Balancing Front Loading and Back Loading

The Front loading and back loading of cost / payment is a favorite discussion topic for many clients and contractors especially at the inception stage of the Projects.

The Inherent Conflict

At any EPC contract, two opposing forces meet:

The Client: Wants to pay as late as possible to ensure the contractor stays committed until the final bolt is tightened.
The Contractor: Wants high invoice value early to maintain a positive cash flow and de-risk the mobilization phase.

Mis-implementation is Fatal

Pushing the scale too far to the left (Front) or right (Back) creates a "death spiral." Before making hasty decisions, parties must conduct Risk and Cost-Benefit Analysis to find the equilibrium point.

The Risk of Heavy Front-Loading

When a project payment is heavily front loaded, the contractor would not have much of interest to finish the project with the remaining budget. They would try to not to get into the pre-commissioning and commissioning stages where the all the construction issues (quality) have to be resolved.

The Risk of Heavy Back-Loading

If it is heavily back loaded, the contractor could be in constant negative cash flow. As a result, to minimize the negative cash flow, the contractor might not be able to mobilize adequate number of resources or will not mobilize additional resources to catch up with delays. Even, it is possible that the contractor could get bankrupted, then the client either has to pay to save the project or contractor will declare he will not be able to finish the project.

The Fatal Mistake: Work vs. Payment

Many professionals mistake Payment Loading for Work Loading. This is a critical error.

If any project manager or planner fails to differentiate between these two, then most certainly the Project will fail. For example, if a project uses the next chart for Payment and Work, because most of work being shifted towards the end, the project wouldn’t be able to complete all the works in a short period of time.

As stated, although many professionals are familiar with the concept but there are small fine lines that if get ignored, they could easily lead the project to the infamous familiar territory.

Audit Your Project Strategy

Is your relationship between invoice loading and work loading clear?

Do you have a correctly resource-loaded schedule to justify payments?

As a Client, can you validate contractor invoices with high certainty?

Does your Progress Measurement System (PMS) actually support your cash flow?