Financial Projection as a Planning Tool on Construction Projects: Cash Flow Analysis and S-Curve Valuation for a Residential Development Scheme

Abstract

The adequacy of financial control in a construction firm signifies a hallmark of its ability to avert failure. A construction firm’s financial standing is, however, an agglomeration of its cash flow management at the project level. Cash inflows and outflows are the core financial management elements on construction projects, needed to ensure sufficient liquidity that is necessary to keep the project running. Cash flow analysis and valuation for a project scenario for a residential development scheme were carried out using the S-Curve and Sawtooth analytical approach. The analysis shows the computation of the cumulative gross valuations based on work done, monthly payments received by the contractor; cumulative costs incurred, monthly costs incurred, and monthly retention amounts. S- curves were plotted using an MS Excel spreadsheet for Value-time, Cost-time, and a 4-week payment delay in meeting cost. Also, the Saw-tooth red and the Saw-tooth black were graphically represented. The shape profile of the S-curves empirically corroborates the presumption that the cumulative expenditure on any construction project normally approximates an S-shaped curve. For valuation purposes, the value of work due for payment at specified time frames can be then read from the S-curve, less previous payments. The Sawtooth red showed the cash-flow balance at the end of each month, just before payment is received, while the Sawtooth black showed the cash flow in terms of balance, at the point payment is received. Delays and variations are however not accounted for. The accuracy of this method of cashflow analysis and valuation thus depends on the accuracy of the planning forecast. S- curves are therefore only useful for giving the client/contractor, a forecast of their likely cashflow requirement over the project duration and as a financial projection mechanism.