Subject: Construction Management

3. Prepare a cash flow projection for a construction company that currently has two projects under contract for the next year and anticipates picking up a third and fourth project during the year. For the first project, the project's owner is holding $26000 in retention from this year's payments and will continue to hold a 7% retention on all payments during the next year. The construction company is holding $5000 of retention on its subcontractors from this year's payments. The retention for this project is expected to be released in June. The estimated bill to the project's owner and construction costs for the first project are as follows: MONTH Dec. Jan. Feb. March Total BILL TO OWNER (5) 126,800 52.900 88,000 25,700 293,400 MATERIAL ($) 25,500 9,900 16,600 5,000 57,000 COSTS LABOR ($) SUB. ($) 24,900 51,200 10,100 22,400 15,600 32,200 5,100 10,400 55,700 116,200 OTHER (S) 10.200 4,100 6,800 2,000 23.100 The second project started last December and the owner has yet to make a payment. The project's owner will hold a 12% retention on this project and is expected to release the retention in August. The construction company will withhold retention from the payments to its subcontractors. The estimated bill to the project's owner and construction costs for the second project are as follows: MONTH Dec Jan Feb March April May June BILL TO OWNER (5) 11,900 33,300 42,200 44,600 70,000 32,200 45,300 15,200 294,700 MATERIAL ($) 3,400 10,300 11,100 14,700 21,500 8,900 12,800 4,600 87,300 COSTS LAROR ($) 3,700 9,400 10,700 14,500 19,100 8,800 12,800 SUB. (5) 1,400 4,300 4,900 6,300 9,500 3,600 5,400 1,900 37,300 OTHER ($) 1,300 4,000 4,400 5,400 7,600 3,100 5,000 1,700 32,500 July 4,100 Total 83,100 The third project is expected to start in April. The project's owner will hold a 6% retention on the project and the construction company will withhold retention from the payments to its subcontractors. The retention for this project is expected to be released in September. The estimated bill to the project's owner and construction costs for the third project are as follows: MONTH April May June July Total BILL TO OWNER ($) 36,300 50,800 61,800 36,100 185.000 MATERIAL ($) 6,400 9,400 10.800 7,400 34.000 COSTS LAHOR (5) 9,400 12,400 15,100 8,600 SUB. (S) 6,300 7,600 10,300 6,000 30,200 OTHER ($) 4,000 5.500 6,500 3,900 19,900 45.500 The fourth project is expected to start in August. The project's owner will hold 3 3% retention on the project and the construction company will withhold retention from the payments to its subcontractors. The retention for this project will not be released this year. The estimated bill to the project's owner and construction costs for the fourth project are as follows: MONTH Aug Sept. Oct. Nov. Dec Total BILL TO OWNER ($) 19.000 53,200 61,600 73,700 115,400 322.900 MATERIAL (S) 4,600 16,500 16,100 19,900 32,700 89,800 COSTS LABOR (5) 5,300 16,200 21.500 21,300 33,400 97,700 SUR ($) 2.900 8,700 9,800 11,800 17,000 50,200 OTHER ($) 1,800 5,000 6,900 7,600 10.800 32.100 The company's fiscal and tax years start in January and end in December. Revenues are received before the end of the month after the month the company bills its clients. Labor costs are paid weekly. Material bills are paid in full when the payment is received from the owner. Subcontractor bills are paid-less retentionwhen payment is received from the owner. The retention withheld from the subcontractor payments is based on the same retention rate that is held by the project's owner and will be paid to the subcontractor when the owner releases the retention. Other costs are paid at the end of the month the costs are incurred. Include in the general overhead budget the following. The budget for advertising is to be 0.5% of revenues. The budget for promotions is to include $1,000 in July for a company picnic, $200 in December for Christmas cards and gifts, and $1,300 in December for a company Christmas party. The monthly fuel and maintenance cost for the company vehicle driven by the owner is estimated to be $225 per month. In April, the company plans on purchasing a new copier for $2,000. The company employs three workers: the owner, an estimator, and a secretary/bookkeeper. The owner is paid $6,000 per month. The estimator is paid $13.00 per hour and works an average of twenty-five hours per week. The secretary/bookkeeper is paid $13.50 per hour and works an average of forty-five hours per week. All of the hourly employees are paid for fifty-two weeks of work per year. Time-and-abalt must be paid to hourly employees for work over 40 hours per week. The company contributes $175 per month per employeeincluding the owner-for health insurance. They also deposit$0.50 in an employee's 401(k) account for every dollar the employee deposits. The maximum the company would deposit is 3% of an employee's wages. The company's owner is included in this match. Historically, the employees have taken full advantage of this benefit. The current social security rate is 5.0% to $93,500 of wages per employee. The current Medicare rate is 1.70%. The company's FUTA rate is 0.5% on the first $7,000 of wages per employee and their SUTA rate is 3.0% on the first $9,000 of wages per employee. The company is charged 0.45% of revenues, 0.65% of wages for hourly employees, and 1.5% of wages for salaried employees for general liability insurance. In January the company pays $25 for a business license. It is anticipated that office supplies will cost $150 per month. Rent for the office space is $425 per month and includes sewer and water. Office utilities are expected to run as follows: $150 per month for power in June, July, and August and $100 per month during the remaining months of the year; and $130 per month for natural gas during November, December, January, and February and $30 per month during the remaining months of the year. It is anticipated that the company will spend $50 per month for postage and $100 per month for janitorial services. The estimated telephone costs are $125 per month for telephone and long-distance service and $100 per month to provide mobile phone service for the owner. In December the company plans on making a $500 charitable contribution to a local university. In April the company must pay $500 for its annual plan room membership. The company plans on spending $250 at the first of each quarter for accounting services to close the previous quarter's books and an additional $500 in April for tax services. The estimated cost of meals and entertainments is 550 per week. Bank fees are $50 per month. Allow 575 per month for miscellaneous expenses. Assume that all overhead costs-except labor-are paid at the end of the month they occur. Labor will be paid throughout the month that the costs occur. Also assume that all of the months are the same length-four and one-third weeks. In addition to the above costs, the company depreciation from previous year's purchases of office equipment is $3,000 per year. The company has an outstanding loan with a payment of $575 per month. Of the monthly loan payments, $3,730 will be in the form of interest and the remaining will reduce the outstanding loan balance. The surplus cash from each month will be placed in a bank account earning a monthly interest rate of 0.45%. Negative cash flows will be covered by funds in this bank account. At the beginning of the year the balance for the bank account will be $55,000. Does the company have sufficient funds for the next year? If not, what changes can the company make to ensure that it has sufficient funds? Marks distribution Revenues, cash receipts, cash disbursements overhead & Ending balance Total wages & Total taxes 15 marks Total 25 marks 10 marks