Construction Of Warehouse And Office - Contract Form AS4000 - Cumulative Cash Flow - Accounting And Finance Assessment Answer

Construction Of Warehouse And Office - Cumulative Cash Flow - Accounting And Finance Assessment Answer

Assessment Task:

Task Brief

A developer has accepted the quotation from your company to carry out the works to lock up a stage for construction of a precast concrete Warehouse and Office illustrated on the attached drawing Nos. S15001, A15001-c and C15001-4. The works include demolition of an existing house and removal of large steel framed shed.

The contract has been signed and has the following requirements:

Contract Price: 

One Million Three Hundred and Sixteen Thousand, Eight hundred and Fifty-Eight Dollars  ($1,316,858)                                           

You have immediate and unrestricted access to the 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. 26% mark-up included in the Contract Price).

The Chief Financial Officer of the company has issued you with a budget for which you are to control expenditure for the project:

Project Budget:     $835,950 

Prime Cost (PC) expenditures are nominated by the owner and are for the values and at the intervals indicated in Table 1 above. PC sums are paid by your company to the relevant subcontractor in the week shown in Table 1. Those amounts are then claimed from the Owner in the month paid (Table 1) and your company receives payment one month later. 

The Principal has agreed that it will pay monthly claims, within 30 days of receiving an approved certified payment certificate and invoice. It takes an average of 2 weeks from the end of a month for the company’s supervisor to measure the work and submit a progress claim to the client and it will take the client’s manager a further 2 weeks to certify the payment.

The defects liability period on this contract is 26 weeks from contract practical completion.

The contract form is AS4000, cash retention is 10% (the company is not able to obtain bank guarantees to allow payment in full) and will be retained to the end of the defects liability period of 26 weeks. See the attached extract from AS4000.

Your company prides itself on paying trade subcontractors and material suppliers within 14 days of an invoice and invoices are generally received within 7 days of material supply or work done. As a result, the company has loyal, well established and reliable suppliers and subcontractors. 

The accounting department advises that employees are paid fortnightly and the average accrual period for expenses is 3 weeks.
Most subcontractors are small businesses and they submit weekly claims for payment. 

The bank charges your company an interest rate on the outstanding cash flow of 10.4% (on overdrafts) and zero % on positive balances.

The forecast expenditure for the project (without the PC items) follows an ‘S’ Curve (Sigmoid function) with the characteristics listed in Table 2. 

The table of weekly Paid and Earned cost was supplied by the project scheduler and is in terms of the value of work done (Paid cost to suppliers and subcontractors) and the value of work earned priced at the contract payment rate, as set out in Table 2.

You have been asked by the Chief Financial Officer to produce a professional excel model for this analysis and you expect to use this analysis for future projects as well as supply the excel model to colleagues.

Assignment Requirements – What You Need to Do:

Prepare a brief (2 pages) report in Memorandum format to the Construction Manager 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 week at which that will occur.  
2.    The total expected cost of finance through to completion.
3.    The week in which you expect the project to attain a positive cash flow. 
4.    Contractors expenses and income as ‘S’ curves on a single graph.
5.    Contractor's Cumulative Cash flow as a graph and in an attached table. 

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