Cost planning is a vital part of cashflow during the life cycle of a scheme / project. Prior to starting any scheme, it is paramount to appreciate forecasted costs and when they will actually become due. The Contractor / Subcontractor is required to invest a certain amount of money into the scheme prior to any returns, gains or profit. This initial investment will be for the purchase of materials, mobilisation costs and enabling works. The Contractor / Subcontractor must secure this budget from personal funds in order to commence works on the scheme. They will only see a return on their investment once the first application for payment has been certified and paid.

This budget can be funded by a bank loan or personal finance, bear in mind this initial investment is at risk until being reimbursed by the Client. This only applies to costs associated with the interim application for payment. Within the interim application, the Contractor / Subcontractor must include costs spent to date and consider claiming a portion of costs to come (liabilities) between the current and next application. This will ensure a steady cashflow so that the Client is consistently paying for activities completed and liabilities up to the payment date.

In order to ensure the above budget is maintained, a Spend Profile will have to be created. This will be accommodated by a schedule of milestone payments. The milestone payment schedule is contractually agreed and it includes a list of activities / durations against lump sum payments. The Spend Profile is a cumulation of forecasted costs on a weekly basis. This will include ongoing preliminary costs and activity related costs.

In order to achieve a healthy cashflow, the milestone payments must exceed the Spend Profile at the time of payment received. Therefore, the milestone payments should include predicted costs up to the milestone and an apportionment of costs up to the next milestone. The Contractor / Subcontractor must remember that whilst the costs are constantly increasing, the applications will be periodic so naturally, until you have reached your forecast cost at completion, the Contractor / Subcontractor will consistently be deploying private or personal funds. The Contractor / Subcontractor should have a certain amount of money to invest with a contingency for unforeseen circumstances. Please see graph below which will demonstrates this:

Graph for cashflow

It is best practice to compile a Spend Profile prior going into contract. When you overlay the milestone payments on to the Spend Profile, it will illustrate the negative cashflow. The amount of negative cashflow must be available to the Contractor / Subcontractor prior to starting the scheme. A Spend Profile is an accumulation of costs related to resources which is tabularised on a weekly basis in accordance with the tender programme. This table will quickly identify costs at any given time. Usually, the Spend Profile is time-sliced to match the milestone payment. The Spend Profile is a vital document for cashflow prediction.