Calculating Billing

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From the course by Columbia University

Construction Cost Estimating and Cost Control

412 ratings

Columbia University

Construction Cost Estimating and Cost Control

412 ratings

Course 3 of 4 in the Specialization Construction Management

This course introduces the types of cost estimation from the conceptual design phase through the more detailed design phase of a construction project. In addition, the course highlights the importance of controlling costs and how to monitor project cash flow. Students will work on a break-even analysis of construction tasks in a project.

From the lesson

Project Cash Flow

Ben Miller, Project Manager at Gilbane Building Company, discusses contracts and cash flows. Revenues, expenses and how they impact projects as a whole will be covered.

Cash Flow Method14:16

Accrual Method8:11

Contractor Cash Flow6:51

Charting Cash Flow3:30

Calculating Billing7:29

Payment Cycle6:56

Payment Cycle Drivers5:57

Payment Cycle Delays12:34

Meet the Instructors

Ibrahim Odeh, Ph.D., MBA
Instructor, Department of Civil Engineering and Engineering Mechanics, Columbia University
Director of Research and Founder, Global Leaders in Construction Management

We know about how we can trace our earned value, but what's our real revenue?

Well, our real revenue comes from our billings and

that's what we're going to figure out.

And so we're going to look at this and there's another simple equation

we have here which is Earned value,

Minus retainage

equals billings.

All right, so if we know that revenues aren't found in the earned value,

where are they found?

Where does our cash flow come from?

Well, as a contractor, our cash flow comes from billings and payment.

So we need to to figure out what our billings are.

And the first thing we need to know is our billing cycle.

That is how frequently can we bill the client?

Typically this is done every 30 days.

Most contractors are used to a 30 day billing cycle.

Now, why would a client want to control that?

Why would they want to have a regular billing.

There's really two reasons for this.

One is the normal efficiency of it.

There's a period of time every month where a client is receiving billings.

It's easy for them to be efficient and effective, and focus on that process.

That also allows them to have an understanding of when they're paying.

So if a client knows that on the first on every month they're going to

receive bills, they also know when they're going to pay them, and

that's a very important thing.

This also allows a client to draw a line in the sand and figure out,

about how far along a project is, what the health of a project is, per say.

Now, most projects billing cycle's every 30 days.

So it follows right along with our eight month schedule,

every month we'll be submitting a bill, so we're going to go ahead and

add a line here, for our earned value.

We're going to extend our chart,

because we're going to have a little bit more that we need to do here.

And we add a line for each month, and as we do this, we're also going to go ahead

and plum up, and look at about our earned value is every month.

So if we look at our chart here where each of our hash marks cross.

Month 1, our earned value is, let's just call it $900.

And then the month 2, earned value, let's call it 1,800.

We'll continue on.

We should know that, by the end if our project $12,000 that's our month 8 value.

We're going to call this 7,500.

Into month 6, let's call it 10,500.

Month seven, we're right on the cusp here, right?

So let's say we're at $11,700.

Now we know our earned value, that's great, right?

We know our billing cycle, and so at the end of month 1,

we can submit a bill for $900, can't we?

The answer is not really.

So, why not?

Why can't we submit a bill?

Why aren't we billing for $900?

And the answer is retainage.

Retainage is a portion of the payment that the client generally withholds.

Why might they hold a portion of the payment?

Well, we talked about uncertainty, we talked about the things, that

we can't necessarily know, we can't know if a client's going to stay in business.

But a client also can't know,

with 100% certainty, that all the work that's being billed for is done.

They also need to know that, when they pay the contractor,

they aren't paying the contractor so much that that contractor can walk away.

That's part of the reason for retainage.

Retainage can range it could be as low, as 2 or 5%, or as high as 15 to 20%.

But typically on projects in the US we're seeing retainage around 10%.

So we're going to go ahead and add a line for

the second half of our equation here, the retainage.

Now, like I said for our project,

let's go ahead and assume retainage is 10%.

This is pretty simple math here, right?

So, month 1 the whole 90.

Month 2, 180, month 3, 300, and so on.

So that's our retainage every month.

That's relatively straightforward, right?

And this equation, that's simple.

Our earned value minus retainage is billings.

Let's go ahead and put in the billings.

So do some quick math here.

Billings we'll put in green, because this should be positive cash flow.

All right, so we have our billings entered for

all eight months, but we have a problem.

We have a problem right here, right?

Worked on the project, but we've only billed $10,800.

So I think maybe we need to add another month, don't we?

So we're going to add another month here, and month nine.

All right, our earned value is still going to stay right at 12,000.

But we're going to go ahead and get rid of our retainage.

We're going to assume, assume the contractor, the general contractor and

the client, these guys, have verified that our work's complete.

So now we can bill the full value of our contract.

$12,000, That's great, right?

We can bill.

That's fantastic, is that revenue?

No, it would be nice if it was in the accrual method, right?

In the accrual method, this is revenue.

We've recognized value, we've provided value to the client.

They should pay us, we should recognize that.

But we're following cash accounting for our revenues.

So, next we need to figure out when we're going to get paid.

And that's our next section.

We're going to look a little more at this chart, fill out a bit more,

and finally see some cash flow.

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