Commercial Management Procedure for Project Cash flow and Flexible Budget Reporting

1.0 Purpose

To set out a standard methodology for the forecasting and reporting of project revenue, project costs, net cash position and monthly profit & loss to facilitate divisional and overall company accounts management.

2.0 Scope

This procedure is applicable for all projects.

3.0 References

Cost Codes & Budget Management

Project Reporting Pack

Subcontractor Liability Assessment Form

Project Cash Flow Report

Project Flexible Budget Report

4.0 Definitions and Abbreviations

Accruals: those  costs  that  relate  to  a  particular  accounting  period (usually a month) that have not yet been processed in the management and forecasting system.

Cost of Funds: the cost to the company of supporting a project in a negative cash flow position.

Forecast Claimed Value: the forecast value of the progress claims to be made to the Client over the life of the project (usually on a monthly basis).

Forecast Incurred Cost: the forecast costs to be incurred over the life of the project (usually on a monthly basis).

Negative Cash flow: the position of the project where Paid Monies exceed Received Amounts in a given time period necessitating funding of the project

Net Cash flow: the difference in any given period (usually monthly) between the Received Amount and the Paid Monies.

Paid Monies: the amount of money paid out in respect of labor, plant, materials, subcontractors and services utilized by the project in a given time period (usually monthly).

Phasing: the process of factoring in the timing impact for actual receipt of monthly Forecast Claimed Values (as determined by the contract payment terms) and actual payment of Forecast Incurred Costs (as determined by payment terms).

Profit & Loss: the monthly “draw‟ of forecast final margin based on % complete by costs

Received Amount: the amount of monies received from the Client (and possibly other sources) as project revenue in respect of a given time period (usually monthly).

Positive Cash flow: the position of the project where Received Amounts exceed Paid Monies in a given time period.

 

5.0 Responsibilities

The following personnel have responsibilities mentioned in this procedure:

Project Director (PD)

General Manager (GM)

Project Commercial Manager (PCM)

Divisional Commercial Manager (DCM)

Corporate Commercial Director (CCD)

Divisional Accounts Manager (DAM)

Corporate Finance Director (CFD)

6.0 Management Cash Flow Procedure

6.1 General

a) Cash is the life blood of any business and good cash flow forecasting is essential to the project management

b) This information is relied upon in the financial planning of the company and provided to banks and therefore critical to ongoing facility arrangements.

6.2 Base Process

a) Regard should be had in the first instance, to the project cash flow prepared as part of the original tender preparation.

b) The following data is to be forecasted and reported on a monthly basis in respect of each project in accordance with Project Reporting Pack.

i. Forecast Claimed Values

ii. Forecast Incurred Costs

iii. Net Cash Position

iv. Profit & Loss

c) Phasing, involving the assessment of when Received Amounts will come in and Paid Monies will go out, may be undertaken by the Project or centrally within each Division by the DAM in accordance with the trading terms established on the project

d) To facilitate the above, at the outset of the Project, the PCM shall forward a copy of the Main Contract payment terms to the DCM / CCD.

e) All forecasts shall be on the basis of the remaining project duration or a rolling 24 month period (Whichever is the lesser).

f) Changes to the forecast final outcome of the project at completion are likely to also have cash flow consequences. These changes must be reflected in the updated cash flow report on a monthly basis.

g) The final profit margin should be equivalent to the final net cash flow position (adjusted for any non cash flow items for example, depreciation).

6.3 Main Components of Cash Flow Process

6.3.1 Claimed Value Forecasting

a) As part of the compilation of the first Project Monthly Report the PCM shall undertake a forecast of Claimed Values.

b) In order to produce the initial forecast of Claimed Values the PCM shall “cash out the program” utilizing the breakdown of the Contract Sum under the Main Contract.

This is applied to activities on the program and spread over their respective durations to produce a forecast value of work for each month (or progress claim period) to the end of the contract.

c) This monthly forecast may have to be adjusted in the case of contracts where Claims are to be made on the basis of achieving milestones rather than monthly progress.

d) The forecast shall be reviewed on a monthly basis and updated with “actual‟ data and any revised forecasts as applicable.

e) Adjustments will typically be required whenever there are delays, acceleration or re- sequencing of the program and where variations (+/-) are involved.

f) The compilation, review and adjustment of this claims forecast should not be confused by considerations of when the monies will actually be paid.

This “phasing‟ shall generally be carried out by the Divisional Finance and Accounts Department.

g) The forecasting done by the PCM in this regard shall be subject to review by the PD, GM and DCM / CCD as it forms part of the Project Monthly Report prepared in accordance with Project Reporting Pack.

6.3.2 Incurred Cost Forecasting

a) As part of the compilation of the first Project Monthly Report the PCM shall undertake a forecast of Incurred Costs.

b) In order to produce the initial forecast of Incurred Costs the PCM shall “cash out the program” utilizing the breakdown of the estimate, exclusive of original margin.

This applies to activities on the program and spread over their respective durations to produce a forecast cost for each month (or period corresponding to that of the Main Contract progress claims) to the end of the Contract.

c) The forecast shall be reviewed on a monthly basis and updated with the „actual‟ data and any revised forecasts as applicable.

d) Adjustments will typically be required where there are delays, acceleration or re-sequencing of the program, where variations (+/-) are involved and where forecast final costs are revised.

e) The compilation, review and adjustment of this cost forecast should not be confused by any consideration of when the monies will actually be paid ou This “phasing‟ will generally be carried out by the Divisional Finance and Accounts Department.

f) Alignment of the cost codes to cost packages in accordance with Cost Codes & Budget Management has a number of significant advantages in relation to cost control, forecasting and administration, including assisting with the forecasting of Incurred Costs on a monthly basis.

g) The forecasting done by the PCM in this regard shall be subject to review by the GM, PD and DCM / CCD as it forms part of the Project Monthly Report prepared in accordance with Project Reporting Pack.

6.3.3 Staff and Direct Labour Costs

a) In reporting the Forecast Incurred Costs for the project, the forecast cost associated with staff and direct labor must be shown separately in accordance with Project Reporting Pack.

b) These costs are not subject to normal trading terms and suitable provision is therefore required to be made in the overall cash flow forecast for the different „phasing‟ applicable.

6.3.4 Management of Dependencies

Where project cash flow data is dependent upon:-

i. The resolution of contractual claims (Main Contract and Subcontract) – the “most likely” outcome should be assessed and a note appended to the forecast detailing the basis of claim, current status, likely date for resolution and value included as “most likely”. If, as a result of resolution of a claim, the claim is to be paid under different trading terms, the anticipated payment date should be noted;

ii. Significant unapproved variations – the “most likely“ outcome should be assessed and a note appended to the forecast detailing the extent of unapproved variations, current status, likely date for resolution and value included as “most likely”;

iii.   The commitment of major client contingency items – relevant values should be included in the time periods when they are anticipated to be claimed or incurred. If the contingency is general in nature it should be included as a lump sum value at the end of the forecast period.

A note should be appended to the forecast detailing the extent of such items. These should then be progressively included as the Client commits to those amounts and the details of values and likely timing are firmed up;

iv. Defects Liability Period/Warranty Provisions – costs and revenue should be shown in the month in which they are anticipated to be claimed or incurred.

6.3.5 Cash Position/Profit & Loss Reporting

a) Based on the accurate assessment and regular update of actual and forecast Claimed Values and  Incurred  Costs,  the  Net  Cash  Position  of  the  project  can  be  established, monitored and forecast.

b) Similarly, from the actual and forecast % complete by cost data, the current and forecast Profit & Loss „draw‟ against Forecast Final Margin can be established, monitored and forecast.

6.3.6 Monthly Reporting

The data for Claimed Values, Incurred Costs, Net Cash Position and Profit & Loss is summarized on Project Cash Flow Report and Project Flexible Budget Report and reported as a “mandatory‟ inclusion in the standard Project Monthly Report prepared in accordance with Project Reporting Pack.

6.4 Cost of Funds

i. ALL PROJECTS are required to be SELF-FUNDING and to actively maintain a positive cash flow position.

ii. In cases where a project exhibits a consistently negative cash position and/or the actions or inactions of the project are adjudged to have contributed to a negative cash flow position, consideration may be given to the project being charged with the cost of funds incurred by the company in respect of that negative cash position.

7.0 Related Records

Subcontractor Liability Assessment Form

Project Cash Flow Report

Project Flexible Budget Report