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Last edited 06 Aug 2018
Cash flow in construction
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In very general terms, 'cash flow' is the movement of income into and expenditure out of a business (or other entity) over time. If more money is coming into the business than is going out of it, cash flow is said to be 'positive'. If more money is going out, this is negative cash flow.
Predicting cash flow is important in order to ensure that an appropriate level of funding is in place and that suitable draw-down facilities are available.
Until the main contractor has been appointed, cash flow projections are likely to be based only on agreed fee payment schedules for consultants and a simple division of the construction cost over the likely construction period (or perhaps an allocation of construction cost over an s-curve distribution). It is only when the main contractor is appointed, a master programme prepared and some form of payment schedule agreed that cash flow projections become reliable.
Cash flow projections may be affected by the need for the early purchase of long-lead time items or by items that the client may wish to purchase that are outside of the main contract (such as furniture or equipment).
Contractors have to have money coming in to pay suppliers and subcontractors and for the day-to-day running of the business.
Carillion's cash flow was very low, leading to their liquidation in January 2018. At the start of any contract, a payment scheme or table is drawn and agreed with the client or their quantity surveyor, e.g.:
[Brook, M., 2016. Estimating and Tendering for Construction Work. 5th Edition. ed. Taylor & Francis.]
Cash flow is also an issue for the construction supply chain, and is a common reason for contractors and sub-contractors becoming insolvent. This can be catastrophic for a project in terms of time and money. It is in the client's interest therefore to ensure that the supply chain is paid promptly.
The government suggest that, 'Historically, it is has not been unusual for lower tier supply chain members to have to wait for up to 100 days to receive payment, which damages their cash flow and can harm their business.' (Ref. Cabinet Office, Project Bank Accounts – Briefing document.)
In addition, there are a number of remedies for late payment.
 Related articles on Designing Buildings Wiki
- Balance sheet.
- Business administration.
- Cash flow forecast.
- Cash flow statement.
- Construction supply chain payment charter.
- Discount rate.
- Discounted cash flow.
- Earned value.
- Fair payment practices.
- Net Present Value.
- Payment schedule.
- Project bank accounts.
- Relevant cost.
- Remedies for late payment.
- Time value of money.
- The Late Payment of Commercial Debts Regulations 2013.
- Whole life costs.
- Working capital.
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