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Budget and Cash Flow Forecast


Budget and Cash Flow Forecast


This article describes PROJECT BUDGET and CASH FLOW FORECAST in D-E Project Accounting.

            PROJECT BUDGET comprises the original Project Cost Estimate, plus Prorates and Contingency, whereas CASH FLOW FORECAST is the same as [BUDGET less Contingency] distributed in the project time frame.

 In the D-E Project Accounting, almost all budget figures are obtained directly from the First Forecast but not from the Cost Estimate. This way all cost figures required for the budget creation are already available in the form of generic expressions obtained from the First Forecast that has been created from the Cost Estimate. This approach,  explained in our other Article, simplifies greatly creating the Project Budget as well as the Project Cash Flow Forecast.

The Budget is always expressed in whole and rounded dollar or other monetary figures broken down into the following six categories, representing Generic Cost accounts, with the dollar values obtained automatically from the already created First Forecast:

           The Budget must also contain the following costs:

        Generally the responsibility for the creation of the Project Estimate rests with the Project Estimator. However, the creation of the Budget is the responsibility of the Cost Engineer. In the D-E Accounting, first he must create the First Forecast from the cost data contained in the the Project Estimate. Only after that, he can create the Budget.   

       The amount of Contingency as well as Prorates shall be expressed as some percentage of the total net-cost of the project, comprising the first six generic categories, mentioned above. The Project Manager should supply the Contingency percentage figure to the Cost Engineer, usually after consultations with the whole Project Team, comprising specialists in various engineering disciplines. The Contingency can vary from as little as 1% to as much 10% or more, depending on the project type and the risks involved.

          The value of the Prorates percentage comes from the Project Sponsors, who may advise accordingly the Project Manager, who in turn instructs the Cost Engineer about the value to use. The Prorates may vary from as little as 0% to as much 3% or even more, depending on the Project Sponsor needs to cover costs of maintaining their own supervisory Project Management and other costs related to the Project.


Creating PROJECT BUDGET

         Using the TECA computer program, the Cost Engineer can create the Budget easily and automatically, within a few minutes. Click here to display the project budget planning screen of an offshore oil and gas project. By clicking the button LOAD FORECAST, the generic cost data of the Project Cost Estimate (already defined by the First Forecast) are instantly displayed. After selecting from combos the percentage value for Prorates (0.5%) and for Contingency (5%), the Cost Engineer clicks the button RECALCULATE. The program calculates all budget figures and displays the resulting screen; click here. As you can see, the 5% Contingency - based on the six major Generic figures - becomes 4.74% of the total Budget. To adjust it higher, one can simply enter a higher % figure (5.29%) in the combo, and then click the button RECALCULATE to get the Contingency worth 5% of the Budget exactly. By clicking the button REPORT, the Budget report and the graph can be displayed and printed; click here; (scroll down to see the graph).

         During the project progress, the BUDGET remains frozen, allowing for comparison with the current FORECAST. The FORECAST usually grows, affected by project changes that are created by Change Orders, all recorded in the Forecast Journal. If during the project development the discrepancy between the FORECAST and the BUDGET becomes very great, new budget version may be created. It should be based on the then current Forecasts, but TECA allows for using the then current Actuals to create the updated budget figures. Many budget alternatives can be created, varying the percentages of the Contingency and Prorates. However, the dollar figures can be edited only via entries made in the Forecast Journal, what ensures the data integrity.


 Creating PROJECT CASH FLOW FORECAST

            Project Cash Flow Forecast, called also Commitment Forecast (because it deals with COMMITMENTS), represents the BUDGET distributed in the project time frame. Creation of this Cash Flow is the responsibility of the Cost Engineer. In the D-E Project Accounting, the Project Cash Flow Forecast is based on the First Forecast. As you know from our Article #8, the Time-Cost Consolidation (click here) yields the distribution of Total Forecast within the project time frame, defined by Project Periods. These figures are utilized directly to create the Project Cash Flow Forecast.

        Using the TECA computer program, the Cost Engineer can create the Project Cash Flow Forecast  easily and automatically. Click here to display the cash flow planning screen of an offshore oil and gas project. As you can see, the initial total Forecast of 859,327,200 SR (Saudi Rials) represents 93.39% of the Budget, because Contingency is not included in the Forecast. By clicking the button CALCULATE, the optimal distribution of the cash flow costs is displayed (click here). When you compare the cumulative figures of Forecast with the cumulative figures of  the Cash Flow, you will see that the Cash Flow's figures are always slightly higher that these of the Forecast.

        This optimal distribution implies that the project funds shall be supplied monthly. However, in practice project funds are supplied quarterly, or even half yearly. This type distribution can be easily made by the Cost Engineer. He enters the periodic fund supply figures manually, watching that the cumulative figure of the Cash Flow is always higher than the cumulative figure of the Forecast; (click here). Notice that this Cash Flow Forecast indicates that project funds shall be supplied quarterly. To see the corresponding report, click here, and scroll down to see the related histogram and S-Curves.



Remarks

        Project Budget and the related Project Cash Flow Forecast can be easily generated using the dual-entry computerized method of Project Accounting. Simply by clicking some buttons, and without any need to do any data retrieval or calculations, the Cost Engineer can create these very important project documents in the matter of a few minutes only. The cost data required for these documents are supplied automatically by the First Forecast procedure, described in our other Article.

         The ease of creating Budget and Cash Flow Forecast reports, illustrated by the pie-graph, histogram, and S-curves, and particularly that they can be created with the minimum of efforts on part of the Cost Engineer, should convince you to apply the dual-entry accounting method in your projects too.        


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