Forecasting cashflows when

budgeting for building projects

Background

Each year, all government building projects estimated to exceed $250,000 are separately listed in
the State budget papers showing their expected cashflow. As a requirement of the budget process,
the total estimated cost for each of these projects is cashflowed across past, present, and future
years (refer Figure 1).

Figure 1 – Forecast building project cashflow

Project Name Total estimated Expenditure to Budget 2006-07 Post 2006-07
cost $’000 30 June 2006 $’000 $’000
$’000
XYZ building 12,600 1,500 7,000 4,100

Compiling a capital works program requires the careful cashflowing of project budgets by
delegated agency officers to take account of two basic requirements:

1. Budgetary requirements

This encompasses all the requirements of Treasury in relation to the formulation of the Capital
Works Program. It involves adjusting the timing and cashflowing of projects to balance the
Capital Works Program with the funds appropriated and forward estimates of expenditure.

2. Construction Programming requirements

This requires acknowledgement that the actual cashflow of expenditure on building projects
will depend on the time taken to plan, design and construct each building project. Realistically
achievable cashflow forecasts will require consideration of lead times, planning and design
activities, time for approvals, and the construction period.

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 With the publication of cashflow forecasts in the Capital Statement (Budget Paper 3) of
Queensland Budget comes an expectation within Government and the community that funds will
be expended and projects will be delivered in line with the projected cashflow.

Managing expectations

Cashflow forecasting and programming of works in the Capital Works Program is a key element
in managing the expectations of Government and the community.

Managing expectations can be difficult when a new facility is in high demand. Therefore, it is
important that the timeframes and forecast cashflows communicated to stakeholders are realistic.

Failure to allow enough time to undertake a project can lead to stakeholders being given false
expectations. As there are many projects competing for funding, stakeholders consider any failure
to deliver and expend in line with the program as wasted opportunity.

The consequences of poor cashflow forecasts

Failure to allow sufficient timeframes can result in delays to projects and have an adverse impact
on the project outputs and outcomes. As many activities are sequential, it is important to allow
sufficient time to undertake each of these activities and be cognisant of the effects of reducing or
delaying the times for any of these activities on subsequent activities. Compressing the timeframe
of ‘downstream’ activities is usually as a result of earlier planning activities not being completed
in the allocated timeframe and the end date not being adjusted accordingly.

Common causes for setting unreasonable and unrealistic timeframes include:

• a non-negotiable, critical end date set very early in the planning phase that results in the
remaining time becoming, by default, the timeframe for procurement. In many cases, the
remaining time bears no relation to a prudent allocation of time.
• reference to previous similar projects without proper analysis of the similarities. It is not
reasonable to assume that the time taken to deliver a similar project was reasonable. It is also
possible that the previous project suffered from acceleration costs and a range of compromises.

In addition, many projects experience compressed design and construction timeframes as a result
of delays in the planning phase. Many factors can cause delays in planning including:

• unforseen legal, technical, and environmental issues

• under-funding and under-resourcing; and
• delayed approvals

Lack of adequate time to conduct planning may result in:

• lack of proper consideration of all service delivery options

• lack of ability to participate in cross-portfolio coordination
• setting of unachievable project budgets; and
• unachievable cash flows.


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 The potential consequences of a compressed timeframe for design and construction could include
a range of compromised project outcomes. More specifically:

• potential to compromise the procurement process by focusing on cash flow achievement over
project or asset outcomes
• shorter or compromised commissioning and handover
• higher costs associated with working to unrealistic deadlines
• reduced quality of workmanship
• undermining other projects by diverting effort and resources to time-critical projects
• poor design resulting in reduced functionality
• risks to the safety of site workers expected to work excessive hours and the subsequent
temptation for them to take shortcuts; and
• increased likelihood of industrial relations issues arising.

Sensitivity testing and analysis may be necessary to assist in forecasting the cashflows where
options may need to be considered with respect to building commencement, staging and
completion. Further guidance on this is available in the Queensland Treasury publication Project
Evaluation Guidelines.

Prudent cashflow forecasting

Achieving expenditure in line with a forecast cashflow is not always easy and can potentially be
made more difficult by poor cashflow forecasting.

Building projects tend to expend funds slowly at first, then ramp up rapidly as the project
progresses and tail off towards the end of the project. This can be illustrated by an S curve graph
(refer Figure 2).

Figure 2 – Typical building project expenditure follows S Curve

full
expenditure expenditure

$0 time

commencement completion

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 Allowing time to conduct the various activities in building procurement is a fundamental
component of capital works management. Such allowances should not only be sufficient for the
activities to be undertaken judiciously, but also to enable the timely completion of the building.

Traditionally, the focus of time management has concentrated on the delivery phase activities,
after project funding has been secured. However, in the context of a government building project,
it is equally important that the planning phase activities are given sufficient time allocation to
ensure full consideration of all service delivery options. This aspect of project planning is often
underestimated.

In this regard, sensitivity testing and analysis may be useful in assessing project options at the
business case stage in addition to their value in identifying appropriate action to adjust the
timing of cashflows during the construction stage.

Judicious time programming will facilitate accurate cash flow forecasting which, in turn, will
ensure that delivery expectations are met and full expenditure is achieved.

Seeking Assistance

Full consideration of lead times, accurate time allowances and realistic cashflow forecasting will
reduce the risk of delayed delivery and underspending.

Professional advice and assistance is necessary to ensure that the cashflows included in the
budget papers are achievable.

Accurate cashflow forecasting requires the application of skills relating to both the budget process
and construction programming. Construction programming requires specific knowledge of the
Government context, and in particular, an appreciation of the lead times for planning and design
activities and the likely approval times. An understanding of the state of the industry and its
capacity relative to the delivery phase is also essential.

Professional assistance should be sought if appropriate human resources are not available in-
house.

For further information on this Capital Works Management Framework Policy Advice Note,
contact:
Principal Policy Manager Department of Public Works
Building Policy Unit GPO Box 2457
Brisbane Qld 4001
Telephone 07 322 45631
Fax 07 322 45498 March 2006
Email bpu@publicworks.qld.gov.au www.build.qld.gov.au

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