by John Chaney
[Editor's note: The following blog post originally appeared on DexterChaney.com. It is the third in a series from Dexter + Chaney co-founder John Chaney, sharing his insights on business and the construction industry at Construction Dive. Check out his previous contributions, part 1 and part 2 of "Negotiating the cash flow minefield."]
Last week we discussed the components that make up the construction cash flow “minefield.” The reason minefields are dangerous is obvious – you can’t see the mines. So let’s remove the dirt, see what’s left, and then see how it all connects.
To begin with, a common vocabulary is in order. You’ll hear a number of terms circling about the central concept of cash flow. Some are clear, others a bit vague, many overlap, and all are important. Let’s dive in and look at some of these cash flow terms and their definitions.
Term: Actual Cost of Work Performed (ACWP)
Definition: Actual costs charged against completed activities, including labor, materials, subcontracts, overhead and other.
Term: Budget at Completion (BAC)
Definition: Total budgeted cost of the project
Term: Budgeted Cost of Work Performed (BCWP)
Definition: Value of work performed, rather than the cost of the actual work performed. This is also referred to as "earned value" or EV.
Term: Budgeted Cost of Work Scheduled (BCWS)
Definition: The amount of money budgeted to complete the scheduled work which is as yet uncompleted.
Term: Committed Costs
Definition: Costs that have not been paid, but have been contractually agreed upon
Term: Cost to Complete
Definition: The expected additional costs needed to complete all remaining work on the activity, phase or project. Also known as ‘Estimate to Complete” (ETC).
Term: Estimate at Completion (EAC)
Definition: Estimate of the project’s total cost at completion, as calculated throughout the life of the project. Calculated as the project’s actual costs plus the estimate to complete.
Term: Float
Definition: 1) Operations: In projects, the amount of time that an activity may slip in its start and completion before becoming critical. 2) Finance: Time lapse between issuing a check and debiting of its amount from the check issuer's account, or between depositing a check and crediting of its amount to the check depositor's account. The check issuer gains interest due to the payment float, the check depositor loses interest due to the collection float.
John Chaney, CPA/MBA, co-founded Dexter + Chaney with Mark Dexter in 1981 after working together at the Seattle office of Arthur Andersen & Co. They decided to form their own company after determining there was a market need for construction management software for construction companies with $1 million or more in annual sales.
John is an active member of the Construction Financial Management Association's Puget Sound chapter and is a former member of the chapter's board of directors and a former chairman of its Academic Scholarship Committee. John is an industry leader in the design of construction management software, and is a frequent contributor to major industry magazines. He earned his Masters of Business Administration from University of Washington and his Bachelor of Science from University of the Pacific.
