MANAGEMENT:CIVIL II_ MCIV 2/0

MODULE SIX(6): FINANCIAL PLANNING JB NARTEY

INCOME STATEMENT

• CASH INFLOWS/REVENUES• CASH OUTFLOWS/EXPENSES• CASH REQUIREMENTS

Assumptions

50% of the costs is for Labour

50% of the costs is for materials payable in 30 days

Performance SuretyWhere the SMME service provider could not be able to arrange sureties prior

to awarding of the contract, surety amounts shall be deducted from the first

progress payment certificate based on work certified.

Retention Guarantee

Retention will continue to be deducted from payment

claims until the Retention guarantee is in place

CASHFLOW M& E(NEGATIVE VARIANCES/DEVIATIONS)Minor Cash outflow negative Variances,revise cashflows to reflect actual trendContinuously Significant Cash outflow negative Variances(>20% of the target), Investigate and provide reasons and introduce measures to control it If it cannot be controlled(external causes),revise cash outflows to reflect the actual trend

TOO LOW IS NOT GOOD,LATE COMPLETION AND PENALTIESTOO HIGH IS NOT GOOD FOR PROFITABILITY

CASH INFLOWS/REVENUESCOMPANY NAME XYZ CompanyPROJECT NAME Construction of a pump houseCONTRACT SUM/VALUE 38 130CONTRACT PERIOD 17 MonthsRETENTION 10% of the Contract claimsRETENTION LIMIT(5%) 1906.5DEFECTS LIABILITY PERIOD 3 MONTHSPROFIT MARGIN /MARK-UP 14%PERFORMANCE SURETY 5% of the Contract SumPENALTIES 0.10% of Contract amount/day

WORK PROGRAM RELATED CASHFLOW ANALYSIS

ACTIVITY WORK VALUE 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20Mob+ Site Establishment- P&Gs 5200 5200Excavation 2000 500 500 500 500Concrete work 3000 750 750 750 750Brickwork 8000 2000 2000 2000 2000Roof 6000 6000Plumbing 6000 1000 1000 1000 1000 1000 1000Electrical 3000 750 750 750 750Finishes 4000 800 800 800 800 800

Value of Work done(Planned) 37200 5200 500 500 500 1250 750 750 2750 2000 3000 3000 7000 1000 2550 2550 1550 1550 800 0 0 0Value of Work done(Planned)-Cumulative 5200 5700 6200 6700 7950 8700 9450 12200 14200 17200 20200 27200 28200 30750 33300 34850 36400 37200 37200 37200 37200Plus Variation orders/additional worksPlus DayworksPlus Contract Price AdjustmentsAmount Due-Subtotal 5200 5700 6200 6700 7950 8700 9450 12200 14200 17200 20200 27200 28200 30750 33300 34850 36400 37200 37200 37200 37200Less 10% Retention -Cum 520 570 620 670 795 870 945 1220 1420 1720 1906.5 0 0 0 0 0 0 0 0 0 0Less other deductions(Penalties)-cumAmount Due-Subtotal 5173 5673 6173 6673 7923 8673 9423 12173 14173 17173 20173 27173 28173 30723 33273 34823 36373 37173 37173 37173 37173Plus 85% Materials On Site-CumPlus Retention Release(50%) 953.25 953.25Plus Surety Release 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1906.5 0 0Final Amount Due- Cum-planned 5173 5673 6173 6673 7923 8673 9423 12173 14173 17173 20173 27173 28173 30723 33273 34823 36373 37173 40032.75 37173 38126.25Monthly Claims-planned 38126 5173 500 500 500 1250 750 750 2750 2000 3000 3000 7000 1000 2550 2550 1550 1550 800 2859.75 -2859.75 953.25Monthly Claims(Actual) 38126 0 0 6173 0 1750 0 1500 0 4750 0 6000 0 8000 0 5100 0 3100 0 3659.75 0 -1906.5Monthly Claims(Actual)-Cum 0 0 6173 6173 7923 7923 9423 9423 14173 14173 20173 20173 28173 28173 33273 33273 36373 36373 40032.75 40032.75 38126.25

Assumptions

QS valuations starting from end of month 1

Payments received 1 month after valuation

DURATION(MONTHS) DEFECTS LIABILITY PERIOD

CASH OUTFLOWS/EXPENSESCOMPANY NAME XYZ CompanyPROJECT NAME Construction of a pump houseCONTRACT SUM/VALUE 38 130CONTRACT PERIOD 17 MonthsRETENTION 10% of the Contract ClaimsRETENTION LIMIT(5%) 1906.5DEFECTS LIABILITY PERIOD 3 MONTHSPROFIT MARGIN /MARK-UP 14%PERFORMANCE SURETY 5% of the Contract SumPENALTIES 0.10% of Contract amount/day

CASHFLOW ANALYSIS- PROJECT EXPENDITURE CURVE

ACTIVITYCOST BUDGET= WORK VALUE/114% 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Mob.+Site Establishment 4561 4561

Excavation 1754 439 439 439 439

Concrete work 2632 658 658 658 658

Brickwork 7018 1754 1754 1754 1754

Roof 5263 5263

Plumbing 5263 877 877 877 877 877 877

Electrical 2632 658 658 658 658

Finishes 3509 702 702 702 702 702

Monthly Cost of Works(Planned) 32632 4561 439 439 439 1096 658 658 2412 1754 2632 2632 6140 877 2237 2237 1360 1360 702 0 0 0Cum Cost of Works(Planned) 4561 5000 5439 5877 6974 7632 8289 10702 12456 15088 17719 23860 24737 26974 29211 30570 31930 32632 32632 32632 32632Monthly Cost-ActualLabour payments(50%) 2281 219 219 219 548 329 329 1206 877 1316 1316 3070 439 1118 1118 680 680 351 0 0 0Materials(50%)- 30 day credit 0 2281 219 219 219 548 329 329 1206 877 1316 1316 3070 439 1118 1118 680 680 351 0 0Performance Surety 1906.5 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0Monthly Cost-Actual 34538 4187 2500 439 439 768 877 658 1535 2083 2193 2632 4386 3509 1557 2237 1798 1360 1031 351 0 0Cum Actual Monthly cost 4187 6687 7126 7564 8332 9209 9867 11402 13485 15678 18310 22696 26205 27762 29999 31797 33157 34187 34538 34538 34538

DURATION(MONTHS) DEFECTS LIABILITY PERIOD

COMPANY NAME XYZ CompanyPROJECT NAME Construction of a pump houseCONTRACT SUM 38 130CONTRACT PERIOD 17 MonthsRETENTION 10% of the Contract ClaimsRETENTION LIMIT(5%) 1906.5DEFECTS LIABILITY PERIOD 3 MONTHSPROFIT MARGIN/PROFIT MARK-UP 14%PERFORMANCE SURETY 5% of the Contract SumPENALTIES 0.10% of the contract sum/day

ACTIVITY SUM 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20CASH INFLOWSValue of Work done(Planned) 37200 5200 500 500 500 1250 750 750 2750 2000 3000 3000 7000 1000 2550 2550 1550 1550 800 0 0 0Value of Work done(Planned)-Cumulative 0 5200 5700 6200 6700 7950 8700 9450 12200 14200 17200 20200 27200 28200 30750 33300 34850 36400 37200 37200 37200 37200Plus Variation orders/additional works 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0Plus Dayworks 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0Plus Contract Price Adjustments 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0Amount Due-Subtotal 0 5200 5700 6200 6700 7950 8700 9450 12200 14200 17200 20200 27200 28200 30750 33300 34850 36400 37200 37200 37200 37200Less 10% Retention -Cum 0 520 570 620 670 795 870 945 1220 1420 1720 1907 0 0 0 0 0 0 0 0 0 0Less other deductions(Penalties)-cum 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0Amount Due-Subtotal 0 5173 5673 6173 6673 7923 8673 9423 12173 14173 17173 20173 27173 28173 30723 33273 34823 36373 37173 37173 37173 37173Plus 85% Materials On Site-Cum 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0Plus Retention Release(50%) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 953 0 953Plus Surety Release 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1907 0 0Final Amount Due- Cum-planned 0 5173 5673 6173 6673 7923 8673 9423 12173 14173 17173 20173 27173 28173 30723 33273 34823 36373 37173 40033 37173 38126Monthly Claims-planned 38126 5173 500 500 500 1250 750 750 2750 2000 3000 3000 7000 1000 2550 2550 1550 1550 800 2859.75 -2859.75 953.25Monthly Claims(Actual) 38126 0 0 6173 0 1750 0 1500 0 4750 0 6000 0 8000 0 5100 0 3100 0 3659.75 0 -1906.5Monthly Claims(Actual)-Cum 0 0 0 6173 6173 7923 7923 9423 9423 14173 14173 20173 20173 28173 28173 33273 33273 36373 36373 40032.75 40032.75 38126.25CASH OUTFLOWSMonthly Cost of Works(Planned) 32632 4561 439 439 439 1096 658 658 2412 1754 2632 2632 6140 877 2237 2237 1360 1360 702 0 0 0Cum Cost of Works(Planned) 4561 5000 5439 5877 6974 7632 8289 10702 12456 15088 17719 23860 24737 26974 29211 30570 31930 32632 32632 32632 32632Monthly Cost-Actual 34538 4187 2500 439 439 768 877 658 1535 2083 2193 2632 4386 3509 1557 2237 1798 1360 1031 351 0 0Cum Actual Monthly cost 0 4187 6687 7126 7564 8332 9209 9867 11402 13485 15678 18310 22696 26205 27762 29999 31797 33157 34187 34538 34538 34538

Monthly Net Cashflow(Surplus/Deficit) Requirements -4187 -2500 -439 -439 -768 -877 -658 -1535 -2083 -2193 -2632 -4386 -3509 -1557 -2237 -1798 -1360 -1031 -351 0 0

Cum Net Cashflow(Surplus/Deficit) Requirements -4187 -6687 -953 -1391 -409 -1286 -444 -1979 688 -1505 1863 -2523 1968 411 3274 1476 3217 2186 5495 5495 3588

DURATION(MONTHS) DEFECTS LIABILITY PERIOD

CASH REQUIREMENTS

0

-4187

-2500

-439-439-768-877-658

-1535-2083-2193

-2632

-4386

-3509

-1557

-2237-1798

-1360-1031

-3510 00

-4187

-6687

-953-1391

-409

-1286

-444

-1979

688

-1505

1863

-2523

1968411

3274

1476

3217

2186

54955495

3588

-10000

-8000

-6000

-4000

-2000

0

2000

4000

6000

8000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22

Net/Gross Cashflow Requirements

Cum Net Cashflow(Surplus/Deficit)Requirements

Monthly NetCashflow(Surplus/Deficit)Requirements

CONCLUSIONS•

• Months of Cash deficits /cash requiredMonths 0,1,2,3,4,5,6,7,9,11•

• Maximum Gross cashflow requirements/Overdraft Limit 6 687.00 •

• Project Becomes Self-sustaining after the 11th month•

• Profitability•

• Net Cash Flow = Cash Inflow – Cash Outflow -NCF, Cash Inflow<Cash outflow• Discounted Net Cash Flow = NCF x Discount Factor•

• ARR = Summation of Net Cash Flows 3 588.17 • Investment = 32632

• ROI = (ARR / Investment) * 100 % = 11.00% >R B Repo Rate of about 5.75%•

CASHFLOW IMPROVEMENT

• Make sure payment claims are delivered correct,regularly and on time

• Make sure you receive payments on time• Take advantage of credit provided by suppliers.(30/90 day credit)

• Provide performance guarantee and retention guarantee from banks to save the surety deposit and retention deductions

• Determine the final certificate asap to allow the defects liability period to start and part of the retention released.

EXAMPLEYou are working a company (Salute Consulting firm) as a project manager. Your company has

won a tender bid of R 1 000 000.00 for the construction of septic tank for Rural community hall. The duration of the project is 6 months. You are required to:

(a) Compile an assessment of the expected cash flow requirements of the project based on the details as set below. Use attached Annexure.

(b) Calculate the maximum over draft facilities that the contractor requires.

Cash flow predictions must be based on the ff. assumptions:• • The client requires a performance guarantee (surety )of 5% (in cash) at the

commencement date of the contract• • The cash required as capital will be distributed as follows over the duration of the

project:• - Cash required at the end of 1st month : 15%• - Cash required at the end of 2nd month : 25%• - Cash required at the end of 3rd month : 30%• - Cash required at the end of 4th month : 15%• - Cash required at the end of 5th month : 10%• - Cash required at the end of 6th month : 5%• -• •

EXAMPLE• That income will be based on:• - Value of claim 1st Claim : 10% of the contract value• - Value of claim 2nd Claim : 15% of the contract value• - Value of claim 3rd Claim : 25% of the contract value• - Value of claim 4th Claim : 35% of the contract value• - Value of claim 5th Claim : 10% of the contract value• - Value of claim 6th Claim : 5% of the contract value• -• • 1st claim will be submitted at the end of month 1 and the actual payment for the

contractor will be at the end of month 2.• • A profit margin of 25% being achieved on all work completed throughout the

contract).• • The withholding of 10% retention by the Employer which is reduced to 5% after

month 6.• • Performance guarantee is returned on the date of issuing Completion Certificate.• • Completion is expected to be achieved at the end of the contractual period• • A defect liability of three months is applicable (from the date of issuing

Completion Certificate).

PROJECT CASHFLOWS750 000

PERIOD(Months) 0 1 2 3 4 5 6 7 8 9

CASH INFLOWSValue of Work done(%) 10 15 25 35 10 5Monthly Value of Work done-Planned 100 000 150 000 250 000 350 000 100 000 50 000 Monthly Retention Withheld 10 000 15 000 25 000 - - - - - - Monthly Value of claim-Planned 90 000 135 000 225 000 350 000 100 000 50 000 - - - Returned Surety 50 000 Retention Release 25 000 25 000 Monthly Payment-Actuals 0 90 000 135 000 225 000 350 000 100 000 125 000 - 25 000 Cum.Monthly Payment-Actuals - 90 000 225 000 450 000 800 000 900 000 1 025 000 1 025 000 1 050 000

CASH OUTFLOWSWorking Capital/Cost of Works(%) 15 25 30 15 10 5Working Capital/Cost of Works 112 500 187 500 225 000 112 500 75 000 37 500 Surety 50 000 0 0 0 0 0 0Monthly Cash Required 50 000 112 500 187 500 225 000 112 500 75 000 37 500 Cum Cash Required 50 000 162 500 350 000 575 000 687 500 762 500 800 000 800 000 800 000 800 000

NET CASHFLOW -50 000 -162 500 -260 000 -350 000 -237 500 37 500 100 000 225 000 225 000 250 000

WORKING CAPITAL/COST OF WORKS Working Capital/cost of works(%) x[contract value-profit margin(25%)xcontract value]

(b) Maximum Overdraft R 350 000

Contract value R 1 000 000.00

Construction period 6 months

Retention (initial) 10%Retention Limit 5%

Profit margin 25%Surety 5%