Cash Flow Forecasting (Updated)

Section 1

Purpose

Note on JCT editions: JCT has published the 2024 Edition. This guidance cites JCT SBC/Q 2016 clause references; the commercial and payment mechanisms are substantively unchanged in the 2024 edition, but specific clause references should be verified against the contract edition in use on any given project.

The Stage 3 Updated Cash Flow Forecast refreshes the indicative Stage 2 forecast using the Cost Plan 2 budget, a developed construction programme, and confirmed inflation adjustments — principally BCIS Tender Price Index (TPI) for tender inflation and a construction inflation allowance for the construction period. By Stage 3, the construction programme should reflect coordinated sequencing information from the architect, structural engineer and M&E engineer, producing a materially more reliable spend profile than the Stage 2 indicative forecast.

Two distinct inflation allowances are required at Stage 3 and must be separately identified within both Cost Plan 2 and the Cash Flow Forecast: tender inflation (the movement in construction prices from the cost plan base date to the anticipated tender return date) and construction inflation (the movement from the tender return date to the mid-point of the construction period). Both are calculated using the BCIS TPI formula: ((current index − base index) ÷ base index) × 100%.

The Stage 3 Cash Flow Forecast is the last version produced before procurement commences. It informs the client's funding drawdown arrangements, bank covenant reporting, and funder's cash flow requirements. The QS must ensure it is comprehensive, clearly states all assumptions, and distinguishes between the construction cost cash flow and the all-in project cash flow (including professional fees, statutory charges and client direct costs).

Section 2

Key Principles

RICS Cash Flow Forecasting (RICS guidance note, 2014): the principal RICS framework for construction project cash flow preparation, including S-curve methodology, fee phasing, retention modelling and inflation treatment.
NRM 1 (2nd edition, 2012): Cost Plan 2 provides the total project budget and elemental breakdown that forms the basis of the Stage 3 forecast; inflation allowances must follow NRM 1 guidance on tender and construction inflation.
BCIS Tender Price Index (TPI): BCIS publishes quarterly TPI values and forecasts. Tender inflation formula (from NRM 1 / APC study packs): ((current TPI − base TPI) ÷ base TPI) × 100%.
BCIS Duration Calculator: BCIS tool that estimates construction duration from project value, building function, procurement route and selection method — used where a confirmed programme is not yet available.
RICS Cost Prediction (Professional Statement, 1st edition, 2021): requires the cash flow to state its base date, inflation assumptions and reasons for change from the previous forecast.
JCT Standard Building Contract (SBC/Q, 2016 edition), Clauses 4.9–4.13: interim payment and retention provisions — contextual basis for modelling monthly valuations, retention deductions and releases in the cash flow.

Section 3

Practical Application

Step 1

Obtain the Stage 3 construction programme from the design team. Confirm: start on site date; practical completion date; construction duration (weeks); key trade programme milestones (groundworks, structure, envelope, M&E first fix, fit-out, commissioning). If a formal programme is not yet available, use the BCIS Duration Calculator to generate a benchmarked estimate of construction duration.

Step 2

Calculate tender inflation: identify the CP2 base date and the anticipated tender return date. Source the BCIS TPI values for both dates (or use the BCIS forecast for future dates). Apply: Tender inflation % = ((TPI at tender date − TPI at base date) ÷ TPI at base date) × 100%. Apply to the full construction cost.

Step 3

Calculate construction inflation: identify the tender return date and the mid-point of the construction period. Source BCIS TPI values (or forecast). Apply: Construction inflation % = ((TPI at construction mid-point − TPI at tender date) ÷ TPI at tender date) × 100%. Apply to the construction cost (post-tender inflation). State both inflation calculations in the Cost Plan 2 inflation section.

Step 4

Re-profile the construction cash flow against the Stage 3 programme using S-curve methodology. Divide the programme into monthly periods. Weight expenditure: slow start (months 1–2 approximately 3–5% of construction cost for mobilisation and early groundworks); ramp-up (months 3–6); peak spend (middle third of programme); tail-off (final 15–20% of programme for fit-out, commissioning, snagging).

Step 5

Apply element-specific phasing: front-load Preliminaries (site establishment in months 1–2); back-load external works (GE 8) and commissioning; ensure M&E (GE 5) expenditure reflects the actual sequence (first fix before structural completion; second fix during fit-out phase).

Step 6

Model retention: deduct retention (typically 3–5%) from each monthly valuation. Release 50% of total retention at Practical Completion (typically month 12–18 post-start); release the remaining 50% at the end of the Defects Liability Period (typically 6–12 months after PC).

Step 7

Prepare the all-in project cash flow: combine the construction cost cash flow with the professional fees cash flow (phased against the fee programme — pre-contract fees typically disbursed before site start; post-contract fees concurrent with construction), statutory charges, client direct costs, and the risk allowance drawdown profile.

Step 8

Issue the Updated Cash Flow Forecast as an appendix to Cost Plan 2. State: base date, tender inflation (% and TPI values used), construction inflation (% and TPI values), programme assumptions, retention basis, VAT treatment, and a comparison against the Stage 2 forecast with reasons for material differences. Obtain client confirmation of the revised spending profile.

Section 4

Common Mistakes to Avoid

Applying a single inflation allowance instead of separating tender inflation (base date to tender return) and construction inflation (tender return to construction mid-point) — NRM 1 and the BCIS methodology require these to be identified separately.
Using a linear (even-spread) spend profile at Stage 3 — by this stage, sufficient programme information exists to produce a properly phased S-curve; a linear profile would misrepresent the client's drawdown requirements.
Presenting only the construction cash flow without the all-in project cash flow — the client's funder typically requires the full project spend profile including fees, statutory charges and client direct costs.
Failing to update the cash flow when the programme or Cost Plan 2 budget changes — the cash flow is a live document; any change to programme dates or construction budget must trigger an immediate update.
Not stating the TPI values and base dates used for inflation calculations — an undocumented inflation adjustment cannot be audited or reconciled at later stages.
Ignoring the effect of retention timing on the client's net cash flow — retention release at PC and DLP end are significant cash receipts that must be correctly timed in the forecast.

Section 5

APC Competency & Quick Reference

APC Competencies: Cost Management (L2) | Programming & Planning (L1) | Commercial Management (L1) | Design Economics & Cost Planning (L2)

How are tender inflation and construction inflation calculated at Stage 3?

Both use the BCIS TPI formula: ((current TPI − base TPI) ÷ base TPI) × 100%. Tender inflation: base TPI = TPI at cost plan base date; current TPI = TPI at anticipated tender return date. Construction inflation: base TPI = TPI at tender return date; current TPI = TPI at mid-point of construction programme. Both are applied separately to the construction cost and stated in the cost plan.

What is the BCIS Duration Calculator and when is it used?

The BCIS Duration Calculator is an online tool that estimates construction duration from four inputs: estimated construction value, building function, procurement route, and contractor selection method. BCIS states it produces results within 90% accuracy. It is used at Stage 3 when a formal construction programme has not yet been issued by the design team, to generate a benchmarked programme for cash flow forecasting.

How is retention modelled in the Stage 3 cash flow forecast?

Retention (typically 3–5% of each interim valuation) is deducted from monthly cash flows. 50% of total accumulated retention is released at Practical Completion (PC); the remaining 50% is released at the end of the Defects Liability Period (typically 6–12 months after PC). Both release dates must be included in the forecast as cash inflows to the contractor (cost outflows to the client cease, representing a reduction in net spend).

Section 6

Cash Flow Forecasting Checklist

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Stage 3 construction programme obtained (or BCIS Duration Calculator used)

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Tender inflation calculated using BCIS TPI (base date to tender return) and documented

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Construction inflation calculated using BCIS TPI (tender return to mid-point) and documented

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S-curve profile applied; element-specific phasing applied (prelims front-loaded; externals back-loaded)

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Retention modelled (50% released at PC; 50% released at end of DLP)

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Professional fees phased separately against fee programme

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All-in project cash flow prepared (construction + fees + statutory charges + client costs)

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Comparison prepared against Stage 2 forecast with reasons for material differences

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VAT treatment confirmed and stated (included/excluded with basis)

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Cash Flow Forecast issued as appendix to Cost Plan 2 with full assumptions schedule

Section 7

CPD Learning Outcomes

Calculate and separately identify tender inflation and construction inflation in a Stage 3 cash flow forecast using the BCIS TPI formula and BCIS published/forecast index values.
Prepare an updated project cash flow forecast using S-curve methodology with element-specific phasing, retention modelling and professional fee phasing, producing both a construction cost cash flow and an all-in project cash flow.
Advise clients on the evolution of cash flow accuracy from the Stage 2 indicative forecast to the Stage 3 updated forecast, and the basis on which the Stage 4 contract-based forecast will supersede it.

Section 8