Project Cash Flow Forecast, How Much Details You Need During Bidding?

In this article I will discuss the contractors cash flow worst case scenario and how much big risk they have to manage to have a positive cash flow. Some of the figures might give you a shock. The numbers are logical based on the provided works progress percentage.

Construction preliminaries are from 10% to 15% globally in most countries according to International construction market survey 2017 published by Turner & Townsend which includes 43 markets around the world. The average preliminaries cost is 10.8%. In UAE it is 8%. Preliminaries – or general conditions – refer to the set-up costs for a project: site offices, approvals, scaffolding, shop drawings, site security, construction plant, power and consumables.

It is a challenge for contractors to calculate their actual cash flow forecast during bidding. It becomes a detail they might consider it secondary in their goal to win the project. This add a high risk to their operations especially when the project contract price is multimillion digits.

The above image is showing a six months project with a cost of around 12 million. The preliminaries cost for the first month calculated to be around 9.51% (1.16 million) of the estimated tender price.

The calculated expenses and income showed that the contractor will have -6% of cash flow until the completion of the project. That’s the worst-case scenario for real on time payment by contractor for all costs and if he submits the first invoice by end of the first month to receive the first payment on the beginning of the third month (considering 30 days only for payment after submitting the invoice). We did not consider an advance payment of 5% to 10% to show how much risks the contractors might take in no advance payment which is available in most contracts.

The contractor of course never has such scenario. He manages the cost risks through delaying material cost for suppliers and by subcontracting some of the works with back to back payments. This facility might be available to existing known contractors. However, what’s about new ones including small and medium contractors. The photo here might show a real scenario for new contractors and small contractors. Even if the discussed scenario is faced by a main existing contractor, he might have access to loans which will add cost and would be also part of the expenses. Some of the discussed expenses (of course) will be part of the running cost which will be spent even if the contractor will not win the tender. The cost of the OH, some of the plant, some labour, some existing material will be there even if he lose the tender. There are many running cost which make the discussed scenario easier for existing contractor but not for new contractors.

The situation might become worse when the payment is delayed or even the invoices are not submitted on time. Also, if there is any delay in the project work which will delay submitting invoices and delay the payment and extending the negative cash flow more. It might be worse more if there is also a currency fluctuation or multi countries operations like JV and overseas companies or importing material from overseas.

The lesson of all the above, whatever is your scenario, if you will not prepare an honest clear cash flow during bidding stage, you are putting the company in a big risk. It is a must to have it. It is not a detail you ignore because you want to win and think about it later.

Best Wishes for you all

Engr. Ziad Albasir

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