This course introduces the types of cost estimation from the conceptual design phase through the more detailed design phase of a construction project. In addition, the course highlights the importance of controlling costs and how to monitor project cash flow. Students will work on a break-even analysis of construction tasks in a project.

From the lesson

Project Cash Flow

Ben Miller, Project Manager at Gilbane Building Company, discusses contracts and cash flows. Revenues, expenses and how they impact projects as a whole will be covered.

Instructor, Department of Civil Engineering and Engineering Mechanics, Columbia University Director of Research and Founder, Global Leaders in Construction Management

Hi, my name is Ben Miller.

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I'm a project manager at Gilbane Building Company.

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And today, I'm going to be talking to you about contracts and cash flow.

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We're going to be talking about revenues, expenses, and

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how they impact contractors and projects as a whole.

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So what is cash flow?

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Well, cash flow is really something we deal with everyday as people in the world.

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It's something they have to understand, something we probably internalize and

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never really actively think about, but we know.

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Well, in projects, this is something that's huge for contractors, for clients,

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and for general contractors, but it can also be a major point of contention.

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It could be something that splits us apart.

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We're going to talk about that a little bit later.

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But it can also be something that helps us drive a project.

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it can be something that we use as a point of leverage to make our project run

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smoothly and efficiently.

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So if we know that cash flow is that impactful, what is it, really?

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Well, it comes down to a pretty simple equation, and that equation is this.

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Revenues

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Minus expenses

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Equals capital.

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Now, I'm going to leave this up on the board for most of this presentation.

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Because really, this simple equation with three variables is everything we do.

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So what's revenue?

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Revenue is really the money coming into a company.

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Expenses Are the money leaving your company,

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the money that a company has to pay for the work that they do.

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And capital is what's remaining at the very end.

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So this seems pretty simple, right?

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It seems like something that we should be able to comprehend with relative ease.

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But what we're going to run through today is why this is actually much

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more difficult and how contractors understand this equation and

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all of its complexities as it relates to them.

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All right, so now we need to create a framework for

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our discussion to talk about the basics of what we're doing.

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And the key here is understanding two different accounting methods.

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Those accounting methods are cash and accrual accounting.

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Cash is really based on your actual receipts and your actual payments,

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whereas accrual is based on the receipts that you've earned and

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the payments that are due.

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And we're going to do a real example about this.

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So here's our example.

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We have a job that pays $140 every other week.

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That's our

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revenue.

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But we also have rent.

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That's $42

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every week.

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So that seems like a relatively simple equation to solve for, right?

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You take two weeks, you take $840, and

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you'll have to pay 84, so you'll have $56 at the end.

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We're going to look at how these two different accounting methods consider that

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so that we can understand exactly how that works.

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We're going to start with the cash method over here.

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So if we created a chart that our total expenses

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And total income, it would have to come out to $140.

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So if we do that.

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Create a simple chart.

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We're going to have $0 here at the bottom.

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And then across our x axis, we'll have the amount of time passed.

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We're going to go ahead and do this based on days, so we need 14 days here.

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Now, if we enter these days starting on Sunday,

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We'll have two total weeks.

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So what do we need to check?

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Well, we know revenues, right?

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And we know expenses.

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So now, we're going to create a chart that helps us fill in this graph.

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First, we know our revenues.

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We're going to look at those on a daily basis.

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And a total basis.

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We're also going to know our expenses, and

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we need to look at them on the same basis daily.

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And total.

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And finally, we want to know at the end of all of this, our capital.

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So we're going to go ahead and create our chart.

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Just straight across for each of these.

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So let's go ahead and fill out this chart.

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And in that way, we can create our graph.

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We know our revenues, right?

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We receive $140 every other week.

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Let's assume that payday is on a Friday.

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So here now at daily revenues, we'll see $140 on Friday.

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Let me just step out of the frame there for you.

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We also know our expense, right?

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We pay $42 once a week for rent.

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So let's say that we pay that on Friday as well.

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So our first Friday, our daily expenses are going to be $42.

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And on the second Friday, our daily expenses will be $42.

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That's pretty easy, right?

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Now, we fill in the rest of this chart.

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So daily revenues, Sunday through Thursday, are just $0.

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Daily expenses are the same, right?

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$0 each day, it's remarkable.

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Now, we have this basic equation.

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Revenues minus expenses equals capital.

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So we can go ahead and fill in our capital line as well.

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So on the first Friday, $0 minus 42 will be negative $42 daily capital.

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And on the second Friday, $140 minus $42

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gives us a daily capital of positive 98.

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So we can now start filling the total lines.

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Our total is simply going to be the previous day plus the current day.

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So, Sunday, we have no previous day, so

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zero Monday, zero plus zero will stay zero.

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We'll just continue this trend across the revenue.

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Then finally, on Friday, our total revenues will be

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equal to zero for our daily plus 140 for our other.

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Zero for our total plus 140 for our daily or $140.

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On Saturday, we'll have 140 total revenue on Friday,

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zero revenue on Saturdays so that, again, we'll have total $140.

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Now, we'll do the same thing for expenses.

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So we have 0, 0, 0, 0, 0.

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And on Friday, we have $42 of expense.

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Continuing our formula, 42 plus 0 across, we'll see expenses of $42 consistently.

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Until finally, on a second Friday, we'll see total expenses of $84, and

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the same will go for Saturday.

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Pretty simple, right?

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Now, we can fill in our capital.

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So we're going to fill in the daily the first time.

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We can do that real quick, and we can do the same procedure of

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adding yesterday's total with today's daily to give us our total capital.

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So straight across, we go with the zeroes.

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Until we hit the first Friday.

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So on the first Friday, our total capital is -42, and it stays that way.

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So the second Friday.

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When we see a total capital on the second Friday for

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$56, and that carries on in to Saturday.

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So now, we want to plot this.

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So we can go ahead and make our marks here.

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So if we start with revenue, which we'll put in green because that should

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be positive, that should be cash coming in, right?

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So we're going to be at zero point, zero Sunday, Monday, Tuesday,

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Wednesday, Thursday, Friday, all the way on til the second Friday.

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Now, here's an important question is, how do we show this $140?

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We know that the end of the day, Friday, we're going to have $140 right up here.

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But do we want to shows as a slope line?

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After all, we start Friday with zero dollars, but we end up with 140.

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The answer to that question is no.

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We're going to show this as a one big step.

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We don't want to show it as a gradual gain across the day, because in reality,

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what will happen is there will be one large lump deposit into a bank account.

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So we're going to go ahead and show this.

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So there's our revenue,

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and our total revenue stays the same all the way into Saturday.

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Easy enough, right?

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Now we want to go ahead and plot our total expenses.

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So the same way, our total expenses are $0 all the way up to the first Friday.

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At which point, we have $42 in expenses.

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And I understand that some of you might be wondering

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why we're plotting these both as positive values.

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After all, the revenue is positive, right, but the expense is something leaving.

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We'll talk about that in one second.

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So on Friday, in the same way that we capture our

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revenues as one large step, we're going to capture our expenses, this one large set.

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So Friday, we have $42 in expenses, and

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that carries straight on over to the second Friday.

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At which point, we still have $42 in expenses at the start of the day,

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but by the end of the day, at some point in that day,

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we make a payment in the amount of 42, and our total expenses will be $84

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So some of you might be wondering why we aren't plotting our capital.

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And that's hidden right in this chart, like we talked about,

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revenue minus expenses is capital.

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So if we look at our chart, for the first half of the two weeks,

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the first week in its entirety, we have greater expenses than we have revenues.

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So this entire area Means that we are in debt.

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Our expense exceeds our capital or exceeds our revenue.

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We have negative capital at this point.

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Now, on the second Friday, we have income, we have our revenues.

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And our revenues exceed our expenses.

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And so this area

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Is cash flow.

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And the difference between the two, right here, is our capital.