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Contractor’s Cash flow

A developer has accepted the quotation from your company to carry out the works to lock up stage for construction of a precast concrete warehouse and Office illustrated on the attached drawing Nos. 1002, 1003A and 1004.
The works include demolition of an existing house and removal of a large steel framed shed:
The contract has been signed and has the following requirements:
Contract Price: One Million Seven Hundred and Three Thousand Dollars $ 1,703,000
Time to complete: 20 months
You have immediate and unrestricted access to site.
You are the project engineer for this job and report to the company General Manager Construction, who has control of the allowances, contingency and profit margin (i.e. 15% mark up included in the Contract Price).

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The chief financial Officer of the company has issued you with the following budget for which you are to control expenditure for the project
Project Budget: $1,407,290 (for works excluding Prime Cost Items)
You also have to control expenditure and invoicing of Prime Cost subcontracts listed in Table 1.
Total Subcontractor Prime Cost payments due
$ 73,710
Ecco Farms
(remove shed)
Demon Demos
(Power line
Local Council
Payment Due Month 4 8 0 20
Amount Due -$ 2,000 $ 15,000 $ 1,500 $ 5,000
Debtor Geoff Jones Plumbing
Payment Due Month 8 12 16
Amount Due $ 4,688 $ 9,375 $ 4,688
Debtor Downtha D rain Constructions
Payment Due Month 4 8 12 16
Amount Due $ 3,546 $ 7,092 $ 10,638 $ 14,184
Table 1: Prime Cost Payment Schedule
Prime Cost (PC) expenditures are for the values and at the intervals indicated in Table 1 above. PC sums are paid by your company to the subcontractor in the month shown in Table 1. Those amounts are then claimed by your company from the Owner in the month due (Table 1) and your company receives payment one month later.
The expected expenditure for the project (without the PC items) follows an ‘S’ Curve (Sigmoid function) with the characteristics listed in Table 2.
The contractor starts work on site at date zero (month 0). At the end of the first month the amount of work completed is measured and agreed with the owner’s representative, a claim is then made for that value of work. Payment of that claim is received by the contractor at the end of the following month. This pattern of doing the work and claiming at monthly intervals continues each month until all contract works are completed. The schedule for the monthly payment claims is set out in Table
2. Prime Cost subcontract payments (not shown in Table 2) form part of the cashflow graph required.
Assignment Requirements – What You Need to Do
Prepare a brief (2 pages) report in Memorandum format to the Construction Manger explaining the Cash
flow expected for this project including the following information
1. Notification of the maximum amount of bridging finance required to cover negative expenditure
and the month at which that will occur.
2. The month in which you expect the project to commence a positive cash flow.
3. Contractors expenses and income as ‘S’ curves on a single graph.
4. Contractor’s Cumulative Cash flow as a graph and in an attached table.
You are working for a construction company and in this assignment you are required to calculate the planned cashflow for a contract. The cashflow will be used by the finance department to arrange project finance from a lender to cover the maximum expenditure. The finance manager also needs to advise the lender (bankers) when that will occur. The lender will also wish to know at what time the project will start to make a profit and how much that will be. Refer to the assignment question for details.

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