Capital project cash flow management: using these tools to manage capital project cash flows can increase investment earnings, reduce borrowing costs, and prevent potentially embarrassing and frustrating cash flow problems.

• Author: Kreklow, Steven R.
• Position: Solutions

Last minute changes in payment schedules on capital projects can be among the most frustrating and unpredictable complicating factors in effective municipal cash management. Capital projects are by definition big ticket items that have a major impact on municipal finances; consequently they require significant planning and coordination on the part of government finance officers. Managing capital project cash flows is often complicated by the need to manage time-limited grant funds and proceeds from debt that are subject to arbitrage regulations.

Changes in payment schedules, can create serious problems for governments. However, such changes in schedule are sometimes unavoidable. Managers responsible for the construction of facilities or completion of economic development projects often face unforeseen changes in circumstances and conditions that impact project timing and cost.

WHY ARE CAPITAL PROJECTS SO UNPREDICTABLE?

While blaming a project's engineers may be the most emotionally gratifying way to explain the unpredictability of capital projects, there are other common causes. Understanding these other common causes can help government finance officers better manage related cash flows.

Project Costs Estimates and Budgets. A number of factors can lead to discrepancies between initial project cost estimates and actual project costs. For example, if inflation is underestimated or not built into the project budget, an estimate that was made a year or more before the project actually begins will be insufficient from the start. Another common error in project budgeting is misunderstanding the nature of the engineering estimate being used. While a conceptual cost estimate may be needed for initial discussions on whether or not to move forward with a project, these types of estimates are not based on a thorough analysis of project-specific conditions. As a result, actual project costs could very likely be significantly different.

Changes in Scope. Changes in project scope are another, particularly frustrating, source of project unpredictability. Changes in scope are sometimes the result of errors or oversights in project planning that are required to ensure the facility functions as necessary upon completion. However, many scope changes result from stakeholder requests to add functionality to the project after work has started.

Unforeseeable Circumstances. Unforeseeable changes in circumstances can take place on a local or a global level that can...