Financial Management of the Construction Projects: A Proposed Cash Flow Analysis Model at Project Portfolio Level

Abstract

Construction sector is vulnerable to economic changes, especially during recession periods due to the high capital outlays, cost flexibility and high competition limiting the price. The changes of the business environment, often associated with shortage of funds, exchange rate fluctuation and political instability are increasing the construction projects financial risks. The actual economical context in the Central and East European countries is characterized by an aggressive competition and a lack of investments in construction area. The common behaviour of the contractor construction companies during these days is to accept a large number of risks beyond their power to mitigate them only to still stay on the business. In order to win the tender, they are bidding lower prices which make them vulnerable to the unexpected events during the project, especially from financial aspects. But the lack of cash during the project progress both at the employer level but mostly at the contractor level leads to delays, penalties and loss of opportunities which are reflected in the health of projects and organizations.The paper proposes a practical cash flow analysis model, which can be applied by the construction companies mainly when decisions about portfolio structure are taken. Applying this proposed model, the construction companies could avoid high financial exposures and loses.

Cash Flow Management of Construction Projects in Saudi Arabia

“…They used a warehouse project to demonstrate the flexibility of the model in incorporating cash flow management strategies and predicting project cash flows. Purnuş and Bodea (2015) presented a probabilistic cash flow analysis model, which allows integration of risk events and uncertainties such that the model becomes a true decision tool that can be applied at the project's portfolio level. They claim that when contractors apply the proposed model, they avoid high financial exposures and losses.…”

“…Bromilow (1978), Peer (1982), Isidore and Back (2002), Boussabaine and Elhag (1999), Tucker (1986), Kenley and Wilson (1986), Kaka and Price (1993), Miskawi (1989), and Boussabaine and Kaka (1998) developed deterministic models for forecasting and managing cash flow at the project level. In contrast, Purnuş and Bodea (2015) argued that projects are highly dynamic, and a deterministic analysis does not provide a realistic view of the financial efforts that a contractor has to make. They also discussed the fact that focusing on the individual project level does not reflect the overall risks at the corporate level, and that the simple sum of an individual project’s risks can be significantly different from the total corporate risks.…”

Application of Fuzzy Modelling to Predict Construction Projects Cash Flow

“…They believed that accuracy in project cash flow forecasting can help project management in controlling delays. Purnus and Bodea [34] proposed a practical model for cash flow in a construction project. Their model was suitable for choosing a reasonable portfolio structure.…”

Financial Planning and Management Practices of Electrical Contractors

“…The 2008-2012 recession, which grew out of the mortgage crisis in the United States, and its global impact have left a weakened economic environment in the United States, Europe, and elsewhere. This makes it imperative to better understand cash flow at the portfolio (Purnus and Bodea 2015) and company levels. Treating it without the necessary care at the managerial level can lead to bankruptcy, even if the company is awarded a sufficient number of projects and all productive processes are performed perfectly (Touran et al 2004, p. 719):…”