A contractor is starting a project with the following programme and costs. 

Months Activity Cost 1 2 3 4 5 6 

Site preparation 800,000 

Substructures 1,800,000 

Superstructures & cladding 3,600,000 

Service & finishes 2,400,000 

The contractor has applied a fixed mark-up rate of 10% on activities to be performed by the contractor’s own labour (Site preparation) and 5% on labour and material subcontracted activities (the rest). The retention to be held by the client is 10% of each valuation. The retention held will be paid back to the contractor in two instalments; at completion of construction and 6 months after. The client is to measure the work monthly and must pay the cash after two months of each measurement. The contractor’s monthly cost is invoiced in such a way that activities performed by their own labour will be paid in the same month the cost has incurred. Subcontractors, material purchases and plan hire are all paid one month after the cost has been committed. The percentage of own labour cost for Site preparation is 50%. 

a) Calculate the contractor’s cumulative monthly cash flow for the project. (18 marks) 

b) Assume that the contractor is considering options for improving the cash flow profile of this contract. One of the ways being considered is to apply a retention rate of 5% of all subcontracted work. This retention is released back to the subcontractors in full at construction completion. Calculate the cash flow that will result from this strategy and discuss the impact of this strategy on the cashflow and the business. (6 marks) 

c) Discuss the other factors that would impact on the contractor’s cash flow, project and company. (