Maximizing expected contractor profit using an integrated model

Purpose

Planning for increased contractor profits should start at the time the contract is signed because low profits and lack of profitability are the primary causes of contractor failure. The purpose of this paper is to propose an integrated profit maximization model (IPMM) that aims for maximum expected profit by using time-cost tradeoff analysis, adjusted start times of activities, minimized financing cost and minimized extension of work schedule beyond the contract duration. This kind of integrated approach was never researched in the past.

Design/methodology/approach

IPMM is programmed into an automated system using MATLAB 2016a. It generates an optimal work schedule that leads to maximum profit by means of time-cost tradeoff analysis considering different activity acceleration/deceleration methods and adjusting the start/finish times of activities. While doing so, IPMM minimizes the contractor’s financing cost by considering combinations of different financing alternatives such as short_term loans, long-term loans and lines of credit. IPMM also considers the impact of extending the project duration on project profit.

Findings

IPMM is tested for different project durations, for the optimality of the solutions, differing activity start/finish times and project financing alternatives. In all cases, contractors can achieve maximum profit by using IPMM.

Research limitations/implications

IPMM considers a deterministic project schedule, whereas stochastic time-cost tradeoff analysis can improve its performance. Resource allocation and resource leveling are not considered in IPMM, but can be incorporated into the model in future research. Finally, the long computational time is a challenge that needs to be overcome in future research.

Practical implications

IPMM is likely to increase profits and improve the chances of contractors to survive and grow compared to their competitors. The practical value of IPMM is that any contractor can and should use IPMM since all the data required to run IPMM is available to the contractor at the time the contract is signed. The contractor who provides information about network logic, schedule data, cost data, contractual terms, and available financing alternatives and their APRs can use an automated IPMM that adjusts activity start times and durations, minimizes financing cost, eliminates or minimizes time extensions, minimizes total cost and maximizes expected profit.

Originality/value

Unlike any prior study that looks into contractors’ profits by considering the impact of only one or two factors at a time, this study presents an IPMM that considers all major factors that affect profits, namely, time-cost tradeoff analysis, adjusted start times of activities, minimized financing cost and minimized extension of work schedule beyond the contract duration.