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Payment Cycle

Course video 53 of 72

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.

Construction Cost Estimating and Cost Control

Universidad de Columbia

Curso 3 de 4 en Gestión de obras Programa Especializado

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.

Destrezas que aprenderás

Cash Flow, Cost, Cost Control, Cost Estimate

Impartido por:

Ibrahim Odeh, Ph.D., MBA
Instructor, Department of Civil Engineering and Engineering Mechanics, Columbia University

Transcripción

All right, so we know we've billed, right?

But we still don't really have revenue, and we're a contractor, we're this guy,

right, the low man on the totem pole.

We want to get some cash flow.

We want this revenue part to be filled in because we have our expense line here.

We know we have expenses, but so far we haven't seen any payment.

That brings us to our payment cycle.

The payment cycle is the period of time between billing and receipt.

It's that period of time where we're waiting for the money to come in.

Now, on most projects that's about 30 days.

It can be as many as 90 days, sometimes.

I mean,

the contractor isn't receiving money until 90 days after they've submitted a bill.

But we're going to assume 30.

So add that assumption up here.

Billings are a 30 day pay.

So, Down here in our chart, let's go ahead and add some information.

We got our payment.

Go ahead and add the line.

So, We're going to assume 30 days, which for most people is a month, right?

So if we build $810 in month one we simply translate it here.

Wait a minute, we're in the same position we were before.

The project's done in month eight, but we build the whole thing in month nine and

now we're waiting a whole nother month.

We gotta add another month to our chart.

This thing's just growing and growing.

Here's month ten, all right?

Our earned value is that same 12,000, we're complete.

Retainage is down to nothing.

We're still billing a total value of $12,000.

And finally, two months after the project is complete, they've checked,

they know our work's done, and we're going to get paid.

We're finally going to get paid the full project amount.

Now this is something we can actually chart, right?

If we want to use this chart to figure out cash flow,

we already have our expenses here.

Now we need to go ahead and chart our revenues.

We really have them now.

So this is actually pretty simple, right.

Now we've gotten paid, and now we can actually chart this.

So we're going to continue our earned value curve here.

And our expense curve.

These go flat, right?

So, in about like that.

Now if we chart up, Each month,

the end of month one, Zero payment.

The end of month two, we're going to receive our payment for month one,

it's going to be $810.

We're going to be right about, Here.

At the end of month three, we're going to receive

our payment, $1,620 right about here.

End of month four, $2,700.

About there.

With our $5,000 mark

10,530, we know that's

just above our line here.

10,800 is going to bring us up right about between the two lines,

a little bit on the low side.

And finally, right, in month ten,

at the end of that month we're going to go ahead and get paid our full amount.

So, how do we connect these dots?

We've got all these little green dots on the screen showing our revenues, but

how do they get connected?

Well, we talked about this before, right?

That every month we're going to receive a lump payment.

We aren't receiving a small payment over time.

We're receiving one stepped payment.

So the end of month two we receive our payment.

Month one we received nothing.

Month two we still aren't receiving until the end of the month.

We're going to see a step.

We're going to stay at that same level revenue, only through the month.

We're going to see another step.

We just continue connecting the dots in this way.

So we know that revenue minus expense equals capital.

Now we can look at this chart, and we can see something here, right?

We can see really clearly that for the entirety of this project,

all the way up through, up to the point, right,

the end of month eight we're completing the project.

We've completed the project.

And it's not until we're done this project that we actually start turning a profit,

right, when I can start shading this in green.

This is the color I like to color in.

It's not until we're done that we see a profit.

Now, why might this be?

A lot of it's this billing cycle, right?

It's a lag between when we've earned our value and

when we actually receive the money for that value.

Next we're going to talk about why that happens and why that exists.

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