Cash flow modeling for construction projects

Purpose

Construction projects are well known for their complexity and ambiguity. These projects carry out higher risk than traditional ones because they entail high capital outlays and intricate site conditions. Poor financial management of these projects may lead to bankruptcy; therefore, effective cash flow management is essential. Although the peculiar characteristics of construction projects, the accuracy of cash flow forecasting has been a long lasting problem. The paper aims to discuss these issues.

Design/methodology/approach

Many unforeseen factors affect the cash flow forecasting of construction projects. Therefore, the objective of the presented research in this paper is to examine the impact of these factors on contractor's cash flow. A model has been established by integrating analytic hierarchy process and simulation to examine the impact of various factors on cash flow. Data on the selected factors have been collected through questionnaires from various agencies in North America and China.

Findings

Results show that the most significant factors are: change of progress payment, payment duration, financial position of the contractor, project delays, and poor planning. It also shows that the effect of cash inflow factors varied approximately from 9.7 to 16.3 percent with a mean value of 12.4 percent.

Research limitations/implications

The implementation of the developed models are limited to few case study projects in testing the models. However, the developed models and framework are sound for future improvement. They are considered as a major step toward a broader cash flow planning.

Practical implications

The developed methodology and models play essential roles in decision-making process.

Originality/value

The developed model is expected to help contractors realistically forecast project cash flow under uncertainty. This may lead to more dependable and professional cash flow management, which might substantially reduce failures in construction business.