Topic 6 - Cash flow Flashcards
Process of Payment for a project? (steps 1-4)
- Perform work (pay for labor, subcontractros, material, etc)
- Submit a payment request (invoice)
- Owner pays contractor
(according to contract, i.e lump sum, unit price, cost + fee)
-includes retainage (percentage)
-therefore, amount paid = pay request*(1-retainage) - Final payment with retainage
what is retainage
Retainage is the percentage of the billed cost (e.g. 5 or 10%) that is
held by an owner until the entire project is complete.
REVIEW CASH FLOW DIAGRAM
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what is overdraft? What odes it depend on? What are overdraft requirements?
-overdraft is amount by which withdrawals exceed deposits
-Overdraft depends on:
• Amount of markup (or profit) applied to a contractor’s bid
• Amount of retainage withheld by the owner
• Delay between billing and payment by the owner
-Overdraft requirements:
• The contractor must know what is the maximum overdraft that
can be accommodated during a construction project:
• Uses income and expense profiles to asses overdraft limits
• Tabulates expenses and revenues to determine maximum amount
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what is bank line (line of credit)?
Bank’s commitment to finance a particular borrower up to a
specified maximum during a specified period (e.g., a loan for
typically 1 year)
How to offset overdraft?
Some contractors offset the overdraft borrowing requirement by requesting front
(or mobilization) money from the owner. This shifts the position of the revenue
profile so that a reduced (or zero) overdraft occurs (Figure 11.3). Since the owner
is normally considered less of a risk than the contractor, the owner or client can
borrow short-term money at a lower interest rate.
Bank’s Evaluation of Construction Contractors
• High risk borrowers
• If the contractor defaults, the loan is secured only by material
inventories and partially completed construction.
• Charges high interest rates
Cash Flow Analysis Example
review
