RESOURCE PLANNING
Learning Objectives
• Produce resource charts from bar charts
• Demonstrate how, for example, activity float can be used to modify a
schedule to take into account limited availability and/or to ‘smooth’
the requirement of a particular resource.
• Produce cash flow estimates
• Determine maximum overdraft requirements and break-even points
• Demonstrate how the required overdraft resources can be limited for
a project by, for example, utilising some of the activity floats and,
for a company, by timing the start of new projects
Resource graph (Labourers)
Activity
1
2
3 4
5
Concreting
Brickwork
Excavation
4
4
4
4
2
1
Sum:
4
1
2
3
4
5
6
7
4 4
4
2
6
6
7
8
4
2 2 2
1 1 1
7 7
3
3
9 10 11
1
1
1 1
Week
4 labourers per week
2 labourers per week
1 labourer per week
Resource graph (Cranes)
Activity 1
2
3
4
5
A
1
1
1
0
B
0
1
1
C
0
0
1
2
Sum:
Crane 1
Crane 2
Crane 3
1
1
6
7
8
9
1
1
1
1
0
1
1
1
3
2
2
1
1
Month
‘Ideal’ resource graph
Time
A gradual increase followed by a gradual reduction
Quantity
Strategy 1
Do not change the schedule but buy additional resources at extra cost
Activity
Time
A
B
(A)
Resource
(A)
(B)
Maximum level of resource available
Strategy 2
Activity A proceeds as scheduled and Activity B is moved in time
Activity
Time
A
B
(A)
(A)
(B)
Maximum level of resource available
Resource
Strategy 3
Part of Activity A and all of Activity B proceeds as scheduled and the rest of
Activity A is delayed
Activity
Time
A
B
(A)
(B)
(A)
Maximum level of resource available
Resource
Strategy 4
Both Activity A and Activity B are re-scheduled with longer durations
Activity
Time
A
B
(A)
(A+B)
(A+B)
Maximum level of resource available
Resource
Resource ‘smoothing’
0
2
2
6
6
A
2w/3L
5
7
D
4w/0L
7
11
0
0
2
0
B
2W/6L
0
2
START
2
7
E
5w/0L
3
8
2
7
H
1w/4L
11
12
7
11
J
4w/2L
8
12
11
14
L
3w/4L
12
15
15
END
15
10
F
8w/4L
2
10
0
1
C
1w/4L
6
7
1
4
G
3w/5L
7
10
10
15
K
5w/2L
10
15
Four ‘paths’
B – F – K (=Critical)
C – G – (K)
(B) – E – J - L
A – D – H – (L)
Activity 1 2 3 4 5
6 7 8
B
6 6
F
4 4 4 4 4 4
K
A
3 3
D
0
0 0 0
H
4
C
4
G
5 5 5
E
0 0 0 0 0
J
2
L
9
10 11 12 13 14 15
4
4
SUM:
6
13 14 9
9
4
4
8
6
2
2
2
6
2
2
2
0
0
0
2
2
2
2
2
4
2
Weeks
Critical
Critical
Critical
TF = 5
TF = 5
TF = 5
TF = 6
TF = 6
TF = 1
TF = 1
TF = 1
All start at ES
5
10
Max req. is 14
15
Activity 1
B
6
F
K
A
D
H
C
G
E
J
L
SUM:
2
6
6 6
3
4
5
4
4
4
6
4
7
8
9
10 11 12 13 14 15
4
4
4
4
2
2
2
2
2
0
0
0
Weeks
Critical
Critical
Critical
TF = 5 used up
TF = 5 used up
TF = 5 used up
TF = 6 used up
TF = 6 used up
TF = 1 used up
TF = 1 used up
TF = 1 used up
2
2
2
All start at LS
3 3
0
0 0
0
4
4
0
0
0
0
5
0
5
2
4
4
4
7
11 9
5
2
2
11 11 4
2
8
5
10
Max req. is 11
Activity 1
B
6
F
K
A
D
H
C
G
E
J
L
SUM:
2
6
6 6
3
4
5
4
4
4
6
4
7
8
9
10 11 12 13 14 15
4
4
4
4
2
2
2
2
0
0
0
2
2
2
2
3 3
0
0 0
0
4
4
0
0
0
5
0
5
0
5
2
7
7
8
9
2
2
9 11 10 6
2
4
2
Weeks
Critical
Critical
Critical
Delay A by 2 wks
Delay D by 2 wks
Delay H by 2 weks
Delay C by 4 wks
Delay G by 4 wks
ES
ES
ES
Delay A by 2 wks
Delay C by 4 wks
5
10
Max req. is 11
DATA NEEDED TO MAKE A FORCAST
1.
2.
3.
4.
5.
6.
7.
The project costs broken down into labour, materials, plant, fees,
subcontractors and other headings.
The delay between incurring a cost liability under these headings
and actually having to meet that liability.
The amounts of money you need to pay out at different points in
time can then be determined and is often described as a graph of
costs versus time.
A graph of the value (which is the contractors cost plus a margin)
versus time, representing the money a contractor will eventually
receive.
The measurement and certification intervals, i.e. how often can the
contractor invoice the client? Normally specified in the contract.
The payment delay between certification/invoicing and receiving
the money, also specified in the contract. From this we get a graph
of income versus time.
The retention conditions and retention repayment conditions.
Terminology
COST: Money that you have to pay out
MARGIN: What you add on to your direct cost for
profit and overheads when you tender for a job.
VALUE: The value to the client of the work you
have completed. Equals the cost plus the margin.
INCOME: Money you receive from the client
1
A
2
3
4
5
6
7
8
9
10
11 month
100 100 100 100 100
B
200 200 200 200
C
100 100 100 100
M. Cost
100 100 100 300 300 200 300 100 100 100 -
M. Value
110 110 110 330 330 220 330 110 110 110 -
M. Income
-
Acc. Cost
110 110 110 330 330 220 330 110 110 110
100 200 300 600 900 1100 1400 1500 1600 1700 1700
Acc. Inc.
-
Acc. Net.
-100
110 220 330 660 990 1210 1540 1650 1760 1870
-90
-80
-270 -240 -110 -190
40
50
60 170
Acc. Inc
$
1800
1600
1400
1200
1000
800
600
400
200
Final OH/profit $170
Acc. Cost
Break even
Final OH/profit $170
100
Acc. Net.
0
-100
-200
-300
Maximum overdraft
CAPITAL LOCK-UP
Accumulated Income
$
Accumulated Cost
+$
Time
Accumulated Nett Cash
Time
-$
CAPTIM = Capital x time
+$ (Accumulated Nett)
2000
1000
Month
-1000
-2000
-3000
-4000
-5000
-$
Sum of overdrafts = 1000 + 2000 + 3000 + 5000 + 4000 + 2000 + 1000 = 18000 $month
Say, Annual interest rate = 15%
Approx. interest cost = 18 000 * 0.15/12 = $225
FACTORS THAT AFFECT THE CAPITAL LOCK-UP
1.
Margin
Acc Income (Big margin)
Acc Income (Small margin)
Acc Cost
NOTE: The area between the red and the black lines is bigger than the area
between the blue and the black lines, i.e. less capital lock-up with a bigger
margin
FACTORS THAT AFFECT THE CAPITAL LOCK-UP
1. Margin
2. Retention
FACTORS THAT AFFECT THE CAPITAL LOCK-UP
1.
2.
3.
Margin
Retention
Claims
FACTORS THAT AFFECT THE CAPITAL LOCK-UP
1.
2.
3.
4.
Margin
Retention
Claims
Front-end loading
Example
A
B
C
D
1
2
$25 000 $25 000
3
4
5
6
7
8
9 mth
$50 000 $50 000
$30 000 $30 000
$20 000 $20 000
Using 20% margin on all activity costs and a cost-plus payment plan
M. Cost
25 000 25 000 50 000 50 000 30 000 30 000 20 000 20 000
M. Income
30 000 30 000 60 000 60 000 36 000 36 000 24 000
24 000
A. Cost
25 000 50 000 100 000 150 000 180 000 210 000 230 000 250 000 250 000
A. Income
30 000 60 000 120 000 180 000 216 000 252 000 276 000 300 000
A. Nett
-25 000 -20 000 -40 000 -30 000
0 6 000 22 000 26 000 50 000
Max overdraft is $40 000 and break even at end of month 5
Using 20% margin on all activity costs (as before)
M. Cost
25 000 25 000 50 000 50 000 30 000 30 000
M. Income
30 000 30 000 60 000 60 000 36 000
A. Cost
25 000 50 000 100 000 150 000 180 000 210 000
A. Income
30 000 60 000 120 000 180 000 216 000
A. Nett
-25 000 -20 000 -40 000 -30 000
0 6 000
20 000 20 000
36 000 24 000
24 000
230 000 250 000 250 000
252 000 276 000 300 000
22 000 26 000 50 000
Using 40% margin on A, 20% on B, 16.67% on C and 0% on activity D
M. Cost
25 000 25 000 50 000 50 000 30 000 30 000 20 000
M. Income
35 000 35 000 60 000 60 000 35 000 35 000
A. Cost
25 000 50 000 100 000 150 000 180 000 210 000 230 000
A. Income
35 000 70 000 130 000 190 000 226 000 260 000
A. Nett
-25 000 -15 000 -30 000 -20 000
10 15 000 30 000
Max overdraft reduced to $30 000 and break even earlier
20 000
20 000
20 000
250 000 250 000
280 000 300 000
30 000 50 000
FACTORS THAT AFFECT THE CAPITAL LOCK-UP
1.
2.
3.
4.
5.
Margin
Retention
Claims
Front-end loading
Over-measurement
FACTORS THAT AFFECT THE CAPITAL LOCK-UP
1.
2.
3.
4.
5.
6.
Margin
Retention
Claims
Front-end loading
Over-measurement
Back-end loading and Under-measurement
FACTORS THAT AFFECT THE CAPITAL LOCK-UP
1.
2.
3.
4.
5.
6.
7.
Margin
Retention
Claims
Front-end loading
Over-measurement
Back-end loading and Under-measurement
Delay in receiving money from the client
FACTORS THAT AFFECT THE CAPITAL LOCK-UP
1.
2.
3.
4.
5.
6.
7.
8.
Margin
Retention
Claims
Front-end loading
Over-measurement
Back-end loading and Under-measurement
Delay in receiving money from the client
Delay in paying suppliers, workers, plant-hire
companies etc
FACTORS THAT AFFECT THE CAPITAL LOCK-UP
1.
2.
3.
4.
5.
6.
7.
8.
9.
Margin
Retention
Claims
Front-end loading
Over-measurement
Back-end loading and Under-measurement
Delay in receiving money from the client
Delay in paying suppliers, workers, plant-hire
companies etc
Company cash flow
SUMMARY
Cash flow forecasting provides warnings for potential cash
flow problems. Steps to take to reduce this risk are:
1. Not to take on new projects unless the cash flow is
manageable
2. Re-negotiate overdraft facilities with your bank based on
updated forecasts
3. Negotiate extended credits with suppliers, even if that
means losing some of your discounts.
Tutorial: Cash flow
This is the same project as in the CPM Tutorial example. You will therefore already have
the Earliest start (ES) and Earliest Finish (EF) times calculated for each activity but you
can also draw the bar chart from the information here.
Activity Duration Depends on activity
Cost
A
3 weeks
$6 000
B
2
4 000
C
5
A
5 000
D
6
A and B
6 000
E
4
Half of D
8 000
F
4
C
12 000
G
5
D
10 000
H
8
C and E
16 000
I
9
D
9 000
J
6
I and H
12 000
K
18
B
18 000
L
4
K
8 000
Carry out a cash flow analysis for the above project in order to determine the maximum
overdraft required, the time when the project breaks even and the final margin. You can
assume that the contractor invoices the client, for his/her costs, plus a margin of 10%,
after every two weeks and that the client pays the full amounts in the following two-week
period. Also plot the Accumulated Net Cash graph.
DISCOUNTED CASH FLOW
Compound amount factor = (1 + i)n
$100 today left for two years in account earning
10%/year will grow to $100 * (1 + 0.1)2 = $121
Discount factor = 1/(1 + i)n
$121 two years from now is, in today’s money
value, worth $121 * 1/(1 + 0.1)2 = $100
This is referred to as the PRESENT VALUE
Example of comparing investments
Say that you can invest $100 000 in the following different ways.
Which is best?
A. Leave the money in a savings account earning 12% annually
B. Invest in a project giving a return of $120 000 in six month
time
C. Invest in a project giving a return of $140 000 in two years
time
D. Invest in a project giving $80 000 in six month and another
$50 000 in two years time.
E. Invest in a project giving $ 110 000 in one years time.
Use the annual rate of 12% to calculate the present value of the
other alternatives. The present value of alternative A is then
$100 000.
B. $120 000 * 1/(1+0.12)0.5 = $120 000 * 0.9449 = $113 389
C. $140 000 * 1/(1+0.12)2 = $140 000 * 0.70719 = $111 607
D. $80 000 * 1/(1+0.12)0.5 + $50 000 * 1/(1+0.12)2 = $115 453
E. $110 000 * 1/(1+0.12)1 = $98 214
Conclusion:
‘D’ is the best alternative as it has the highest present value.
Note that alternative ‘E‘ is worse than keeping the money in the
bank.
Process to find the NPV
Step 1. Determine (guess) the future interest rate
Step 2. Calculate the discount factors that apply to each of the
future payments
Step 3. Discount each of the future transactions to today’s
money value
Step 4. Add together those discounted cash flows to find the
Nett Present Value (NPV) of the project’s cash flow.
To determine the discount rate for shorter periods,
like month.
Say that the annual discount rate is 10%. On a monthly
basis we get
(1 + i)n = (1 + 0.1)1/12 so, (1 + i) = 1.00797414, which we
use for the discounting.
If your payments are done on a 4-weekly basis, use n =
13. For a weekly basis use 52 etc.
Example (’Cost Plus’ with 20% margin)
Month Cash Out
Cash In
Monthly Disc. factor (14% /year) Discounted
Nett Cash (1 + i = 1.010978852)
Cash Flow
1
25 000
0
-25 000
1/(1.01098)1
-24 728
2
25 000
30 000
5 000
1/(1.01098)2
4 892
3
50 000
30 000
-20 000
1/(1.01098)3
-19 355
4
50 000
60 000
10 000
1/(1.01098)4
9 573
5
30 000
60 000
30 000
1/(1.01098)5
28 406
6
30 000
36 000
6 000
1/(1.01098)6
5 619
7
20 000
36 000
16 000
1/(1.01098)7
14 823
8
20 000
24 000
4 000
1/(1.01098)8
3 665
9
0
24 000
24 000
1/(1.01098)9
21 753
Sum:
250 000
300 000
50 000
NPV =
44 648
Example (’Money upfront’ )
Month Cash Out
Cash In
Monthly Disc. factor (14% /year) Discounted
Nett Cash (1 + i = 1.010978852)
Cash Flow
0
0
300 000
300 000
1/(1.01098)0
300 000
1
25 000
0
-25 000
1/(1.01098)1
-24 728
2
25 000
0
-25 000
1/(1.01098)2
-24 460
3
50 000
0
-50 000
1/(1.01098)3
-48 389
4
50 000
0
-50 000
1/(1.01098)4
-47 863
5
30 000
0
-30 000
1/(1.01098)5
-28 406
6
30 000
0
-30 000
1/(1.01098)6
-28 097
7
20 000
0
-20 000
1/(1.01098)7
-18 528
8
20 000
0
-20 000
1/(1.01098)8
-18 327
Sum:
250 000
300 000
50 000
NPV =
61 202
Example (’Two stage payments’ )
Month Cash Out
Cash In
Monthly Disc. factor (14% /year) Discounted
Nett Cash (1 + i = 1.010978852)
Cash Flow
1
25 000
0
-25 000
1/(1.01098)1
-24 728
2
25 000
0
-25 000
1/(1.01098)2
-24 460
3
50 000
0
-50 000
1/(1.01098)3
-48 389
4
50 000
0
-50 000
1/(1.01098)4
-47 863
5
30 000
150 000
120 000
1/(1.01098)5
113 624
6
30 000
0
-30 000
1/(1.01098)6
-28 097
7
20 000
0
-20 000
1/(1.01098)7
-18 528
8
20 000
0
-20 000
1/(1.01098)8
-18 327
9
0
150 000
150 000
1/(1.01098)9
135 959
Sum:
250 000
300 000
50 000
NPV =
39 191
Example (’Get paid upon completion’ )
Month Cash Out
Cash In
Monthly Disc. factor (14% /year) Discounted
Nett Cash (1 + i = 1.010978852)
Cash Flow
1
25 000
0
-25 000
1/(1.01098)1
-24 728
2
25 000
0
-25 000
1/(1.01098)2
-24 460
3
50 000
0
-50 000
1/(1.01098)3
-48 389
4
50 000
0
-50 000
1/(1.01098)4
-47 863
5
30 000
0
-30 000
1/(1.01098)5
-28 406
6
30 000
0
-30 000
1/(1.01098)6
-28 097
7
20 000
0
-20 000
1/(1.01098)7
-18 528
8
20 000
0
-20 000
1/(1.01098)8
-18 327
9
0
300 000
300 000
1/(1.01098)9
271 918
Sum:
250 000
300 000
50 000
NPV =
33 120
The NPVs varied between ~$33 000 and
~$61 000 depending on the payment plan,
when in each case it looked as if the profit was
$50 000. Quite a difference, don’t you think?
This further emphasizes the importance of
paying out moneys as late as possible and
receiving moneys as early as possible.