RICS QS & Construction Standards (the Black Book) RICS QS & Construction Standards GN 79/2011

Cash flow forecasting RICS Practice Standards, UK

1st edition, guidance note

This guidance note summarises what cash flow forecasting is, how to
produce a useful forecast and how to use the forecast to assess Cash flow forecasting
progress on site and assist both employers and contractors to analyse
1st edition, guidance note
actual expenditure against forecast expenditure.
Guidance is given on the cash flow of construction contracts (project
cash flows) and not specifically for the cash flows of companies
(organisational cash flow), although many principles do overlap.
Guidance is given under the following headings which map to the
Assessment of Professional Competence (APC):
General Principles (Level 1: Knowing)
Practical Application (Level 2: Doing)
Practical Considerations (Level 3: Doing/Advising)

rics.org/standards rics.org/standards
Cash flow forecasting

RICS guidance note

1st edition (GN 79/2011)
Published by the Royal Institution of Chartered Surveyors (RICS)
Surveyor Court
Westwood Business Park
Coventry CV4 8JE
UK
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No responsibility for loss or damage caused to any person acting or refraining from action as a result of the material included in this publication can be
accepted by the authors or RICS.
Produced by the QS & Construction Professional Group of the Royal Institution of Chartered Surveyors.
ISBN 978 1 84219 687 8
Royal Institution of Chartered Surveyors (RICS) July 2011. Copyright in all or part of this publication rests with RICS, and save by prior consent of
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Contents
Acknowledgments v

RICS guidance notes 1

Introduction 2

1 General principles: Level 1 Knowing 3

1.1 Uses of cash flow forecasts 3

1.1.1 Obtaining loans and bank monitoring 3

1.1.2 Contractor progress monitoring 4

1.1.3 Managing cash within a business 4

1.1.4 Forecasting business performance 4

1.1.5 Stakeholder management 4

1.1.6 Managing consultants resources 5

1.2 Cash flow forecasting and business failure 5

1.3 Standard contracts, methods of valuation and cash flow forecasting 5

1.3.1 Types of valuation 5

1.3.2 The effect of valuation method upon cash flow forecast 6

1.3.3 Contractual procedures 6

1.4 The Construction Acts 1996 and 2009 7

1.5 Curves and formulas 7

1.5.1 S-Curve 8

1.5.2 Advanced cash flow forecasting 9

2 Practical application: Level 2 - Doing 9

2.1 Contractor vs. employers approach to cash flow forecasting 9

2.2 Identifying the employers brief for the cash flow forecast 9

2.3 Project programme start date/end date 10

2.4 Construction and project value 10

2.5 Adjustment for cyclical events 10

2.6 Public holidays (Christmas and Easter) 10

2.7 Retention percentage and period 11

2.8 Rectification period 11

2.9 Certification period 11

CASH FLOW FORECASTING | iii

 2.10 Payment period 12

2.11 Sectional completion and partial possession 12

2.12 Currency 12

2.13 Variations 12

2.14 Forecasting risk allowance and spend 13

2.15 Provisional sums 13

2.16 Fees and other development costs 13

2.16.1 Consultant fees 13

2.16.2 Direct contracts 13

2.16.3 VAT and other taxes 13

2.16.4 Internal costs and transfers 14

2.17 Materials on and off site 14

2.17.1 Materials on site 14

2.17.2 Materials off site 14

2.18 Input from specialists 14

2.19 The need for regular adjustments to reflect progress and events on site 14

2.20 Effect of delays 15

3 Practical considerations: Level 3 Doing/Advising 16

3.1 Cash flow representation 16

3.2 Reasons for variances to cash flow 16

3.3 Actions to be taken when variances occur 17

3.4 Items for consideration when analysing cash flow forecast 17

3.5 Risk factors inherent in construction cash flow forecasting 18

3.6 Effect of claims and loss and expense and liquidated damages 18

3.6.1 Claims for loss and expense from contractor 18

3.6.2 Liquidated damages 18

3.7 Re-sequencing and acceleration 19

3.8 Effect of VAT 19

3.9 Effect of alternative procurement routes 19

3.9.1 Traditional versus Design and build and cost reimbursable/target costs 19

3.9.2 Construction management (and other package based procurement routes) 19

3.10 General considerations 20

iv | CASH FLOW FORECASTING

Acknowledgments
RICS would like to thank the following for their
contributions to this guidance note:

Lead author
James Garner (Gleeds Cost Management Limited)

Contributor
David Benge (Gleeds Cost Management Limited)

Working Group
Chair: Andrew Smith (Laing ORourke)

Alpesh Patel (APC Coach Ltd)

Christopher Green (Capita Symonds Ltd)

David Cohen (Amicus Development Solutions)

Duncan Cartlidge (Duncan Cartlidge Associates)

Jim Molloy (Department of Health, Social Services

and Public Safety NI)

John G Campbell (BAM Construction Limited)

Kevin Whitehead (McBains Cooper Consulting

Limited)

Michael T OConnor (Carillion Construction Limited)

Michelle Murray (Turner & Townsend plc)

Roy Morledge (Nottingham Trent University)

Stuart Earl (Gleeds Cost Management Limited)

CASH FLOW FORECASTING | v

vi | CASH FLOW FORECASTING
RICS guidance notes
This is a guidance note. It provides advice
to RICS members on aspects of their work.
Where procedures are recommended for
specific professional tasks, these are intended
to represent best practice, i.e. procedures
which in the opinion of RICS meet a high
standard of professional competence.
Although members are not required to follow
the advice and recommendations contained in
the note, they should note the following points.

When an allegation of professional negligence is

made against a surveyor, a court or tribunal is likely
to take account of the contents of any relevant
guidance notes published by RICS in deciding
whether or not the member had acted with
reasonable competence.

In the opinion of RICS, a member conforming

to the practices recommended in this note
should have at least a partial defence to an
allegation of negligence if they have followed
those practices. However, members have the
responsibility of deciding when it is inappropriate
to follow the guidance.

Alternatively, it does not follow that members will

be found negligent if they have not followed the
practices recommended in this note. It is for each
surveyor to decide on the appropriate procedure
to follow in any professional task. However,
where members do not comply with the practice
recommended in this note, they should do so only
for a good reason. In the event of a legal dispute,
a court or tribunal may require them to explain
why they decided not to adopt the recommended
practice. Also, if members have not followed this
guidance, and their actions are questioned in
an RICS disciplinary case, they will be asked to
explain the actions they did take and this may be
taken into account by the Panel.

In addition, guidance notes are relevant to

professional competence in that each member
should be up to date and should have knowledge
of guidance notes within a reasonable time of their
coming into effect.

CASH FLOW FORECASTING | 1

Introduction
This guidance notes summarises what cash flow Guidance is given in relation to the main forms of
forecasting is, how to produce a useful forecast contract and main procurement routes, under the
and how to then use the forecast to assess following headings, which map to the Assessment
progress on site as well as other issues, and to of Professional Competence (APC):
assist both employers and contractors to analyse
actual expenditure against forecast expenditure. General principles (Level 1: Knowing)
Practical application (Level 2: Doing)
For the purposes of giving guidance the client
is referred to as the employer and the main Practical considerations (Level 3: Doing/
contractor as contractor. However, much of the Advising)
guidance can equally be applied to a contractor/
Minimum level of service
sub-contractor or supplier arrangement.

This guidance note generally gives guidance on The quantity surveyor is expected to fulfil the
the cash flow of construction contracts (project following duties, notwithstanding the detailed terms
cash flows) and not specifically for the cash flows of any appointment or contractual obligation:
of companies (organisational cash flow), although
there are many principles that do overlap. Take an initial brief from the employer to
understand their requirements for a cash
Cash flow is the lifeblood of the construction flow forecast.
industry and relates to the incoming or outgoing of
Produce an initial cash flow forecast at the
money to or from a company over a given period
feasibility stage to give the employer an
(usually monthly). Within construction contracts
understanding of their likely obligations.
a cash flow forecast is generally used to inform
the employer so that they know what and when Update the cash flow forecast throughout the
their monetary commitments under the contract design, tendering and contract period.
will be. They can be in the form of long-term or Monitor actual payments against the cash flow
short-term forecasts and these forecasts should forecast and explain any discrepancies.
be constantly updated and revised as better, more
accurate information becomes available or when
variations to the model occur (i.e. non-expenditure
of provisional sums, claims, extension of times).

2 | CASH FLOW FORECASTING

1 General Principles: Level 1 Knowing
Guidance is given in this section in respect of what etc.) and other fees (fit-out costs, VAT, etc.) for an
purposes cash flow forecasts are used for; their overall project cash (see Table 1).
usefulness in terms of running a business and
predicting business failure; the various contractual Table 1: Potential directions of cash flow
mechanisms for dealing with cash flows; the
From Employer Main Sub
relevant legislative items and the formulas
contractor contractors
or curves used to predict the cash flow for
To Main Sub Suppliers
construction projects.
contractor contractors
Consultants Suppliers Specialist
1.1 Uses of cash flow forecasts
Specialist HM
contractors Revenue &
There are two main types of cash flow forecast:
Customs
The cash flow forecast of a company (i.e. a HM Revenue Designers
contractor or consultant) otherwise known & Customs
as organisational cash flow. Direct
T
he cash flow forecast of a particular appointments
construction contract or project otherwise
known as project cash flow. The following list is not exhaustive but aims to
The cash flow forecast of a company will review illustrate some of the common usages of cash
and analyse the predicted incoming and outgoing flow forecasts:
cash for a set period of time (usually a year) and is
often used for business and resource planning and 1.1.1 Obtaining loans and bank monitoring
for analysing the financial health of companies. In simple terms the purpose of a cash flow
The cash flow forecast of a construction contract forecast is to ensure that the employer has an
or project deals specifically with the payments accurate assessment of what needs to be paid to
due under a particular construction contract. the contractor and at what periods, therefore the
The construction contract cash flow will often employers bank or funder needs to be aware of
inform a companys overall cash flow as they are draw-downs to manage the movement of funds
intrinsically linked. to meet the contractual timescales of payment.
Although especially important for developers and
It is important to understand both types of cash
clients if they are obtaining debt finance (loans) to
flow forecast and how and why they are used
fund their projects, it is also important if they are
within the construction industry.
using their own money. It is not uncommon for
Various parties within a construction contract use banks and other funders to request a drawdown
cash flow forecasts for different reasons and it schedule at the beginning of any project. If an
is therefore not uncommon to present cash flow employer has money (equity) this may be tied up in
forecasts in different ways to fit the requirement. It other assets or dependent on in-coming
is also important to note that cash flow can travel cash flow (revenue).
in different directions, but for the purposes of this
guidance note any reference to cash flow shall Banks will often employ bank monitoring
mean the cash flow from the employer to the main specialists (often quantity surveyors) to ensure
contractor unless otherwise stated. that the contractors drawdown requests are in
line with the original cash flow forecast and to
Other directions of cash flow to consider are provide an explanation if it differs. The business
the main contractors cash flow to their sub- case of projects can be linked to the funding terms
contractors and suppliers, the employers cash flow received from their funder and a deviation to this
to consultants (i.e. architect and quantity surveyor, agreement can have a significant effect on the

CASH FLOW FORECASTING | 3

overall business case. The employer can be liable 1.1.3 Managing cash within a business
for penalties, interest charges and arrangement It has been regularly stated that cash is the
fees for securing an accelerated fund, from their lifeblood of the construction industry.
funder if the drawdown is markedly less or in
excess of the drawdown schedule. Cash drives all businesses and the management
of the flow of cash in and out of a business is
1.1.2 Contractor progress monitoring essentially to the survival of any company. It is
Perhaps the most common use of a cash flow also important for sole practitioners for their own
forecast for a quantity surveyor is to monitor the business planning and forecasting.
progress of the works on site against the agreed The payment terms of most contracts means that
programme. At the point of entering into contract work is usually paid in arrears so it is important that
with the contractor the employer will often ask contractors and consultants understand what their
for a cash flow forecast based on the agreed liabilities are and when they are likely to be paid.
programme. Overdrafts with banks are often used to manage
It is equally important that this done between the any shortfalls but delays in payments, disputes
main contractor and their subcontractors. This with clients or renegotiation of overdraft terms can
becomes more accurate than using an S-curve as have disastrous consequences to the future of
it is based on an agreed sequence of events rather businesses.
than a formula. It is also therefore very useful in
assessing whether a contractor is on programme
1.1.4 Forecasting business performance
or not. If the interim valuations are ahead of cash Before appointing any company (whether a
flow then this can signify that the works are ahead contractor or a consultant) it is crucial that their
of programme. If the interim valuations are behind past and likely future performance is carefully
cash flow then this can signify that the works analysed. An organisational cash flow forecast is
are behind programme. It should be noted that particularly useful in predicting how a business
monitoring against a cash flow forecast can only will be performing in the future and whether they
be taken as indicative. The most accurate form will be able to adequately cope with the works
of measurement is always a physical assessment being considered. It is also prudent to check the
of the works carried out on site versus the company cash flow of any key subcontractor or
programme. supplier being proposed.

The cash flow forecast can also be used internally Some of the key details to review are the overdraft
by contractors to monitor their own progress (or level, the frequency that the business is using the
subcontractors progress) or used to assess the overdraft facility and the potential effect if the bank
movement of any float within the programme. removed the overdraft facility. It is also important to
review the companys largest clients and analyse
It takes on extra significance for NEC contracts, the effect of a reduction or omission of business
as the programme and activity schedules are from one or more of these. It is a simple equation
specifically referenced within the contract that must be reviewed is the business bringing
conditions. Therefore, cash flow forecasts that are in as much money (revenue) as it is spending
produced in accordance with these documents, (expenditure)?
can be used by the project manager to assess
any compensation events, early warnings or 1.1.5 Stakeholder management
programme revisions before accepting them. There are very often third parties or stakeholders
While cash flow forecasts can be used to monitor who have a vested interested in the cash flow of
progress on site, both the preparation of the a company or construction contract and often
cash flow forecasts and the valuation have to be for very different reasons. Funders will want to
accurate to ensure comparisons are valid. It goes know that a business is sound and solvent before
without saying that the further along the design and agreeing to loans. Shareholders will be interested
tender process the project is the more detailed and in company performance and ensuring that their
accurate the cash flow forecast will become. annual dividends are as high as possible. This
may impact a companys ability to make decisions

4 | CASH FLOW FORECASTING

for the long term of the company in expense of 1.2 Cash flow forecasting
the short terms profits for the shareholders.The and business failure
construction contract cash flow will feed into the
overall company cash flow forecast and any errors
It is important to understand that just because a
or slippage in a particular project cash flow could
business is successful or profitable it does not
have an effect upon the companys overall cash
mean that it cannot have cash flow problems.
flow and performance.
Some very successful and profitable companies
Banks, local authorities and other guarantors have ended in business failure due to inability to
will often fund construction contracts and they manage cash flow adequately. Many contractors
will often want to review the cash flow forecast have entered administration simply due to short-
of a construction contract. Employers who are term inabilities to meet current liabilities. This may
dependent upon debt finance for their projects will be due to late payments from clients, tying up too
be especially interested in reviewing and vetting the much capital in assets (known as cash-farming) or
cash flow forecast before entering into contract, as withdrawal of overdraft facilities from funders.
any errors in the cash flow forecast could leave the
The quantity surveyor can assess the cash flow
client in a situation where they are unable to meet
forecast of a company before selecting tenderers
their liabilities for a certain period.
for a project.
1.1.6 Managing consultants resources
Cash flow forecasts are often used within a
1.3 Standard contracts, methods of
company to manage resources. Resources may valuation and cash flow forecasting
include staff, training, equipment, premises, etc.
Companies must be sure that they can meet the 1.3.1 Types of valuation
liabilities in terms of wages, insurances and other
Each of the standard forms of contract has different
overheads before employing additional staff. An
methods of valuing the work for the purposes of
organisational cash flow forecast can help to inform
an interim payment. Some forms include options,
these decision making processes. There is often
which have to be chosen by the employer and
a fine balance to be struck between adequately
resourcing for a given period and over committing.
Table 2: The different types of period
payment mechanisms

Type of payment Description Accuracy

1 Stage payments Pre-agreed amounts are paid Provides high predictability of
at pre-set times regardless of cash flow but low accuracy of
progress on site value of works done to date
2 Milestone payments Pre-agreed amounts are paid Provides high predictability of
upon completion of pre-agreed payments but low predictability
elements of when they may become due.
3 Payment against an activity At pre-agreed timescales Provides reasonable predictability
schedule progress against an activity of cash flow forecast but only
schedule is monitored and pre reasonable accuracy of value of
agreed payments are made works done to date
for activities which have been
completed
4 Valuation of works done to date At pre-agreed periods the value Provides lowest predictability
on site (3rd party certification) of work on site is assessed of cash flow forecast but high
accuracy of value of works done
to date

CASH FLOW FORECASTING | 5

agreed by the contractor before entering into only. Therefore there may be a time lag between
contract. completion of an activity under an NEC Activity
Schedule and recognition of that completed
There are four main methods of valuing the activity, whereas with a milestone payment a
work, with an inherent trade-off between the contractor can ask for certification once the
predictability of cash flow forecast and accuracy of milestone is complete.
the value of works carried out to date (see Table 2
and Figure 1). 1.3.2.4 Third party certification
This is when a third party (usually the quantity
1.3.2 The effect of valuation method upon
surveyor) measures and values the works carried
cash flow forecast out to date by visiting sites and assessing the
1.3.2.1 Stage payments value of preliminaries, works carried out, materials
Stage payments are often used under design and on-site, materials off site (if applicable), and any
build contracts and are effectively pre-agreed instructed variations. This provides the most
values to be paid to the contractor at pre- accurate assessment of works carried out on site
determined times. These are not tied to milestones to date.
and are the least accurate assessment of works 1.3.2.5 Actual Cost/Target Cost
carried out on site. There is a benefit to the
If an Actual Cost/Target Cost contract (such as
employer in knowing the exact amount due at any
NEC ECC Options C and D) is used, and if both
given time but this increases the risk of overpaying
parties agree, then the monthly valuations are
(or indeed underpaying) the contractor. A valuation
assessed by ascertaining the contactors actual
of works done on site could therefore be very
costs plus any agreed fee percentages. This can be
different to a third party certification if they are not
carried out by reviewing actual invoices. It should
tied to milestones.
be noted that these are not lump sum contracts
and there is a risk that actual costs could exceed
1.3.2.2 Milestone payments the target cost.
Milestone payments are a type of stage payment
Figure 1: Illustration showing trade-off between
but instead of being triggered by reaching a given
accuracy of the cash flow forecast and
date, payment is triggered by completing a pre-
accuracy of the valuation of works carried out
agreed milestone. In its simplest form this could
on site
constitute a single payment at the completion
of the building, but more likely they will be tied Accuracy of
to elements (e.g. completion of foundations, cash flow
forecast
completion of frame, etc). It is also possible to be Stage payment

very prescriptive and have milestones payments

Milestone payments
associated with sub-sections of elements (e.g.
completion of laying rebar to first floor). The
more prescriptive the milestone payments the Activity schedules

more accurate the assessment of works will be.

However, this inevitably leads to a less accurate 3rd party certificate

predictability of the cash flow.

Accuracy of
1.3.3.3 Activity schedules valuations

The NEC Option A and Option C includes the

requirement for an activity schedule, which is 1.3.3 Contractual procedures
a form of milestone payment. The fundamental Different forms of contract have different timescales
difference is that milestone payments are made between application and payment. All of these
when the particular milestone is complete, whereas factors must be considered when producing a
an activity schedule is assessed at regular intervals cash flow forecast. It is also worth noting that
and payment made against completed activities amendment to contracts may change the standard

6 | CASH FLOW FORECASTING

timescales and these should be checked before durations if the parties agree.
producing the cash flow forecast. Parties are free to agree the amounts for
payment and the intervals.
1.4 The Construction Act 1996 and Every construction contract has to provide
2009 a mechanism to determine what payment
becomes due and when, and a final date for
Otherwise known as the The Construction payment. This has to be agreed between the
Act, The Housing Grants, Construction and parties.
Regeneration Act (HGCRA) 1996 fundamentally Payment can no longer be conditional on the
attempted to improve payment practices in the performance of obligations under another
construction industry by improving cash flow and contract. Therefore performance on another
helping to resolve disputes quicker. Its effect on contract cannot effect the payment entitlement
cash flow forecasting was profound as it set the under the contract.
following rules in law:
A
mechanism now has to be in place for
Providing the right to interim, periodic or stage determining who should give notice of payment
payments. due (either the employer or contractor) and
Requiring that contracts should provide a the basis on how the sum is calculated has
mechanism to determine what payments also been made clearer. The Act has been
become due and when, and a final date for amended to ensure the employer pays what is
payment. due before the due date unless they give notice
with reasons why now, or if they believe the
R
equiring that the payer gives the payee early contractor is insolvent. If the employer fails to
communication of the amount he has paid or pay and does not give notice in accordance
proposes to pay. with the act, or if the contractor is not insolvent
P
roviding that the payer may not withhold then the contractor can suspend the works.
money from the sum due unless he has given  owever, this right ends when payment is made
H
an effective withholding notice to the payee. in full by the employer (albeit any costs and
Providing that the payee may suspend expenses are to be paid by the employer).
performance where a sum due is not paid in full
by the final date for payment. The requirement for adjudication in the event
that the parties cannot agree the payment
Prohibiting pay when paid clauses that link amount remains.
payment to payments received by the payer
under a separate contract.
1.5 Curves and formulae
Providing a statutory right to refer disputes
to adjudication. The adjudicators decision
Cash flow curves and formulae are often used early
is binding until finally determined by legal
in the design process to give employers a guide as
proceedings or arbitration at the end of the
to the predicted cash flow forecast. This is usually
contract.
before a contractor has been appointed; therefore
Source: CIOB Construction Act Reform Improving an agreed programme or activity schedule cannot
payment practices in the construction industry be used to inform the cash flow forecast. The
employer may want a guide to the cash flow early
The Construction Act was updated by the in the process to assist with funding agreements
Local Democracy, Economic Development and and also to assist in procurement and contract
Construction Act 2009 (which received royal assent choice. Different procurement routes and contracts
on 12 November 2009). may result in different contract sums but equally
The Act now applies to all construction they may also result in different cash flow profiles.
contracts whether they are in writing or not. It is therefore entirely feasible that a higher contract
The requirement for payments to be by sum with a more generous cash flow profile may
installments is un-amended as long as the be favourable to an employer with regards to their
contract period of 45 days or more, or for lesser overall business case.

CASH FLOW FORECASTING | 7

1.5.1 S-Curve quantity surveyors but alternative formulae are now
also available. Its reliability must be considered,
The S-curve stands for standard curve but it also particularly its original intended use and age, when
takes the shape of the letter S when shown on producing a cash flow forecast.
a graph (see Figure 2). This represents the lower
level of periodic expenditure at the beginning 1.5.1.2 Other special curve
of a contact (due to site set up and relatively
Many firms (such as quantity surveyors, project
inexpensive enabling works) and the lower level of
managers and developers) have their own special
expenditure at the end of a contact (due to the vast
curve formulas, which represent their own specific
majority of materials being on site, reduced number
field. There are no hard and fast rules about what
of trades on site and reduction of contractors staff
is needed to create an S-curve as long as the
overhead). These S-curves are ascertained by
benchmarked projects are suitable and the basis of
formula, which uses data from previously similar
the model is explained to the employer.
construction projects.
Figure 2: An S-curve 1.5.1.3 Computer modeling
In recent times more advanced computer models
% Planned 100
cost and simulations have been used to produce cash
flow forecasts. However, these are still based on
80
the same principles as the S-curves but provide
60
more flexibility in terms their ability to analyse the
sensitivity of the variables.
40
1.5.2 Advanced cash flow forecasting
20 Once the project has been tendered or a contract
has been entered into with the contractor then the
0
0 20 40 60 80 100 120
cash flow forecasting can become more accurate.
If the contract is for stage payments of milestone
% Planned time payments then it becomes relatively simple to plot
Bromilows s curve using Balkau (1975) constants this information and create an accurate cash flow
forecast. For third party certification contracts the
1.5.1.1 DHSS contractors programme and pricing document
The DHSS Expenditure Forecasting was created (whether builders quantities or a bill of quantities)
by KW Hudson for the Department of Health and can be used to provide a more accurate cash flow
Social Security for forecasting expenditure on forecast. While it is feasible to predict the cash flow
capital projects, particularly for hospital projects. by relating the pricing document to the programme
It is in no way limited to hospital projects and has this can be very time consuming and the accuracy
become one of the most popular formulae for is often no better than using an industry S-curve
deriving S-curves. It is still widely used today by formula.

8 | CASH FLOW FORECASTING

2 Practical application: Level 2 Doing
This section looks in more detail at the practical Is it for the employer or contractor?
applications of producing a cash flow forecast and S
hould it be produced for the whole
the information required to improve the accuracy development or just the construction contract?
of the forecast. This section deals specifically with
cash flow forecasting at construction project level S
hould it show values at valuation date,
(see Figure 3) but many of the principles will equally certificate date, invoice date or payment date?
apply to organisational cash flow forecasting. Should gross or net values be used?
Should it show cumulative payments, monthly
Wherever possible the cash flow forecast should
payments or both?
be written in conjunction with the main contractor
who will often be able to provide more detailed and Different construction contracts have different
specific information, although it is recognised that payment terms and time-scales, which have a
this will often not be possible at the early stages of significant impact on the cash flow profile of a
a project. project. It is always important to check whether the
employer intends to amend contracts to provide
A differential must also be made between the different payment periods for the employer.
overall cash flow profiles for a project which
Figure 3: An example cash flow for a typical
will be the accumulation of a number of separate
construction project
cash flow profiles for the many cost centres within
a project (see Figure 4). Cumulative
value

2.1 Contractor versus employers pc

end of
defects

approach to cash flow forecasting

period

It should be noted that there is generally a

difference in the approach to producing a cash flow
forecast between an employer and a contractor. Mobilisation
Different considerations will be important to each Payment
date
party, in terms of payment dates and presentation
of the cash flow forecast, and some issues will Cash flow throughout construction contract to the
end of the defect period
not be applicable or will differ between one party
and another (i.e. the employer may hold retention Figure 4: The cumulative development cash flow
against the contractor, but the contractor may not
hold retention against their subcontractors). The Cumulative
value
remainder of this section does not differentiate
explicitly between these different approaches. The Pre-contract
Mobilisation and
construction Defects period

user of the cash flow forecast should be kept in

mind when reviewing the following sections.

2.2 Identifying the employers brief for

the cash flow forecast

Before undertaking a cash flow forecast it is

imperative that a brief is taken from the employer Time
to make certain that it provides the information
s
rks ng
t

rio t
es rac

lia fect
pe trac

pe ility
wo itati

d
Fe on

that the employer requires. The following are an

De
n

b
rio
Co
cil
C
e-

Fa
Pr

examples of the types of questions that should Cumulative development cashflow

be asked:

CASH FLOW FORECASTING | 9

An employer must decide whether the cash flow the light fittings will be installed. The overall value
forecast is to show the valuation date, certificate therefore needs to be weighted to give a more
date, invoice date or actual payment date. accurate reflection. This can be said for a lot of
Whatever is decided must be clearly noted in the packages that have high value items contained
cash flow forecast; otherwise a problem could within a longer programme. The quantity surveyor
arise if the employer assumed that the valuation should have an adequate understanding of building
date was shown when it was actually showing the processes to be able to provide a confident and
payment date. The time lag between the valuation accurate cash flow forecast.
date and payment date could leave the employer
short of the necessary funds. 2.5 Adjustment for cyclical events
(holiday periods, industry shut downs,
2.3 Project programme start date/ winter working, etc.)
end date
When plotting the time data from the programme
The current design status of a project will dictate
any cyclical events which will affect progress
the level of accuracy of the programme. At the
on site, must be taken into account. The most
early stages of a project it may be no more than
common of these events will be Christmas, Easter
an aspiration date, but by the time the contractor
and other statutory public holidays, but may also
is appointed the programme should be developed
include project specific events (i.e. examination
to quite an advanced stage. It is always worth
periods for schools or colleges).
investigating the programme as much as possible
as the usefulness and accuracy of any cash flow Certain sensitive projects may require work to be
forecast relies on the quality of the information carried out during nights or only at weekends and
fed into it. Even at an early design stage it may this may also need to be factored into the forecast.
be worth asking for contractor input to the
programme. Less predictable events (such as the effect of
adverse weather in the winter months) are harder to
There may be separate enabling works and main input into the forecast, but the overall programme
works contracts and these may even overlap in should attempt to take seasonal variations into
some scenarios. If any of the separate contacts account.
are of substantial value then it is worth producing
separate cash flows and merging the data to
produce an overall development cash flow. 2.6 Public holidays (Christmas
and Easter)
2.4 Construction and project value
Although Christmas and Easter are mentioned
The value of a cash flow can either be produced above it is worth reviewing these periods in greater
based on the construction contract value or the detail as they have such as significant impact on
overall project value. The construction contract the cash flow profile of a project. The construction
value will be the amount due to the main contractor industry, and in particular subcontractors and
only and will not include elements such as fees, suppliers tend to shut down for two weeks over the
VAT, direct contracts, etc. Therefore a discussion Christmas period, however, the effect of this can
should be held with the employer (or any person have a more lasting effect upon the cash flow of a
requesting the cash flow forecast) to ensure that it project. Valuations may have to be made slightly
contains the necessary information. earlier in December so as not to clash with the
shut down period. The payment date in January
It is important to understand the subcontractors will therefore often be a week or so earlier than
trades and how their package value is spread. anticipated. This relatively minor adjustment will not
Taking electrical services as an example, work will make a huge difference to an indicative cash flow
traditionally involve first fix works (containment and forecast at an early stage of a project, but could
cabling) in the early period of their programme. have a significant impact if a client is relying on
This will be followed by the delivery of big price drawdowns from a funder on the basis of a cash
equipment (e.g. Switchgear) and then finally, flow forecast.

10 | CASH FLOW FORECASTING

2.7 Retention percentage and period Figure 5: Graph showing the effect of payment
at the end of rectification period
Most standard forms of construction contract Cumulative
include a provision for retention to be held on value

each payment of a project. The retention is usually PC End of

a percentage of the construction value, usually rectification
period
around three to five per cent, but can be a fixed
sum. A proportion of the retention is usually
returned at the point of practical completion with
the remainder due to the contractor at the end of
the defect liability period (or defects period). This
period is usually 12 months but can be whatever
the parties to the contract agree it to be.
Time
An accurate cash flow forecast will have to take PC

account of retention, especially when showing

the net payment at the end of each month. It will There may be circumstances where defects, which
also mean that there will be a long period between are not corrected by the contractor in a timely
practical completion and the final certificate where manner are carried out by an alternative contractor,
the cash flow is static, with a final jump at the procured directly by the employer and the cost of
end, which signals the return of the final part of the work is offset against the remaining retention.
retention. The graph below shows this in graphical
format.
2.9 Certification period (delay from
valuation to certificate)
2.8 Rectification period
Sometimes referred to as defects liability period, This refers to the period between the third party
most contracts include a mechanism for retaining a (usually the quantity surveyor) issuing the valuation
portion of retention after practical completion of the (or recommendation for payment) and the payment
project (usually for 12 months). The result of this certificate being issued. It should be noted that
mechanism strongly affects the cash flow forecast, the value shown on the valuation and payment
as a large proportion of the retention (usually half) certificate could differ if the contract administrator
is kept with the employer for a long period after deems that works have not been carried out
practical completion (see Figure 5). in accordance with the contract. It is therefore
important to use the certificate values when
For example, on a 10,000,000 project with three
plotting actual payments against the forecast,
per cent retention, half of which is returned at
as opposed to the valuation amounts.
practical completion, the client will retain 150,000
for a long period after practical completion. A schedule of interim certificate dates should be
This information is especially important for the listed up to one month after practical completion.
contractor, managing their organisational cash From these the contractor may provide an
flow to ensure they have properly taken account application for payment no later than seven
of the retention held. Most contractors simply days before the date for issue of the interim
pass this same mechanism to their subcontractors certificate. While it is standard practice for the
and suppliers but this still means that somewhere main contractor to submit interim valuations to
along the chain a substantial lag will appear before the quantity surveyor, the contract does not make
payment is made. this an obligation and the quantity surveyor is
ultimately responsible for valuing the works, with
the schedule of interim certificate dates being the
key dates in the process.

CASH FLOW FORECASTING | 11

2.10 Payment period (delay from 2.12 Currency
certificate to payment)
Although it may seem obvious it is clearly important
The payment period is the time lag between the to identify the currency of contract or cash flow
payment certificate being issued and the payment forecast, particularly when dealing with employers
being made. The standard time lag is normally or contractors based overseas. The consequences
14 days in a standard form of contract but can of such a misunderstanding can be disastrous and
substantially differ if client amendments have been clearly should be avoided.
made to the contract.
Currency also plays a bigger part in terms of
The information used for the cash flow forecast will exchange rates for employers paying from a
have a significant impact on the results so care must different source. The employer may rely on the cash
be taken when inputting timescales on the cash flow flow forecast to change monies into the currency
forecast. of the contract. Changing more than is actually
required at a given date may not be advantageous
2.11 Sectional completion and partial to the client, particularly if the exchange rate is not
possession beneficial to the employer.

Most contracts include a mechanism for either If the project includes materials from other
pre-determined parts of the building to be handed countries then this may affect the contractors
over early (sectional completion) or for previously outward cash flow to the suppliers and
undefined areas to be handed over with the subcontractors, principally if the contracts with
contractors consent if they are completed earlier these subcontractors and suppliers are dependent
than planned (partial possession). If sectional on the exchange rate.
completion is used then it will be relatively
straightforward to factor this information into 2.13 Variations
the cash flow forecast, as dates will be included
against each of the sections within the contract.
Each of these sections will have their own unique Most contracts have a means for allowing
completion dates and retention amounts and variations to the contract, which will change the
periods. This means each section will have its own amount due to the contractor. The cash flow
unique S-curve. The easiest way to deal with this is forecast should therefore make some attempt to
to produce a separate cash flow for each section, include for likely spend on variations. The identified
based on its unique information, and merge them risk allowance can be used for this exercise. If
together to give an overall cash flow. a priced risk register has been produced for the
project then the value of this should be included
The time lag between completed sections will have
in the cash flow. However, if the risk allowance is
an effect on the profile of the overall cash flow. If
all sections complete within a few weeks of each based on a percentage then this should also be
other then it will not have a significant impact on included in the forecast.
the overall development cash flow. If a section As well as having an effect on the price of the
completes significantly earlier than others (i.e. say contract, a variation may also affect the programme
a school has a block finished 12 months earlier than
of the contract. In fact, a variation may have no
the rest of the school), then this will clearly have a
effect on the contract value but could increase the
rather more marked impact.
programme. If the risk allowance is included within
Different sectional completion elements may also the forecast then the employer should be made
have individual retention releases (relative to their aware that the programme effects of any variations
value) and this should be incorporated into the cash are not factored in, as they will be unknown.
flow forecast.

12 | CASH FLOW FORECASTING

2.14 Forecasting risk allowance spend 2.16.1 Consultants fees
Consultants fees will have a unique cash flow
The New Rules of Measurement for Estimating and profile, which will spread over a far longer
Cost Planning calls for risks to be split between period than the construction contract period.
four categories: This is because the appointment of the design
team can take place months or years before the
Design development risks contractor is appointed.
Construction risks It can be predicted on an S-curve over
Employer change risks, and the length of the development in the early
stages but once a full fee schedule has been
Employer other risks. developed this should be used to inform the fee
At early stages it will often be expressed as a cash flow forecast with dates of appointment
percentage of the construction total, in which case used to generate the cash flow. Often
it can just be fed into the standard S-curve. consultants will provide their own cash flow
forecasts as part of their bid.
For a more detailed and accurate cash flow As well as the core design team (QS, Architect,
forecast the priced project risk register should Structural, Services) other fees (such as
be used to produce a cash flow profile. The risk acoustician, party wall surveyor, etc.) will need
spend can therefore be fed into the overall project to be taken account of to give an accurate cash
cash flow. This can be done by applying close out flow forecast.
dates to each of the risks on the register and these Fees are often included with the contract value
can be used as the assumed expenditure points for of a design and build contract. This must be
each risk. considered when putting together both cash
flows to work out which pot they sit in.
2.15 Provisional sums When producing an overall development cash
flow then the payment terms of the different
It is not always clear when a provisional sum is to cost centres must also be taken into account.
be expended, especially for undefined provisional
sums. Provisional sums will also usually not be 2.16.2 Direct contracts
instructed and agreed at exactly the same amount Examples
 of other direct contracts could
as the provisional sum within the contract sum (i.e. include the loose furniture, fittings and
the actual amount on the contract administrators equipment works, enabling works, decanting
certificate is likely to be at least slightly different works or even demolition works.
to the provisional sum within the contract sum). It
is also not uncommon for them to be substantially 2.16.3 VAT and other taxes
more (or less). VAT is a complex area and payment terms to
the HMRC are complex.
While a cash flow forecast may include the value
of the provisional sum within it there is clearly an See section 3 for more details of VAT.
associated risk. The risk of each of the provisional
sums being over (or under) should be added to the 2.16.4 Internal costs and transfers
risk register and factored into the risk spend profile. Some companies have to provide internal
transfers between different departments
2.16 Fees and other development costs or internal companies. This can often be
particularly difficult to predict as the information
on payment terms and structures is often
As described in section 2.4, a cash flow forecast
sensitive information, which is not given out
will often be based on the construction contract
easily. It should be noted that although an
value. If the client required a full development cash
internal transfer or payment may seem like a
flow then other cost centres will also need to be
simple exercise with little effect to the employer,
added to the overall cash flow profile. The following
these kinds of arrangements and payments can
list is an example of other cost centres and is not
often be the most difficult and sensitive
exhaustive.
to overcome.

CASH FLOW FORECASTING | 13

2.17 Materials on and off site 2.18 Input from specialists

2.17.1 Materials on site While S-curves can do a good job of predicting

the cash flow forecast for a standard development
Materials on site generally will not affect the
type, their use is diminished when dealing with very
cash flow forecast, unless the contractor is
bespoke, specialist or complicated projects. In
bringing on more materials than envisaged. This
these situations specialist advice may be required
may be a cause for concern on its own merits
to ascertain the effect on cash flow. An example of
in relation to contractor insolvency. The quantity
this may be the building of a nuclear power plant,
surveyor should not allow payment to be made
whereby the construction of the actual technical
for materials which are brought onto site well
facilities may be a significant percentage of the
in advance just to boost the contractors cash
cost of construction. In this situation a proper
flow. A cash flow forecast should be carried
out on the assumption that materials will be understanding of the techniques involved would
brought onto site as and when required unless be needed from a specialist before undertaking the
otherwise stated. cash flow forecast.

There may be occasions when materials do

have to be on site well in advance of use in
2.19 The need for regular adjustments
the construction. This may be, for example, to reflect progress and events on site
to reduce delivery costs for a product from
abroad by bringing all shipments in and storing A recurring theme of all the above points is the use
them, or if there is general concern regarding of a cash flow forecast as an iterative exercise that
availability of supplies and the contractor should be adapted and amended throughout the
wants to secure these. These issues should be development project as more detailed information
considered early on and amendment should be becomes available. The early cash flow forecast
made to the cash flow. may be produced on an S-curve basis, but detailed
design will give more information; and once a
2.17.2 Materials off site contract has been signed with the contractor
M
aterials off site can be a complicated subject an employer should have a fairly accurate
and can have a significant impact on the cash representation of their likely payments.
flow forecast. If materials off site are agreed for
any element on a contract then the cash flow Even this should not be the conclusion of the
forecast should be revised accordingly. Taking exercise and the cash flow forecast should
the use of bathroom pods as an example, on continue to be monitored and updated to reflect
a typical project the costs of the bathrooms the following; all of which will be likely to affect the
would be payable as the individual bathrooms profile of the cash flow:
become complete. However, if pre-fabricated actual progress on site (in front or behind cash
bathroom pods were used and materials off site flow)
were allowable, then payment for them may
become due much earlier. For a major element actual variations against the risk allowance
this can significantly shift the emphasis of the changes in sequencing
cash flow forecast. Traditionally the bathrooms
formally awarded extension of times
may not have been completed until near the
end of the project whereas with this example, acceleration in the event of falling behind
payment for the pods may become due during programme
the middle part of the contract as the pre- partial possession.
fabricated pods are completed off site.
It should be noted that there is a clear distinction
between English and Scottish contracts. SBCC
form of contract does not recognise payment
for materials off site. The mechanism to cover
payment for such items would be the use of a
separate Contract of Purchase.

14 | CASH FLOW FORECASTING

2.20 Effect of delays

The interpretation of delays and how a cash flow

can be used for that purpose is discussed in the
next section, but on a practical basis it should be
remembered that a delay to the contract will affect
the timing and amount of payments and may well
have a knock-on effect on the sequencing of the
remainder of works.

The cause of the delay may change the effect. For

example, adverse weather may close the site for
a set period of time, in which case the cash flow
simply moves back by the same period (unless
acceleration is undertaken). However, delay caused
by a significant variation may change the whole
sequencing and rational of the project, in which
case it may be more sensible to re-review the entire
cash flow for the remaining period as it may have
too many knock-on effects

CASH FLOW FORECASTING | 15

3 Practical considerations: Level 3
Doing/Advising
This section looks at the practical considerations 3.2 Reasons for variances to cash flow
that have to be made when producing and
analysing cash flow forecasts.
Once a cash flow is established then it should also
A chartered surveyor should consider the following be used to monitor variances to it. It can be used
when advising on the uses of a cash flow forecast as a tool to compare the forecast with the actual
and in particular when using the cash flow forecast payments and ascertain what these results show.
to monitor progress on site or when assessing If the cash flow forecast has been based on the
claims. programme or an activity schedule then it can be
inferred that variances to the forecast must mean
variances to the programme. This is not always
3.1 Cash flow representation
strictly true as the variances may be a result of
re-sequencing or other factors, but it does provide
Graphs can be used to graphically illustrate the a good guide and may prompt questions.
cash flow forecast
Graphs can show either the cumulative or a If the valuation for a particular month is significantly
periodic cash flow (see Figure 6) lower than the cash flow forecast then it could be
inferred that the contractor is simply behind their
Periodic payments can be shown on a bar chart intended programme.
Might show both cumulative and bar chart
together. Some of the reasons for actual payments being
below the cash flow include:

(a) site conditions, and

Figure 6: Graph showing the relationship (b) adverse weather
between periodic and cumulative payments

3.0 M 10 M

Periodic
2.5 M
8M
Cumulative

2.0 M
6M
Periodic 1.5 M Cumulative

4M
1.0 M

2M
0.5 M

0M 0M
May

Aug
Mar

Sep
Apr

Oct
Jun
Feb
Jan

Jul

16 | CASH FLOW FORECASTING

(c) re-sequencing of works (perhaps due to 3.3 Actions to be taken when variances
procurement of sub-contractors) occur
(d) materials being stored off site (and not claimed
for) Whether the actual payments are above or below
(e) project progressing slower than anticipated the forecast it is always wise to discuss with
the contractor before making any assumptions.
(f) materials not being delivered on time, and
The very nature of cash flow forecasting,
(g) cash flow not being accurate in the first place. particularly when using S-curves is that they are
Similarly, the actual payments may be above the simply forecasts and no matter how detailed or
cash flow forecast, which could pose funding complicated they are they can never hope to
problems to the employer. If the actual payments capture all the intricacies of a living and breathing
have been certified and deemed to be correct this construction project. Employers should be advised
should also prompt searching questions. Some of of this at all points of the process.
the reasons for a contractor being ahead of cash
flow are: 3.4 Items for consideration when
analysing cashflow forecast
(a) front-end loading
(b) contractor being ahead of programme by It should be remembered that any cash flow
working faster than envisaged forecast based on third party assessment or
(c) re-sequencing of works meaning that higher activity schedules are a forecast and not a fully
value works are carried out earlier accurate assessment, unless stage payments are
(d) materials being stock-piled on site far before being used, which are extremely accurate by their
they are required very nature.

(e) materials off site not taken into account when As a construction development progresses so
producing cash flow forecast should the cash flow forecast. It would be unwise
(f) the inclusion of variations to rely on a forecast carried out at the beginning of
a project throughout the development, particularly
(g) contractor purposely accelerating the works to
if important changes have been made to the
complete earlier (and therefore expending less
design, value or programme (see Figure 7).
preliminaries)
Figure 7: Diagram showing the relationship
(h) the sign of a distressed contractor (or
between the stage of the project and the
subcontractor) or supplier, and
information used in the production of the
(i) cash flow not being accurate in the first place. cash flow forecast

Appraisal / Briefing S curves

Order of Cost Estimates
RIBA
Stage C / Project Managers
Risk register programme
D+E

Cost plans and

Stage E / Tender pre tender estimates

Activity schedule Tender returns and

Award contractors programme

Variations / compensation
Construction events

Claims
Final account Final account
It is essential that the actual payments are analysed delay damages). However, both of these factors
against the forecast and adjustments made to the can have an acute effect on the accuracy of the
forecast as necessary. If a payment has been made forecast.
which differs to the forecast then it would seem
unreasonable to expect the employer to rely on 3.6.1 Claims for loss and expense from
the cash flow forecast for the following payment contractor
without updating it to show the current actual Claims for loss and expense will be made against
situation. an event listed in the contract and will usually also
involve an extension of the contract period. As
3.5 Risk factors inherent in soon as it becomes apparent that a claim may be
construction cash flow forecasting made by the contractor, the employer should be
made aware that the accuracy of the cash flow
The following list gives an indication of the sort of forecast may be compromised. An assessment of
items, which should be considered as potential the likely settlement of the claim should be made
risks to the accuracy of the cash flow forecasts. and the cash flow updated accordingly. This may
This is by no means a definitive list and indeed a involve producing a best-case and worst-case
major risk is the fact that every project is different assessment so that the employer understands their
and comes with its own set of circumstances. potential liability.
While cash flow forecasts are valuable tools they The timing of the claim is also important and will
also come with inherent risks, which must be often depend on the economic circumstances
considered. of the time. It is not uncommon for claims to be
Perhaps the biggest danger comes from the agreed upon many months after the end of the
reliance on a cash flow forecast without proper contract period. In this circumstance the cash
understanding on how it was produced and the flow forecast should be updated regularly so as
limitations of the data that informed it and a failure to inform the client of any slippage in the likely
to adjust the assumptions as circumstances payment of claims. This is also significant as an
change; for example: additional payment may be due to the contractor
some time after practical completion.
(a) effect of changes in design specification may
change sequencing of works, value of works or 3.6.2 Liquidated damages
overall programme of works
If a contractor is late delivering a project through
(b) effect of inflation the value of money may be
no fault of the employer then most construction
different at the time of payment to the time of
contracts will include a provision for the employer
production
to claim liquidated damages from the contractor.
(c) effect of interest and exchange rate This will have the effect of reducing the employers
particularly where supplies or labour are being liability to the contractor but employers should be
sourced from overseas advised not to forecast the benefit of liquidated
(d) complexities of the building the more damages until they have been formally agreed with
complicated and bespoke the building the less the contractor. As liquidated damages are meant to
accuracy that can be placed in the forecast. be a genuine pre-estimate of likely loss then there
should be no real saving to the employer, simply
(e) estimating error, and
a transfer of liability from one source to another.
(f) changes in sequence to mitigate delays. This will affect the construction cash flow but not
necessarily the overall cash flow position.
3.6 Effect of claims and loss and
The cash flow forecast can be used to help paint
expense and liquidated damages a picture when assessing the legitimacy of a
contractors claim. It should be noted that a claim
At the early stages most cash flow forecasts would should be based on determining a series of issues
not pre-empt a claim from the contractor for loss which were out of the contractors control and
and expense, or a reduction of the contract sum that are so defined in the relevant clauses of the
due to the deduction of liquidated damages (or particular form of contract. It is unlikely that an

18 | CASH FLOW FORECASTING

application for loss and expense would be rejected project, are subject to zero rating.
on the grounds that the cash flow forecast did not
show a marked difference to actual expenditure In these cases the VAT is added to the invoice and
alone. However, if the employer can show that paid by the employer but then claimed back from
payments were made in accordance with the HMRC at a later date. The effect on the cash flow
contractors cash flow forecast then this would is therefore considerable as the employer will be
need to be considered when assessing the claim. without funds for a period of time. This may cause
a dip in the cash flow near the end of the project
This is why it is important to update the cash where the VAT is paid back to the employer from
flow in conjunction with the contractor as early HMRC.
as possible. On the other hand, the contractor
can use the cash flow forecast to support their Changes in VAT legislation can also cause a
entitlement claim to loss and expense. variance to the cash flow forecast. As construction
projects can be for a long duration a change
They may be able to use the cash flow forecast to in legislation may have time to impact on the
show they were on their intended programme up payments of a project. The changes in legislation
until a relevant event caused them to slip behind. could mean a change in the overall level of VAT,
An example may be a significant variation to the what services VAT applies or does not apply to,
scope of the works. or a change in the zero rating or reduced rating
to certain construction services or products.
3.7 Re-sequencing and acceleration
3.9 Effect of alternative procurement
A change in sequence of the construction works routes
could impact the actual payment against the
forecast. The following list gives an indication of
some of the reasons for re-sequencing the works: 3.9.1 Traditional versus design and build
and cost reimbursable/target costs
to recover time due to previous slow progress
(acceleration) this may be imposed by the A traditional construction contract would generally
employer as a variation separate the construction cost from the design
fees and the risk allowance. However, a design
late procurement of sub-contractors or
and build contract sum would probably include
suppliers programme having to be updated
an element of design fees (either novated by
once appointment made
the design team or in-house designers) and an
change of subcontractor or supplier element of risk allowance. Therefore a change in
to accommodate employers variations procurement route from traditional to design and
build may require an amendment to the cash flow
site conditions encountered
forecast to take account of the inherent design and
adverse weather risk within the contract sum analysis.
insolvency of subcontractor or supplier.
Cost reimbursable and target cost contracts are not
lump sums. Therefore the cash flow forecast would
3.8 Effect of VAT initially only be based on the estimate or the target
cost. The employer would have to pay the actual
The nature of VAT in construction is a complicated costs, plus any agreed fees and taking into account
subject and specific advice should be sought to any pain/gain share. In this scenario the cash flow
establish which payments are subject to which forecast must be updated regularly to reflect the
levels of VAT. actual costs as they emerge.
On the assumption that VAT is incurred on a project
then it is usually paid for at the time of payment
3.9.2 Construction management (and
to the contractor. It is not uncommon for the cash other package based procurement routes)
flow forecasts to exclude VAT but if the employer Package based procurement routes should not
has asked for VAT to be shown this can be done. lead to a vastly different overall cash flow profile
Difficulty arises where the project, or parts of the to a traditional procurement route at a high level

CASH FLOW FORECASTING | 19

but at a micro level the cash flow forecast will have Figure 9: Graph showing an example
to be amended to take account of the intricacies construction management type
of this type of procurement route (see Figure 8). arrangement
The contractual relationships in a construction Cumulative
management procurement route are directly value of
each package
between the employer and subcontractors
therefore the cash flow will effectively become an

t
ntrac
accumulation of lots of mini cash flows for each

n co
io
project (this is slightly different in management

truct
contracting and other packaged based routes

cons
es
rvic
d se
s an
where the contractual link is still with the main/ io nal
fee
fess
Pro
management contractor only).

This will be similar to the contractor/subcontractor FF+E

arrangements. Some of the keys issues that will Time

need to be considered for the employer in terms of
Demolition /
cash flow forecasting are as follows: enabling works

payment terms for each sub-contract may be

different
3.10 General considerations
payment dates will fall throughout the month
The effectiveness of a cash flow forecast is
(usually with an increase at the end of the
based on the accuracy of the information used
month) rather than at one point in the month
to produce it. The cash flow forecast should
the construction manager fee will need to be be updated once information is received which
taken into account (see Figure 9) may affect it. The revision number and date
VAT applications may be different for each should always be included.
contract. It is important to understand who the cash flow
Figure 8: Figure showing how the various cash forecast is for and what the cash flow forecast
flows interact through the life of a development needs to communicate. Find out if it should be
showing the full development cost or just the
construction cost.
Cumulative
value Keep advised about any legislation which may
(of each package)
effect the basis of a cash flow forecast (i.e. VAT
changes or revisions to the Construction Act).

rs f
ee When using an S-curve formula ensure that the
age

st ruct
ion
Man basis of the formula is understood so that an
Con
s explanation of the basis of the S-curve can be
ice
e
rks

am

rv
Se communicated to a client.
Fr
wo

pe
nd

es
lo

+E
ish
ou

ve

ing
Consider cyclical events that will delay payment
En

Fin
Gr

FF

Pil
Time
throughout a construction contract (i.e.
The various overlapping cash flows within a
construction management procurement route Christmas and Easter).
The likely expenditure of risk allowances should
be considered, perhaps by allocating dates to
the project risk register.
Any assumptions and exclusions and any
relevant notes that affects the readers
understanding of the cash flow forecast should
be clearly included.
The information used to produce the forecast
should be included.

20 | CASH FLOW FORECASTING

RICS QS & Construction Standards (the Black Book) RICS QS & Construction Standards GN 79/2011

Cash flow forecasting RICS Practice Standards, UK

1st edition, guidance note

This guidance note summarises what cash flow forecasting is, how to
produce a useful forecast and how to use the forecast to assess Cash flow forecasting
progress on site and assist both employers and contractors to analyse
1st edition, guidance note
actual expenditure against forecast expenditure.
Guidance is given on the cash flow of construction contracts (project
cash flows) and not specifically for the cash flows of companies
(organisational cash flow), although many principles do overlap.
Guidance is given under the following headings which map to the
Assessment of Professional Competence (APC):
General Principles (Level 1: Knowing)
Practical Application (Level 2: Doing)
Practical Considerations (Level 3: Doing/Advising)

rics.org/standards rics.org/standards