Cash flow forecasting and the link to project finance

0:00 Profitable and still out of money

Here's a situation that surprises a lot of people. A contractor wins a profitable job. Every monthly cost report shows healthy margins. And three months in, it can't pay its suppliers. How? Because cost and cash are not the same thing. The contractor pays its people and suppliers long before the client pays it. In this lecture you'll learn how to convert a time-phased cost forecast into a cash forecast by applying payment terms, retention and advance payments, how to find the peak funding need, and how controls outputs feed directly into project finance. By the end you'll be able to build a simple monthly cash forecast and explain to a finance director exactly when and how much money the project needs.

0:53 Why it matters

Why does this matter to controls? Earned value tells you what the work is worth. Cash flow tells you when money leaves and arrives. Both matter, and the controls team is often best placed to forecast cash, because it holds the schedule, the commitments and the progress data that drive the timing. When the schedule slips, both costs and income move. When a subcontract changes payment terms, cash moves even if cost doesn't. If controls and finance work from separate plans, the first time anyone notices the gap is when the overdraft limit is hit.

1:34 The concept: payment timing

Here's the method. Think of it like your own household budget with a salary that arrives at the end of the month but bills that come in at different times. Start from the time-phased estimate to complete by control account. Apply payment terms: a subcontractor paid thirty or sixty days after valuation, materials paid on delivery or with deposits, staff paid monthly. Apply retention: many construction contracts hold back a percentage of each payment, often around five to ten per cent, depending on the contract, released at completion or after a defects period. Add any advance payment received and model its recovery through deductions from later payments. For a contractor, model income from the client's payment terms. Then net the two, accumulate, and find the lowest point of the cumulative curve. That's your peak funding need.

2:33 Worked example one: a thirty-day lag

A simple example first. Your costs are one hundred thousand a month for four months, and you pay everyone thirty days after the cost is incurred. Month one: cost one hundred, cash out zero. Month two: cost one hundred, cash out one hundred, for month one's work. And so on, until month five, when the final hundred goes out. The cumulative cash curve is simply the cost curve shifted one month to the right. That gap is good news for the payer: it's effectively short-term credit from suppliers. And it's exactly the reverse for whoever is waiting to be paid. Now imagine the client pays you forty-five days after each valuation, minus ten per cent retention. You can see the problem forming already.

3:26 Worked example two: a contractor in Jeddah

Now the realistic example from the lesson. A fictional contractor in Jeddah has a six-month contract worth six million dollars. Monthly valuations. The client pays forty-five days after each valuation, with ten per cent retention, and a ten per cent advance paid up front, recovered pro rata from each payment. The contractor pays its own costs about thirty days after they're incurred. Here's what happens. Month one, the advance arrives, which helps. But by months two and three, costs are running at over a million a month, and client payments for those months haven't arrived yet, reduced by retention and advance recovery when they do. The cumulative net cash position goes negative, potentially by several hundred thousand, even though the job is profitable. Knowing that low point, and when it occurs, tells finance how much working capital or credit facility is needed.

4:28 Watch me do it: a cash forecast in Excel

Let me show you the template. Months across the top. Row one, cost incurred, from the time-phased forecast. Row two, cash out: I simply reference the previous month's cost, which models a thirty-day lag. For a sixty-day lag, I reference two columns back. Row three, valuation or billing. Row four, retention: ten per cent of each valuation, as a negative. Row five, advance recovery: the advance divided across the valuations, also negative. Row six, cash in: the net valuation received one or two months later, depending on the client's terms. Then net cash, cumulative net cash, and one final cell: MIN of the cumulative row. That's the peak funding need. I chart cumulative cost, cumulative cash out and cumulative net on one graph, and the lowest point of the net line is the number finance needs.

5:27 The owner's view and the finance link

Now the owner's side. For an owner or developer, the cash forecast drives funding drawdowns: equity injections, loan draws and the timing of financing costs. On project-financed assets, such as energy, infrastructure and public-private partnerships, lenders require regular reporting of cost to complete and funding sufficiency, often verified by an independent engineer. So controls outputs flow straight into finance. The EAC and contingency position feed the test of whether sources still cover uses. The forecast completion date drives interest during construction, the start of revenue and the timing of debt repayment. The change and claims log shows potential cost increases. And the P50 and P80 ranges from risk analysis help size contingency and standby facilities. The companion course on project finance takes this much further.

6:21 Common mistakes

The common mistakes. Assuming cash equals cost in the same month. Ignoring retention, advances and their recovery, which can make income look far healthier than it is. Not updating the cash forecast when the schedule slips; delays shift both costs and income, and usually push income further than costs. Forgetting taxes, duties and currency conversions in cash timing. And treating finance's cash plan and controls' cost plan as unrelated documents. On AI: tools can learn actual payment behaviour, such as which clients or subcontractors habitually pay late, from accounts data, and improve cash timing predictions. That's useful, but review predictions against the contract terms and the relationships you actually have before relying on them.

7:11 Recap and try this now

Let's recap. A project can be within budget and still run out of money, because cost and cash move at different times. Build the cash forecast from the time-phased cost forecast by applying payment terms, retention and advance recovery. Net and accumulate, and the lowest point of the cumulative net line is your peak funding need. Keep the cash forecast linked to the schedule so slips flow through automatically, and share one template with finance. Each month, ask finance and controls to compare the next three months side by side. Your try-this-now: take a simple six-month cost profile and convert it into a cash-out profile using a thirty-day payment lag. Plot cumulative cost against cumulative cash, then add a client income row with forty-five days and ten per cent retention, and find the peak funding need.