RESOURCE PLANNING Learning Objectives Produce resource charts from bar charts Demonstrate how, for example, activity float can be used to modify a schedule.

RESOURCE PLANNINGLearning 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 6 7 8 9 10 11 Week Concreting 4 4 4 4 4 4 4 labourers per week Brickwork 2 2 2 2 2 2 labourers per week Excavation 1 1 1 1 1 1 1 labourer per week Sum: 4 4 4 6 7 7 3 3 1 1 1 2 3 4 5 6 7

Resource graph (Cranes)Activity 1 2 3 4 5 6 7 8 9 Month

A 1 1 1 1 0 B 0 1 1 1 1 1 1 0

C 0 0 1 1 1

Sum: 1 1 2 3 2 2 1 1 Crane 1 Crane 2Crane 3

‘Ideal’ resource graph

Time

A gradual increase followed by a gradual reduction

Quantity

Activity Time

A

B

(A) (A) (B) Maximum level of resource available

Resource

Strategy 1Do not change the schedule but buy additional resources at extra cost

Strategy 2Activity 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 3Part 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

Activity Time

A

B (A) (A+B) (A+B)

Maximum level of resource available

Resource

Strategy 4Both Activity A and Activity B are re-scheduled with longer durations

Resource ‘smoothing’ 0 2 2 6 6 7 A D H 2w/3L 4w/0L 1w/4L 5 7 7 11 11 12

0 0 2 2 7 7 11 11 14 15 START B E J L END 2W/6L 5w/0L 4w/2L 3w/4L 0 0 2 3 8 8 12 12 15 15

2 10 F 8w/4L 2 10 Four ‘paths’ 0 1 1 4 10 15 B – F – K (=Critical) C G K C – G – (K) 1w/4L 3w/5L 5w/2L (B) – E – J - L 6 7 7 10 10 15 A – D – H – (L)

Activity 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 WeeksB 6 6 CriticalF 4 4 4 4 4 4 4 4 CriticalK 2 2 2 2 2 Critical A 3 3 TF = 5 D 0 0 0 0 TF = 5 H 4 TF = 5 C 4 TF = 6 G 5 5 5 TF = 6 E 0 0 0 0 0 TF = 1 J 2 2 2 2 TF = 1 L 0 0 0 TF = 1

SUM: 13 14 9 9 4 4 8 6 6 6 4 2 2 2 2 All start at ES

5

10

Max req. is 14 15

Activity 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 WeeksB 6 6 CriticalF 4 4 4 4 4 4 4 4 CriticalK 2 2 2 2 2 Critical A 3 3 TF = 5 used up D 0 0 0 0 TF = 5 used up H 4 TF = 5 used up C 4 TF = 6 used up G 5 5 5 TF = 6 used up E 0 0 0 0 0 TF = 1 used up J 2 2 2 2 TF = 1 used up L 0 0 0 TF = 1 used up

SUM: 6 6 4 4 4 7 11 9 11 11 4 8 2 2 2 All start at LS 5 10 Max req. is 11

Activity 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 WeeksB 6 6 CriticalF 4 4 4 4 4 4 4 4 CriticalK 2 2 2 2 2 Critical A 3 3 Delay A by 2 wks D 0 0 0 0 Delay D by 2 wks H 4 Delay H by 2 weks C 4 Delay C by 4 wks G 5 5 5 Delay G by 4 wks E 0 0 0 0 0 ES J 2 2 2 2 ES L 0 0 0 ES

SUM: 6 6 7 7 8 9 9 11 10 6 4 2 2 2 2 Delay A by 2 wks Delay C by 4 wks 5 10 Max req. is 11

DATA NEEDED TO MAKE A FORCAST1. The project costs broken down into labour, materials, plant, fees,

subcontractors and other headings.2. The delay between incurring a cost liability under these headings

and actually having to meet that liability.3. 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.

4. A graph of the value (which is the contractors cost plus a margin) versus time, representing the money a contractor will eventually receive.

5. The measurement and certification intervals, i.e. how often can the contractor invoice the client? Normally specified in the contract.

6. 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.

7. The retention conditions and retention repayment conditions.

TerminologyCOST: 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

A

B

C

200400600800

1000

14001200

16001800

$

Acc. Cost

Acc. Inc

0

-100

-200

-300

100Final OH/profit $170

100 100 100 100 100

200 200 200 200

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 - 110 110 110 330 330 220 330 110 110 110

-

-

Acc. Cost 100 200 300 600 900110014001500160017001700

Acc. Inc. - 110 220 330 660 99012101540165017601870

Acc. Net. -100 -90 -80 -270 -240 -110 -190 40 50 60 170

Acc. Net.

Final OH/profit $170

Break even

1 2 3 4 5 6 7 8 9 10 11 month

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. Margin2. Retention

FACTORS THAT AFFECT THE CAPITAL LOCK-UP

1. Margin2. Retention3. Claims

FACTORS THAT AFFECT THE CAPITAL LOCK-UP

1. Margin2. Retention3. Claims4. Front-end loading

Example 1 2 3 4 5 6 7 8 9 mthA $25 000 $25 000B $50 000 $50 000C $30 000 $30 000D $20 000 $20 000

Using 20% margin on all activity costs and a cost-plus payment planM. Cost 25 000 25 000 50 000 50 000 30 000 30 000 20 000 20 000M. Income 30 000 30 000 60 000 60 000 36 000 36 000 24 000 24 000A. Cost 25 000 50 000 100 000 150 000 180 000 210 000 230 000 250 000 250 000A. Income 30 000 60 000 120 000 180 000 216 000 252 000 276 000 300 000A. 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 20 000 20 000M. Income 30 000 30 000 60 000 60 000 36 000 36 000 24 000 24 000A. Cost 25 000 50 000 100 000 150 000 180 000 210 000 230 000 250 000 250 000A. Income 30 000 60 000 120 000 180 000 216 000 252 000 276 000 300 000A. Nett -25 000 -20 000 -40 000 -30 000 0 6 000 22 000 26 000 50 000

Using 40% margin on A, 20% on B, 16.67% on C and 0% on activity DM. Cost 25 000 25 000 50 000 50 000 30 000 30 000 20 000 20 000M. Income 35 000 35 000 60 000 60 000 35 000 35 000 20 000 20 000A. Cost 25 000 50 000 100 000 150 000 180 000 210 000 230 000 250 000 250 000A. Income 35 000 70 000 130 000 190 000 226 000 260 000 280 000 300 000A. Nett -25 000 -15 000 -30 000 -20 000 10 15 000 30 000 30 000 50 000

Max overdraft reduced to $30 000 and break even earlier

FACTORS THAT AFFECT THE CAPITAL LOCK-UP

1. Margin2. Retention3. Claims4. Front-end loading5. Over-measurement

FACTORS THAT AFFECT THE CAPITAL LOCK-UP

1. Margin2. Retention3. Claims4. Front-end loading5. Over-measurement6. Back-end loading and Under-measurement

FACTORS THAT AFFECT THE CAPITAL LOCK-UP

1. Margin2. Retention3. Claims4. Front-end loading5. Over-measurement6. Back-end loading and Under-measurement7. Delay in receiving money from the client

FACTORS THAT AFFECT THE CAPITAL LOCK-UP

1. Margin2. Retention3. Claims4. Front-end loading5. Over-measurement6. Back-end loading and Under-measurement7. Delay in receiving money from the client8. Delay in paying suppliers, workers, plant-hire

companies etc

FACTORS THAT AFFECT THE CAPITAL LOCK-UP

1. Margin2. Retention3. Claims4. Front-end loading5. Over-measurement6. Back-end loading and Under-measurement7. Delay in receiving money from the client8. Delay in paying suppliers, workers, plant-hire

companies etc9. Company cash flow

SUMMARYCash 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 manageable2.Re-negotiate overdraft facilities with your bank based on updated forecasts3.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 investmentsSay that you can invest $100 000 in the following different ways. Which is best?

A.Leave the money in a savings account earning 12% annuallyB.Invest in a project giving a return of $120 000 in six month timeC.Invest in a project giving a return of $140 000 in two years timeD.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 389C. $140 000 * 1/(1+0.12)2 = $140 000 * 0.70719 = $111 607D. $80 000 * 1/(1+0.12)0.5 + $50 000 * 1/(1+0.12)2 = $115 453E. $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 NPVStep 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

Nett CashDisc. factor (14% /year)(1 + i = 1.010978852)

Discounted 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 Nett Cash

Disc. factor (14% /year)(1 + i = 1.010978852)

Discounted 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 Nett Cash

Disc. factor (14% /year)(1 + i = 1.010978852)

Discounted 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 Nett Cash

Disc. factor (14% /year)(1 + i = 1.010978852)

Discounted 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.