Cash Flow Forecast Updates — QS Guidance Notes

Section 1

Purpose

The cash flow forecast is the financial model that predicts when money will flow out of the project — from the employer to the contractor — over the construction programme. For the employer, it is an essential treasury management tool: it informs borrowing strategy, equity drawdown timing, and compliance with loan-to-cost covenants. For the QS, updating the cash flow forecast monthly against actual certified amounts is a core Stage 5 responsibility that provides early warning of programme slippage, over-certification, and contractor financial distress.

RICS Cash Flow Forecasting (2nd edition, July 2024) treats cash flow as "the lifeblood of the construction industry" and distinguishes two related but distinct exercises: the project cash flow (the payments due under a particular construction contract) and the organisational cash flow (the company-level inflows and outflows of the contractor or consultant). This guidance note is concerned principally with the project cash flow but recognises that errors or slippage on a project will feed into the contractor's organisational cash flow and may have wider consequences.

RICS PI identifies an inherent trade-off between the predictability of payment timing and the accuracy of the value of completed work. Stage and milestone payments give the employer high timing predictability but lower accuracy of value completed. Third-party certification (the QS's monthly valuation) gives the highest accuracy of value completed but the least predictability of timing — the forecast must therefore be constantly updated as better information (the contractor's programme, actual measured progress, agreed variations, extensions of time) becomes available. A cash flow forecast prepared once at contract execution and never revisited has no value as a management tool and may mislead the employer about the financial demands of the remaining programme.

Section 2

Key Principles

2.1 Two types of cash flow forecast Per RICS PI section 2.1, a project cash flow deals specifically with payments due under the construction contract; an organisational cash flow reviews the predicted incoming and outgoing cash for a company over a defined period (typically a year) and is used for business planning, resource management, and assessing financial health. The two are intrinsically linked: a project cash flow feeds into the contractor's organisational cash flow, and the QS may legitimately review a tendering contractor's organisational cash flow as part of pre-qualification.

2.2 Direction of cash flow Cash flows in multiple directions on every project: employer → main contractor; main contractor → sub-contractors / suppliers / HMRC / designers; employer → consultants / specialist contractors / direct appointments / HMRC; sub-contractors → suppliers / specialists / HMRC. The reference to "cash flow" in this guidance note means the cash flow from the employer to the main contractor unless otherwise stated.

2.3 Methods of valuation and the predictability/accuracy trade-off RICS PI section 2.2 sets out four principal methods of valuing the works for interim payment, with the trade-off illustrated below:

2.4 Statutory framework — Construction Act 1996 (as amended 2009) The Housing Grants, Construction and Regeneration Act 1996, as amended by the Local Democracy, Economic Development and Construction Act 2009, sets the payment framework that every cash flow forecast must respect. Key effects on cash flow forecasting:

Right to interim, periodic or stage payments where the contract period is 45 days or more (or shorter if the parties agree).
Every construction contract must contain a mechanism to determine what payment is due, when it is due, and a final date for payment.
"Pay when paid" clauses linking payment to receipt under a separate contract are prohibited (subject to limited insolvency exceptions).
The payer must give a payment notice (or default payment notice) and may only withhold sums by issuing an effective pay-less notice.
The payee may suspend performance (in whole or in part) if a sum due is not paid in full by the final date for payment.
Statutory right to refer disputes to adjudication; the Act now applies to all construction contracts whether in writing or not.

The certification period (valuation date → certificate / payment notice) and the payment period (certificate → final date for payment) together create the time lag the forecast must apply to each month's certified amount. Standard contracts have different default periods, and these are frequently amended by the employer; the QS must check the executed contract before producing the forecast rather than relying on standard-form defaults.

2.5 Curves and formulae Before a contractor is appointed there is no agreed programme to drive the forecast, so the QS uses a formula-based S-curve. The S-curve ("standard" curve, named for its shape) reflects the empirically observed fact that periodic expenditure is lower at the beginning of a contract (set-up and enabling works) and at the end (snagging and reduced site presence), with the bulk of expenditure concentrated in the middle. S-curves are derived from data on previous projects.

The DHSS (Department of Health & Social Security) expenditure forecasting model developed by KW Hudson is one of the longest-established and most widely used S-curve formulae. It was originally developed for hospital capital projects but is applied across many sectors. Its age and original intended use must be considered when relying on it. Many organisations have developed their own "special" curve formulae for their specific sectors, and computer modelling allows sensitivity analysis of the underlying variables. Once a contract has been signed, the contractor's accepted programme and pricing document (BQ or activity schedule) provide a more accurate basis than any generic S-curve.

Section 3

Practical Application

Step 1

Take the employer's brief for the forecast Before producing any forecast, the QS must establish what the employer needs. RICS PI section 3.2 sets out the questions to ask:

Is the forecast for the employer or the contractor (different audiences require different presentation)?

Construction contract value only, or full development value (fees, VAT, direct contracts, FF&E, enabling works)?

Should it show the valuation date, certificate date, invoice date, or actual payment date? The lag between these can be material for treasury planning.

Gross or net of retention? Inclusive or exclusive of VAT?

Cumulative, periodic, or both? In which currency?

Whatever is agreed must be clearly stated on the face of the forecast. A common error is the employer assuming valuation dates when the QS has plotted payment dates, leaving the employer short of funds during the lag period.

Step 2

Establish the baseline S-curve At contract execution, plot the contractor's accepted programme against the pricing document (BQ by trade section or contract sum analysis by element) to produce the initial expenditure profile. Apply the contractual payment lags (valuation date + certification period + payment period). Apply retention deductions and model the two retention release events (PC and end of rectification period). This baseline is the reference against which monthly actuals are tracked. Where individual trade packages have heavily weighted internal value distributions (e.g. M&E with switchgear delivered mid-package), apply the appropriate weighting rather than spreading the package value linearly.

Step 3

Apply payment timing — valuation, certification and payment dates RICS PI sections 3.9 and 3.10 distinguish three time points the forecast must keep separate. The valuation date is when the QS assesses the work in place. The certificate date is when the payment notice is issued (the certified value may differ from the valuation if the contract administrator considers work has not been carried out in accordance with the contract — actuals should be tracked against certified values, not application values). The payment date is when funds physically leave the employer's account. The default payment period in many standard forms is 14 days from certificate, but this is frequently amended; always check the executed contract. A schedule of interim certificate dates should be listed up to one month after practical completion.

Step 4

Model retention Most standard forms include a retention provision — typically 3–5% of certified value, sometimes a fixed sum. Half is normally released at practical completion and the remaining half at the end of the rectification period (typically 6–12 months, but as agreed). The forecast must show: (i) retention deducted from each net interim payment; (ii) the cumulative retention build-up; (iii) the first release tranche at PC; (iv) the static period during the rectification period; and (v) the second release tranche at end of defects. On a £10m project at 3% retention, half released at PC, the employer continues to hold £150,000 for 6–12 months after PC — this static balance and final release must appear on the forecast.

Step 5

Cyclical events — Christmas, Easter and seasonal working The construction industry — sub-contractors and suppliers in particular — typically shuts down for around two weeks over Christmas. December valuations are commonly brought forward to avoid the shutdown, and the January valuation date and resulting payment can fall a week or so earlier than the normal monthly cycle. Easter has a smaller but similar effect. Adverse winter weather is harder to predict but the overall programme should attempt to take seasonal variation into account. Project-specific cyclical events also need allowance — for example examination periods at schools and universities, or restricted working windows on operational sites (hospitals, retail, transport).

Step 6

Variations, provisional sums and risk allowance Variations may change the contract value, the contract programme, or both. The forecast should make some attempt to include likely variation spend: where a priced project risk register exists, allocate "close-out dates" to each risk and feed those into the cash flow; where the risk allowance is held only as a percentage, feed it into the S-curve at the same proportion as the rest of the works. Provisional sums (especially undefined ones) carry both timing and value uncertainty — the actual instructed value commonly differs from the allowance. The risk of provisional sums coming in materially over or under should be recorded in the risk register and reflected in the risk-spend profile. The employer should be told explicitly that the programme effects of variations are not factored into a forecast based on the original programme.

Step 7

Sectional completion and partial possession Where the contract provides for sectional completion (pre-defined sections handed over on different dates) or partial possession (taken with the contractor's consent), each section will have its own completion date, retention amount and rectification period — and therefore its own S-curve. The cleanest approach is to produce a separate sub-cash-flow for each section and merge them. Different sectional completion elements may also have individual retention releases proportional to section value; this must be incorporated.

Step 8

Materials on and off site, and Modern Methods of Construction Materials on site should not normally distort the forecast; the QS should not recommend payment for materials brought to site significantly in advance simply to boost the contractor's cash flow (a possible insolvency warning). Materials off site, where contractually permitted, can shift the forecast materially — the textbook example is bathroom pods, traditionally paid for as installed but, when pre-fabricated and paid for off-site, paid for during the middle of the programme as pods are completed in the factory. With increasing use of Modern Methods of Construction (MMC) and significant Pre-Manufactured Value (PMV), this effect is becoming more pronounced; the QS must also address ownership and transfer of title for off-site materials. Note that the SBCC versions of JCT contracts (Scotland) do not recognise payment for materials off site — a separate Contract of Purchase is the usual mechanism.

Step 9

Currency, fees and other development costs Where the project involves overseas employers, contractors or material supply, the forecast must clearly state the currency. Exchange rate movement affects both the employer (timing FX conversions) and the contractor (paying overseas suppliers). For a full development cash flow rather than a construction-only one, additional cost centres must be added: consultant fees (which start before and run beyond the construction period and have their own bespoke profile), direct contracts (FF&E, enabling works, decanting, demolition), VAT and other taxes, and internal cost transfers. Each of these has its own payment terms that must be respected when building the consolidated profile. Note that under design-and-build contracts, fees may sit inside the construction contract sum rather than as a separate cost centre — establish where they sit before merging.

Step 10

Specialist input S-curves perform well for standard development types but their reliability falls away on highly bespoke, specialist or technically complex projects (the PI uses a nuclear power plant as the illustrative example). On specialist projects, formal input from those familiar with the construction techniques and supply chain should be obtained before the forecast is finalised; the QS should not rely on a generic curve in such cases.

Step 11

Iteration — the monthly update process After each interim certificate, compare the certified amount against the forecast for that month. Record the variance in pounds and percent. Investigate the cause (programme slippage, measurement difference, materials timing, front-end loading, agreed variation, re-sequencing, EoT). Update the forecast: agreed variations are added to the appropriate future month(s); programme revisions shift the curve; agreed EoTs extend the curve to the right; acceleration compresses it. Update the cumulative retention balance. Adjust for cyclical events (December/January in particular). Present the updated forecast vs actuals as a graph and as a numerical summary in the monthly cost report. Always include the revision number and date.

Section 4

Variance Analysis

4.1 Reasons actual payments fall below the forecast Per RICS PI section 4.2, the most common causes are:

Adverse site conditions or adverse weather closing the site for periods.
Re-sequencing of works, often driven by late sub-contractor procurement.
Materials stored off site but not claimed for, or not yet delivered.
Project simply progressing more slowly than the contractor's original programme assumed.
The original cash flow forecast was inaccurate (over-optimistic programme or pricing assumptions).

4.2 Reasons actual payments run above the forecast Sustained over-certification deserves searching questions; common causes include:

Front-end loading — early activities priced above market rates to boost early cash flow.
Contractor genuinely ahead of programme by working faster than envisaged.
Re-sequencing places higher-value work earlier than originally planned.
Materials stockpiled on site well ahead of need (a possible insolvency warning sign).
Materials off site not taken into account when producing the original forecast.
The inclusion of variations not previously modelled.
Contractor accelerating to complete earlier and reduce preliminaries exposure.
A distressed contractor, sub-contractor or supplier (overclaiming to relieve cash pressure).
The original cash flow forecast was inaccurate.

Section 5

Common Mistakes to Avoid

Errors most frequently encountered in cash flow forecasting and reporting:

Producing an initial forecast at contract execution and never updating it — a static forecast has no value as a management tool.
Not adjusting the forecast when variations are agreed — the forecast then diverges from reality progressively.
Ignoring the Christmas/Easter shutdown — December valuations are typically brought forward, creating an apparent (but unreal) anomaly the following month.
Confusing valuation, certificate and payment dates — the forecast must specify which is plotted; for treasury management, only payment date is relevant.
Not flagging persistent positive variance — sustained over-certification may indicate front-end loading; on contractor insolvency the employer will have paid more than the value of work completed.
Forecasting the benefit of liquidated damages before they are formally agreed — LADs are a transfer of liability, not a saving, and should not be assumed.
Treating cost-reimbursable / target cost contracts as if they were lump sum — actuals must be fed in regularly as they emerge.
Failing to distinguish English and Scottish positions on materials off site (SBCC vs JCT).

What are the four main methods of valuing the works for interim payment, and how do they trade off accuracy for predictability?

Per RICS Cash Flow Forecasting (2nd ed, 2024), section 2.2: (i) stage payments — high timing predictability, low accuracy of value done; (ii) milestone payments — high payment-amount predictability, lower timing predictability; (iii) activity schedules (NEC A and C) — reasonable on both, with a recognition lag; (iv) third-party certification — lowest timing predictability, highest accuracy of value done. There is an inherent inverse relationship between the two.

What are the common causes of actual payments running below the cash flow forecast?

Per RICS PI section 4.2: (i) site conditions; (ii) adverse weather; (iii) re-sequencing of works (often late sub-contractor procurement); (iv) materials stored off site but not claimed for; (v) project progressing slower than anticipated; (vi) materials not delivered on time; (vii) the cash flow forecast was not accurate in the first place.

What is front-end loading and how can the QS detect it from the cash flow?

Front-end loading is the contractor's practice of pricing early, high-volume activities above market rates to improve their early cash flow. It can be detected when actual certified amounts run consistently above the S-curve forecast in the early months, particularly if concentrated in early trade packages with corresponding under-pricing of later packages. Cross-reference against the priced BQ. The risk is that on contractor insolvency mid-contract, the employer has paid more than the value of work completed.

How does the Construction Act 1996 (as amended) affect the cash flow forecast?

Per RICS PI section 2.4 and HGCRA 1996 (as amended 2009): the contract must specify a payment due date and final date for payment, supported by a payment notice and, where applicable, a valid pay-less notice. "Pay when paid" is prohibited. The payee may suspend performance for non-payment. These statutory time lags between valuation, certification and payment must all be applied to the forecast. The Act applies to all construction contracts whether in writing or not.

How is retention modelled in the cash flow forecast?

Per RICS PI sections 3.7 and 3.8: typically 3–5% retention on each certified amount; commonly half released at practical completion and half at end of rectification period (6–12 months). The forecast must show retention deducted from each net payment, the cumulative balance, the static period after PC and the final release. Sectional completion may produce multiple, staggered retention releases.

Why does the procurement route affect the forecast structure?

Per RICS PI section 4.9: traditional contracts separate construction, fees and risk; D&B may bundle them; cost reimbursable / target cost are not lump sums and need actual cost updates; construction management produces many parallel package cash flows with different payment terms and a construction manager fee running throughout. A change of procurement route normally requires the forecast to be restructured, not just re-numbered.

Section 6

Practical Considerations — Claims, Acceleration, VAT & Procurement

6.1 Claims for loss and expense As soon as it is apparent the contractor may submit a claim for loss and expense (against a qualifying matter under the contract), the employer should be told that the cash flow forecast accuracy may be compromised. Best- and worst-case settlement assessments should be prepared so the employer understands the range of liability. The timing of claim settlement is itself uncertain — claims are often resolved many months after the end of the contract period, generating a payment well after PC. The forecast should be updated regularly to flag slippage in expected settlement. The cash flow forecast can also support — or rebut — a claim: a contractor may use the forecast to demonstrate they were on programme until a relevant event caused slippage; an employer may use payments tracking the forecast to question delay assertions. This is why early collaborative updates with the contractor matter.

6.2 Liquidated damages Where the contractor is in culpable delay, most contracts allow the employer to deduct LADs at the rate stated. This reduces the cash outflow to the contractor but is a transfer of liability rather than a saving — the employer's loss should be no greater than the LADs (LADs being a genuine pre-estimate of likely loss). Employers should be advised not to forecast the benefit of LADs until they have been formally levied through the contract mechanism.

6.3 Re-sequencing and acceleration Re-sequencing affects the actual payment profile against the forecast even where the total value is unchanged. Triggers include: instructed acceleration to recover delay, late procurement of sub-contractors (programme updated once appointed), change of sub-contractor or supplier, accommodating employer variations, encountered site conditions, adverse weather, and sub-contractor or supplier insolvency. Each of these should prompt a forecast revision.

6.4 Effect of VAT VAT in construction is complex; specialist advice should be sought on which payments attract VAT and at which rate. Forecasts often exclude VAT, but where the employer asks for it to be shown, the QS should reflect that VAT is paid with the contractor's invoice and (typically) recovered from HMRC at a later date — creating a temporary cash demand on the employer and a corresponding recovery dip later in the project. Long-duration projects may also see legislative VAT changes (rate, scope of zero/reduced rating) that must be reflected as they take effect.

6.5 Effect of procurement route Traditional contracts separate construction from design fees and risk; design-and-build typically wraps an element of design fees and risk allowance inside the contract sum; a procurement-route change may therefore require the forecast structure to be reworked. Cost reimbursable and target cost contracts are not lump sums — the forecast is initially based on the estimate or target, and must be updated regularly with actual costs plus agreed fee, taking pain/gain share into account. Construction management and other package-based routes produce the same overall profile at a high level but, at micro level, become an accumulation of many smaller cash flows with different payment terms, payment dates falling throughout the month, and the construction manager's fee running across the whole programme. VAT treatment may also differ between packages.

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Brief taken from employer recorded (audience; construction-only or full development; valuation/certificate/payment date; gross or net; with or without VAT; cumulative or periodic; currency).

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Baseline S-curve plotted at contract execution from the contractor's accepted programme and pricing document, with package-level weighting where appropriate.

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Payment lags applied (valuation date + certification period + payment period = payment date) — terms taken from the executed contract, not standard-form defaults.

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Retention modelled: percentage applied to each certified value, cumulative balance tracked, both release tranches plotted (PC and end of rectification period).

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Sectional completion and partial possession, where applicable, modelled as separate sub-curves and merged.

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Materials off site (and any MMC / PMV element) reflected in the timing of payments where contractually permitted; ownership / transfer-of-title considered.

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Provisional sums and risk allowance reflected — close-out dates assigned where possible; risk register linked.

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Other cost centres added if a development cash flow is required (consultant fees, direct contracts, FF&E, enabling works, VAT, internal transfers).

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Cyclical events (Christmas, Easter, statutory holidays, project-specific shutdowns) reflected.

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Currency stated; FX assumptions documented if relevant.

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Monthly comparison: cumulative certified vs forecast plotted; variance (£ and %) calculated; cause investigated and recorded.

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Forecast updated for each agreed variation (value and timing) and for each programme change, EoT or acceleration instruction.

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Persistent positive variance investigated as possible front-end loading; pricing schedule cross-referenced.

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Updated S-curve included in the monthly cost report (cumulative graph + summary table) with revision number and date.

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Drawdown schedule updated and issued to funder/bank where applicable; deviations flagged with reasons.

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Assumptions, exclusions and source data noted on the face of the forecast.

Section 7

ISO 9001 / Audit Management Relevance

Cash flow forecasting and its monthly update sit within several ISO 9001:2015 clauses. The activity is part of operational planning and control (clause 8.1) and design and development outputs (8.3.5) where the cost plan and forecast are the principal financial outputs. Monitoring actual against forecast and acting on variance falls under monitoring, measurement, analysis and evaluation (9.1) and management review inputs (9.3.2). Each forecast revision should be controlled as documented information (7.5) — version-numbered, dated, retained — and changes captured under control of changes (8.5.6). For an auditable trail, retain: the brief from the employer, the baseline forecast and its source data (programme used, pricing document, payment terms applied, retention assumptions), each monthly revision with the reason for change recorded, and the cost report in which the updated forecast was issued.

Section 8

APC Competency & Quick Reference

APC Competencies: Cost Management (L2) | Commercial Management (L2) | Contract Administration (L1) | Legal & Regulatory Compliance (L1)

9. Cash Flow Forecast Checklist

10. CPD Learning Outcomes

After working through this guidance note the reader will be able to:

Distinguish project cash flow from organisational cash flow; explain the four main methods of interim valuation (stage, milestone, activity schedule, third-party certification) and the inverse relationship between timing predictability and value-of-works accuracy.
Produce a baseline cash flow forecast using the S-curve methodology (including DHSS / sector-specific curves), correctly applying HGCRA payment lags, retention deductions, the two retention release events, and adjustments for sectional completion, materials off site, MMC/PMV, currency, and cyclical events.
Update the forecast monthly in response to agreed variations, programme changes, EoTs and acceleration instructions; perform variance analysis, identify front-end loading and other warning signs, and present the updated forecast (graph and table) in the monthly cost report.
Explain how alternative procurement routes (traditional, D&B, cost reimbursable / target cost, construction management) affect the structure of the forecast, and how loss-and-expense claims, liquidated damages and VAT interact with it.

11. Further Reading

RICS Cash Flow Forecasting (2nd edition, July 2024) — RICS practice information.
RICS New Rules of Measurement: NRM1 — Order of cost estimating and cost planning for capital building works.
RICS Rules of Conduct (current edition).
Housing Grants, Construction and Regeneration Act 1996 (c.53), as amended by the Local Democracy, Economic Development and Construction Act 2009.
JCT Standard Building Contract with Quantities (SBC/Q) — current edition, payment provisions.
NEC4 Engineering and Construction Contract — Options A, C and D, and the activity schedule provisions.
BCIS price and cost indices (RICS BCIS) — for inflation adjustment of forecasts on long-duration projects.

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