Cash Flow Management Flashcards

What is the primary purpose of a cash flow forecast in construction project management?

Answer: To anticipate timing differences between cash receipts and disbursements

A cash flow forecast identifies when cash will be received versus when it must be paid out, allowing the contractor to plan financing needs and avoid shortfalls.

Which type of billing method allows a contractor to invoice for work before it is fully performed, most directly improving early-stage cash flow?

Answer: Mobilization billing billed as a separate line item upfront

Mobilization billing allows contractors to invoice a specific amount at project start before significant work is complete, accelerating early cash inflows.

In construction cash flow terminology, what does 'float' refer to?

Answer: Funds temporarily available because checks issued have not yet cleared

Float represents the temporary availability of funds resulting from the lag between when a check is issued and when it actually clears the bank.

How does retainage most directly affect a construction contractor's cash flow?

Answer: It reduces cash inflows by withholding a percentage of each payment until project completion

Retainage withholds a percentage (typically 5–10%) of each progress payment, creating a cash flow deficit that persists until project closeout or substantial completion.

Which payment term in a subcontract is most favorable to a general contractor's cash flow?

Answer: Pay-when-paid clauses that tie sub payments to owner receipts

Pay-when-paid clauses allow the GC to delay subcontractor payments until the owner funds the GC, aligning cash outflows with cash inflows.

What is the primary function of a Schedule of Values (SOV) in the context of contractor cash flow?

Answer: It allocates contract value to work items, forming the basis for progress billings

The SOV breaks the contract sum into line items, enabling owners and lenders to verify progress and approve billing amounts that drive the contractor's cash receipts.

A contractor's cash flow projection shows significant negative cash flow in months 3 and 4 of a 12-month project. What is the most appropriate corrective action?

Answer: Arrange a short-term line of credit or construction loan to bridge the gap

Arranging financing such as a revolving credit line before the gap occurs is the appropriate response, ensuring the contractor can meet obligations without disrupting project operations.

What is a construction draw schedule, and who typically prepares it?

Answer: A periodic billing plan tied to project milestones prepared by the contractor and approved by the lender or owner

A draw schedule outlines when and how much the contractor will request from the owner or lender at defined project stages, providing structure to the cash receipt process.

Which of the following best describes the 'cash flow gap' problem commonly faced by construction contractors?

Answer: The timing mismatch where labor and material costs are paid before owner payments are received

Contractors must pay workers weekly and suppliers within 30 days while owners typically pay 30–60 days after billing, creating a recurring gap that requires working capital financing.

How do joint checks issued by an owner directly to a subcontractor and general contractor together primarily benefit construction cash flow management?

Answer: They ensure subcontractors are paid from owner funds, reducing the GC's cash outlay and lien exposure

Joint checks require both parties to endorse them, ensuring sub-tier payments come directly from the owner's funds rather than the GC's operating cash, reducing the GC's financing burden and lien risk.

When analyzing a construction company's statement of cash flows, which section reveals the company's ability to fund operations from its core contracting activities?

Answer: Cash flows from operating activities

Operating cash flows reflect cash generated or consumed by the company's primary contracting operations, such as collecting receivables and paying suppliers and payroll.

What is the effect of accelerating subcontractor invoice approvals on a general contractor's overall project cash flow?

Answer: It generally increases the GC's cash outflows earlier but can reduce subcontractor claims and improve project efficiency

Faster sub invoice approval and payment can reduce costly delays, back-charges, and disputes, even though it accelerates cash outflows, ultimately improving overall project economics.

In construction cash flow management, what is the significance of the 'underbilling' (costs in excess of billings) balance on a contractor's balance sheet?

Answer: It reflects work performed but not yet billed, indicating a future receivable and current cash deficit

Underbilling means costs have been incurred but not yet billed; the contractor has spent cash without receiving offsetting payments, creating a financing need until the billing is submitted and collected.

Which cash management strategy is most effective for a multi-project contractor trying to optimize overall company-wide cash flow?

Answer: Centralizing cash management with a daily sweep to a concentration account and using project-level tracking for reporting

A cash concentration structure pools funds from all projects into one account for maximum investment efficiency and borrowing offset, while project-level accounting maintains cost control and reporting accuracy.