A general contractor starting his business in residential projects has signed a

Question

A general contractor starting his business in residential projects has signed a one-year contract for a total price of QR12 Million. The contractor has started his business with an initial cash available of QR 500,000 according to his accounting department. The signed contract states that there are 4 payments by the client scheduled to be made as follows:

initial payment of 15% after signing the contract

-30% at the beginning of month #4

-30% at the beginning of month #9

-25% at turnkey (sign off)

-10% at the end of the 3rd. month after signing off (end of month 15)

The contractor’s work estimates show that the project’s total cost is distributed as follows:

labor cost= QR 1,200,000

equipment cost= QR 2,400,000

material cost= QR 3,600,000

subcontracting cost= QR 4,200,000

As part of the contractor’s internal management processes and for such size of project, he will limit the project’s total in-direct cost not to exceed QR 240,000 for the entire project duration. Additionally, the contractor has a credit facility of QR 200k and QR 300k for both equipment and material respectively with 2 months allowable period (his account payable). Similarly, the contractor has a bank credit seal of QR 2,000,000 @ 6% interest rate.

You are required to do the following:

1. Prepare an EXCEL sheet to present a working cashflow analysis plan for the contractor and Plot the curves of Total Direct Costs, total In-Direct Costs, total Costs, contract payments, and his final cash flow. Use a 15 months period.

2. At the beginning of which month the contractor should start seeking funds (cash) for the project? How he can manage such situation?

3. What will be the expected contractor’s profit in this project if he follows such cashflow plan?

Explanation / Answer

Total Direct cost is QB 11,400,000

Total indirect cost is QB 1,20,000 for 12 months and QB 1,50,000 for 15 months

2. The contractor shall start seeking fund from month 12 since he has the credit period of 2 months. However by the end of 15 months his account payables would be paid off.

3. His expected profit is QB 1,750,000/-

Month Description Cash Inflow   Cah Outfllow Net Cash position                     1 Opening balance                     500,000                     1        1,800,000           (950,000)                 1,350,000                     4        3,600,000       (2,850,000)                 2,100,000                     9        3,600,000       (4,750,000) 950,000                   10                       -             (950,000) -                     11 Credit taken        2,000,000           (960,000)                 1,040,000                   12                       -             (960,000) 80,000                   13                       -                10,000 90,000                   14              10,000 100,000                   15        1,200,000              10,000                 1,310,000

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