Working out the peak funding requirement

Across a construction contract, money goes out before it comes in. Wages weekly, materials on supplier terms, subcontractors monthly, and receipts arriving three weeks after the valuation date at best.

The cumulative difference, plotted over the job, produces a curve that goes negative early, deepens through the middle and recovers slowly at the end. The deepest point is the peak funding requirement.

Why it is not the same as the contract value

A five million pound contract does not need five million in funding. It needs whatever the widest gap between cumulative outgoings and cumulative receipts turns out to be, which on a typical job might be eight to fifteen per cent of the contract sum.

The variables that move it are the payment terms, the retention rate, the profile of the work and how promptly the client actually pays.

What deepens it

• Retention. Three per cent of every certificate simply does not arrive. On five million that is a hundred and fifty thousand pounds absent from the curve.
• Long payment terms. Every additional week between valuation and receipt shifts the entire curve down.
• Late payment. A client that habitually pays a fortnight late moves the peak by roughly a fortnight’s outgoings.
• Front-loaded costs. Heavy early procurement, long-lead items, substantial preliminaries at set-up.
• Subcontractors paid faster than the client pays you. The single most common cause.

The tail nobody models

The curve does not return to zero at practical completion. Half the retention is still held, the second half is a year away, and the final account is not agreed. On many jobs the position is still negative eighteen months after handover.

A forecast that shows the project cash positive at completion is understating the requirement by exactly the retention plus the unagreed account.

Using the number

Compare it against the facility available. If the peak on one job is close to the whole overdraft, taking a second job that peaks in the same quarter is the decision that ends companies, and it is nearly always taken without the two curves ever being laid side by side.

The habit worth having

Calculate it at tender, not after award, and reforecast monthly against actuals. The variance between forecast and actual receipts is the earliest signal available that a client’s payment behaviour has changed, and it shows up in the cash curve months before it shows up anywhere else.