Abstract:
A contractor’s financial viability is affected by late and incomplete payments
from the owner. Late and incomplete payments lead to cash flow
uncertainty, additional bank interest, and delays in paying creditors
such as suppliers and subcontractors, and may lead to decreased project
performance, and possible additional time and cost due to disputes.
The paper presents a method for cash flow and present value analysis
under uncertainty based on an owner’s payment history or estimated
payment characteristics. The paper generalises existing modelling of
uncertainty associated with late and incomplete owner payments to a
range of claim types by the contractor, and different owner types. Aging
contractor claims are analysed for claims submitted on a regular basis
for amounts which may vary depending on project phasing. For each of
the pre-identified typical owner payment practices, the estimated paid
proportions of claims and the steady state distribution of payments in different
age categories are established. A present value analysis assesses
project viability from the contractor’s viewpoint. Actual project data are
used to confirm the validity of the method. The intent of the paper is to
assist contractors establish suitable allowances in their tender pricing,
to choose a suitable claim/payment schedule and/or to adopt suitable
administration practices to optimise cash flow. The paper gives a summary
approach for contractors, providing them with a practical tool in
cash flow planning, control and risk management.
Keywords: Cash flow, Markov chains,
contractor payment,
owner classification
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