years.

2. Development of Project Cash Flow Planning Application
Project cash flow planning is a significant tool that assists construction firms in managing their project financial status. Due to the complexity and various factors involved in the project cash flow planning process, the project cash flow planning application is developed to assist contractors in performing this task. In order to develop the project cash flow planning application, several steps are involved, starting from system requirement identification, system design and development to system testing.

System Requirement Identification
System requirement identification can be divided into two sections: system requirement acquisition and system requirement analysis. In order to determine system requirements, interviews were carried out with five construction companies. The outputs of this stage include existing problems and basic requirements of project cash flow planning system. Another section is the system requirement analysis of such acquired information. The outputs of system requirement analysis are project cash flow planning framework, data flow diagram and data dictionary. These will be used as input for the system design and development phase.

System Design and Development
The system design and development phase comprises of three major tasks, namely the system architecture design, the system database design and development, and the application interface design and development. The system is designed according to the retrieved information from previous phase. The system architecture of project cash flow planning system is the output of the system architecture design stage, consisting of MS Project, MS Excel, MS Access and Project Cash Flow Planning Application. The second task is the system database design and development which consists of entity design, entity-relationship diagram design (E-R diagram) and database development, where the project cash flow planning database is the output of this stage. The last task in the system design and development phase is the application interface design and development.

System Testing
The key objective of system testing is to ensure that the developed prototype can accomplish the stated objectives. In this phase, the project cash flow planning system is tested in terms of system verification and system validation. System verification is carried out to test the overall functions and the accuracy of the system whether there is any system error. Then, system validation is carried out by demonstrating the system to contractors and noting their comments to assess whether the system meets their requirements.

His thesis abstract is copied and posted.


An essential element in a construction firm’s overall strategy is its financial plan, which should be designed to ensure an adequate provision of finance for the firm’s needs. Without sufficient funds, a company cannot safely expand as quickly as it might wish. This is due to the reason that the fund shortage problem is the most common cause of business failure, particularly the profitable and growing firms. The planning of project cash flow is a management tool used by the construction firms to improve the firms’ financial position and remove the risk of bankruptcy. Similar to other management tools, cash flow planning is a repeated process. During the initial stage, a forecast plan or target is complied. Next, when the project is progressing, the performance is measured and compared with the plan. It is often the case that there are discrepancies between the plan and actual performance; therefore, the plan has to be consequently changed in order to meet the original target or at least minimizing the discrepancy between the actual performance and the original target. Cash flow planning is a time-consuming and very complicated process because it involves lots of documentation and several procedures for calculating and checking the cash flow.

Acknowledging the inconvenience and complication of cash flow planning process, this research aims to develop a new and innovative computer tool used for project cash flow planning. The system being developed is the integration of Microsoft Project and project cash flow planning application in order to generate project cash flow plan. The benefits from this application include a reduction of time used for planning the cash flow planning, a lower error during cash flow project planning, and an increase in the construction management efficiency.


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Darcy Grubaugh said...

Cash flow is important everywhere, even in the construction industry. The current status of the construction industry's cash-flow should be really detailed. Getting good construction materials may hurt the pockets for now but it will surely lessen the chance of any problems later.

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Anonymous said...

this is very helpful thank you very much.
im doing an essay for uni on cash flow in the construction industry.
this has given me the start i needed.
thank you again

Anonymous said...

thank you very much for the post, now is the time to change the industry an d ev1 should manage their cash flow to help reduce the number of insolvencies within the industry.

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