Maximizing expected contractor profit using an integrated model

Abstract

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.

The contractor time–cost–credit trade‐off problem: integer programming model, heuristic solution, and business insights

“…Unfortunately, solutions cannot be benchmarked against exact solutions or bounds obtained from solving IP models. GA is the most used meta‐heuristic to solve the FBSP and its variants (Elazouni and Metwally, , ; Ali and Elazouni, ; Abido and Elazouni, ; Fathi and Afshar, ; Elazouni and Abido, ; Alghazi et al., ; Alavipour and Arditi, , ). Other techniques include frog leap algorithm (Alghazi et al., ), ant colony optimization (Al‐Shihabi and AlDurgam, ), and general heuristics (Elazouni, ; Gajpal and Elazouni, ).…”

“…A chromosome is translated into a schedule having a specified duration, for which an LP algorithm finds the best alternatives to minimize financing costs. This GALP algorithm of Alavipour and Arditi () was extended in Alavipour and Arditi () such that the start times of activities can be delayed to improve profitability while maintaining the project total duration. Alavipour and Arditi (, ) can either consider CL constraint and then find the optimum financing alternative or find the optimum financing with no limitation considered for CL.…”

“…Examples about these criteria are makespan and tardiness for time based, resource leveling and investment problems for the resource based, and NPV for the finance based (Palacio and Larrea, ). The objective functions of the proposed DTCCP model can be classified as a time‐based one, while the objective functions in Alavipour and Arditi (, ) are finance based.…”

“…Researchers have considered variants to this problem earlier (e.g., El‐Abbasy et al., , ; Alavipour and Arditi, ); however, and to the authors' knowledge, no exact technique has been used to solve this problem; instead, researchers have relied on meta‐heuristics to solve this problem. A common excuse to avoid using exact methods, especially IP, is the time needed to solve this problem compared to genetic algorithm (GA).…”

Payment Scheduling Problem with Multiple Modes for Activities to Maximize the Net Present Value of a Project

“…Alavipour and Arditi developed an integrated profit maximization framework for expected profit maximization through cost-time trade-off evaluation, activity start time adjustment, financing cost minimization, and work schedule extension minimization. eir model demonstrated its efficiency for contractors to maximize profits [19]. Liang et al presented a model considering stochastic activity durations in robust resource-constrained max-NPV project problem.…”