May 10, 20234 minute read

Overall Cashflow at FEP-1 Stage
Mohamed El-Mehalawi

In a previous article, the overall project schedule has been introduced. It is a simple Level-1 schedule that corresponds to Class 5 estimate. This schedule can be utilized to develop multiple cashflow scenarios for the overall project. Many organizations need to know a funding profile before authorizing front end planning (FEP) There may be some kind of funding constraints for every project in order to optimize the overall business portfolio. In other cases, the project team tries to optimize the schedule for multiple cashflow scenarios.

In this article, we will explain how to use the Level-1 conceptual schedule to easily and efficiently produce cashflow scenarios.

Budget Allocation

Having both the high-level estimate and schedule, we can merge them together to produce the cashflow. The budgeted amount for every line item can be allocated to that corresponding line item in the schedule. Figure 1 below shows how to allocate the project management budget and the contingency allocation to a single WBS-Summary activity. In Primavera P6, the easiest way to allocate the budget at this early stage is to use the “Expense” as shown in the figure. Expense Item, Accrual Type, and Budgeted Cost are required fields for every expense assignment at this early planning stage. More fields like the Expense Category and Cost Account would be needed during future stages for better planning.

Expense Item is just a description of budget like the project management and contingency as shown in the figure. The accrual type is somewhat important. There are three types of accruals:

  • Uniform over Activity: this makes equal amount of cost allocated for every work day of the activity duration. In other words, it is a linear distribution of the budget over the activity duration
  • End of Activity: this will allocate the budget on the last day of the activity
  • Start of Activity: this will allocate the budget on the first day of the activity

The accrual type is selected based on the activity type and the contract terms with vendors and contractors.

The third item is the Budgeted Cost. This amount can be calculated from the estimate. This amount does not need to accurate at this early time. In other words, the planner schedulers do not need to spend a lot of effort to make this value very accurate because they will not reach any kind of accuracy at this early planning stage. The scope itself is not accurate at this time. The size of equipment or the details for structural steel or piping is not defined. The schedule and the allocated cost here are based on the capacity required and they are used for very rough planning and directional guidance for the project team.

Budget Allocation as Expense

Figure 1: Allocation of Budget to Schedule Activities

Cashflow Scenarios

Allocating the budget to different high-level activities, produces the cashflow shown in Figure 2 below. Based on this monthly cashflow, the expected spending per year will be as follows:

  • 2023: $10M
  • 2024: $35M
  • 2025: $5M

Cashflow 01 for Boiler Project

Figure 2: Cashflow based on first version of the schedule

This funding strategy may not be the optimum for the owner of the project. They would like to move more fund into 2025 fiscal year. The planner moved all fabrication and construction activities to be as late as possible. The result came as shown in Figure 3. Yearly funding will look as follows:

  • 2023: $10M

  • 2024: $30M

  • 2025: $10M

Cashflow 02 for Boiler Project

Figure 3: Cashflow after delaying construction activities

Project owner would like to move more fund into 2025 fiscal year. The planner moved all procurement activities and construction activities to be as late as possible. The result came as shown in Figure 3. Yearly funding will look as follows:

  • 2023: $10M

  • 2024: $25M

  • 2025: $15M

Cashflow 03 for Boiler Project

Figure 4: Cashflow after delaying procurement and construction activities

It is worth noting that this scenario introduces the risk of schedule overrun because most schedule activities are as late as possible. It is hard to say that activities are critical or they will become critical because there is not enough information about the detailed schedule which will be developed at the FEP-3 stage.

Conclusions

The cashflow scenarios developed above are just examples. Project team can choose to extend the duration to accommodate for equal annual funding. Another team may choose to accelerate and they would like to understand the impact of acceleration on the cashflow.

For the best schedule performance, it is recommended not to add any constrains on the project. Funding constraints proved to have severe impact on schedule performance even if it is planned from the beginning. However, funding constrains are imposed on individual projects in order to optimize for the overall portfolio of the owner. Funding constraints improve the business global optima at the expense of the project local optima. Project controls professional need to accommodate the business owner requirements even if it is not the best for each individual project.