Portfolio Cash Assessment Using Fuzzy Systems Theory

Gaps between cash outflows and inflows throughout the life cycle of construction projects can create extended periods of low cash availability for a construction contractor, jeopardizing the financial stability of the business. A number of researchers have therefore attempted to model cash availability at a project level. However, at a firm level, financial stability is more thoroughly examined as a function of the cash flows related to multiple projects. This paper proposes a methodology on the basis of fuzzy systems theory to forecast cash requirements of a portfolio of projects for a construction firm, taking into account the effect of changing portfolio composition on portfolio cash-flow risk. Portfolio cash-flow risk is calculated from a variance matrix created by using covariance among cash flows of pairs of projects. Expert opinions of a group of highway construction contractors regarding project selection, project risk assessment and cash control were collected to create a fuzzy proportional derivative (PD) model that predicts portfolio risk for a construction firm. The model was assessed by the same group of contractors for overall logic (if/then rule base), appropriateness of cash-flow calculations (moving weights of cost categories), and practicality through application on a hypothetical test case. The paper concludes that a fuzzy proportional derivative model can be an effective tool to establish trends in cash-flow availability and risk across a portfolio of construction projects.     

Payment Timing as a Factor in Bid Evaluation

While the timing of payments to the contractor, in the course of the construction process, is an important factor in the project cost, it is not referred to either by the bid‐comparison procedures or by the contract terms, in almost all kinds of contracts used in construction projects. An attempt is made here to overcome the consequent disadvantages to the owner, by means of a procedure based on an obligatory schedule whose activities are appropriately related to the items of the bill of quantities, the whole set‐up forming an integral part of the bid and of the final contract. This enables the owner to prepare cash‐flow estimates for the bids, compare them according to the present value of all expected payments, and select the bid with minimum cost. Apart from this, the procedure neutralizes bid imbalances (regarding unit prices and the production schedule) and facilitates deferment of non‐critical activities, thereby reducing financial cost. The cash‐flow estimate of the winning bid serves as a basis for the owner's budget planning, with much higher accuracy in this function. The suggested procedure is adapted also for comparison of bids in which construction duration is determined by the bidder within a given interval.     

Financial Risk Analysis of Project Finance in Indonesian Toll Roads

If a project is implemented using a project-finance approach, the debt service payment relies solely on the project cash flows and its assets. This paper identifies, quantifies, and evaluates major financial risks associated with project-financed toll road projects in Indonesia. Ordering payments by priority level, subject to cash availability, enables risk to be evaluated from the different perspectives of multiple parties involved. The paper makes use of Latin Hypercube simulations for risk analysis because they deal with problems involving large and complex systems. To better illustrate the concept, a case study is presented. A sensitivity analysis of the impact of delay-in-adjustment risk and of the adoption of a new regulation related to the toll adjustment is performed and discussed. Simulation results show that the project sponsor fares worse as delay-in-adjustment risk increases but that the creditor can fare better, given that the risk level is low or moderate. Output statistics also reveal that the adoption of the new regulation has negative impact on the project cash flows from both the project sponsor’s and the creditor’s perspectives under different scenarios associated with delay-in-adjustment risk.     

Analysis of the United States Department of Transportation Prompt Pay Provisions

In recent past the United States Department of Transportation has implemented a number of changes in regulations regarding federal-aid transportation projects. Some of these regulations are designed to help the disadvantaged business enterprise (DBE) firms and subcontractors in general, by requiring the general contractors to pay their subcontractors in a timely manner. Further, these regulations require that general contractors pay their subcontractors’ retainage after the subcontracts are completed, even if they have not received their own retainage from the owner. This paper reviews these new regulations and introduces a financial model for quantifying the effect of these new regulations on the contractors’ profit and the cost of transportation projects. The analysis is done using a spreadsheet-based cash flow model that takes into consideration the expenditure curve, the owner and general contractor’s payment and retainage policies, front money, finance charge on negative cash flow, and interest income on positive cash flow, and final payment and return of retainage policies. A survey was conducted among contractors in Massachusetts and their input was used to run the cash flow model. The results of the analysis for eight different projects are presented and it is shown that the new regulations, on average, reduced the contractor’s profit by 4.35%. It is also shown that the average potential cost increase for transportation projects is 0.14%.     

Evaluation of Risk Factors Leading to Cost Overrun in Delivery of Highway Construction Projects

Accurate owner budget estimates are critical to the initial decision-to-build process for highway construction projects. However, transportation projects have historically experienced significant construction cost overruns from the time the decision to build has been taken by the owner. This paper addresses the problem of why highway projects overrun their predicted costs. It identifies the owner risk variables that contribute to significant cost overrun and then uses factor analysis, expert elicitation, and the nominal group technique to establish groups of importance ranked owner risks. Stepwise multivariate regression analysis is also used to investigate any correlation of the percentage of cost overrun with risks, together with attributes such as highway project type, indexed cost, geographic location, and project delivery method. The research results indicate a correlation between the reciprocal of project budget size and percentage cost overrun. This can be useful for owners in determining more realistic decision-to-build highway budget estimates by taking into account the economies of scale associated with larger projects.     

Assessing the Accuracy of Cash Flow Models: The Significance of Payment Conditions

Cash flow forecasting methods have evolved to allow detailed predictions for individual projects. These methods, principally the cost-schedule integration (CSI) technique, make extensive use of project estimate and schedule data. An implicit assumption of these methods has been that accuracy is largely a function of the quality of data available to the model. To the writers’ knowledge, there has been no assessment of the ability of project specific cash-flow models to accurately predict cash flows given accurate input data. This paper makes two contributions. First, two complementary methods are presented—pattern matching logic and factorial analysis—that provide an ability to assess the accuracy of cash flow models. Second, through demonstration of these methods using data from two projects, a critique is made of the ability of existing CSI models to accurately predict cash flows. The paper concludes by recommending extensions of CSI models to include more detailed payment conditions, including differential payment lags, components for materials and labor, and payment frequency. A further conclusion is the call for more research to better understand the balance between managers’ need for information and the ability of predictive models to provide that information.     

Cost Information Model for Managing Multiple Projects

Construction companies must deal with several projects at once, but a system to manage multiple projects is not fully developed yet. The first step towards developing such system is to design an information model that is suitable for managing multiple projects. This paper presents the cost-based project modeling (CBPM) method in contrast to the traditional activity-based project modeling methods. The CBPM uses cost as a core of the model along with other project information organized around it. The CBPM serves as a platform for integrating project information from multiple projects. Various types of construction costs are hierarchically modeled to generate corporate-wide information such as project performances, cash flows, and other predictive indicators. Based on the information model, an object-oriented database was developed to contain cost data across several projects. In the model, a module that connects to external systems is built into the model to enhance interactivity with the legacy systems and the industry standards. A prototype system was developed and tested with actual project data to validate the information processing capabilities of the model. The findings from the test indicate construction cost can be an excellent medium that can organize various types of information of multiple projects.     

Causes of Delay in Building Construction Projects in Egypt

Delay in construction projects is considered one of the most common problems causing a multitude of negative effects on the project and its participating parties. This paper aims to identify the main causes of delay in construction projects in Egypt from the point of view of contractors, consultants, and owners. A literature review was conducted to compile a list of delay causes that was purged based on appropriateness to Egypt in seven semistructured interviews. The resulting list of delay causes was subjected to a questionnaire survey for quantitative confirmation and identification of the most important causes of delay. The overall results indicated that the most important causes are: financing by contractor during construction, delays in contractor’s payment by owner, design changes by owner or his agent during construction, partial payments during construction, and nonutilization of professional construction/contractual management. The contractor and owner were found to have opposing views, mostly blaming one another for delays, while the consultant was seen as having a more intermediate view. Results’ analyses suggest that in order to significantly reduce delay a joint effort based on teamwork is required. Furthermore, causes of project delay were discussed based on the type and size of the project.     

Optimization of Project Time-Cost Trade-Off Problem with Discounted Cash Flows

Traditional time-cost trade-off (TCTO) analysis assumes constant value of activities’ cost along the project time span. However, the value of money decreases with time and, therefore, discounted cash flows should be considered when solving TCTO optimization problem. Optimization problems in project management have been traditionally solved by two distinctive approaches: heuristic methods and optimization techniques. Although heuristic methods can handle large-size projects, they do not guarantee optimal solutions. A nonlinear mathematical optimization model for project TCTO problem is developed, which minimizes project direct cost and takes into account discounted cash flows. Costs of activities are assumed to be incurred at their finish times. The model guarantees the optimal solution, in which precise discrete activity time-cost function is used. The model input includes precedence relationship between project activities, discrete utility data for project activities, and discount rate. Details of model formulation are illustrated by an example project. The results show that selected activities’ durations and costs and consequently optimal project duration differ from traditional analysis if discounted cash flow is considered. The new approach provides project practitioners with a way for considering net present value in time-cost decisions so that the best option can be identified.     

Managing money flow to safeguard your practice

Whether payments for service come in the form of patient cash or checks, or insurer payments, it is paramount that a doctor implement a strong accounting system to disclose all daily financial transactions. It is also essential that a strong audit trail be part of this accounting system. By taking a few minutes at the end of each day to do the necessary review, dentists protect their income and provide one of the best protections an owner can have against embezzlement. Let the staff know you are on top of the books!     

Probabilistic Approach for Budgeting in Portfolio of Projects

This paper presents a mathematical model for calculating the budgetary impact of increasing the required confidence level in a probabilistic risk assessment for a portfolio of projects. The model provides a rational approach for establishing a probabilistic budget for an individual project in such a way that the budget for a portfolio of projects will meet a required confidence level. The use of probabilistic risk assessment in major infrastructure projects is increasing to cope with major cost overruns and schedule delays. The outcome of the probabilistic risk assessment is often a distribution for project costs. The question is at what level of confidence (i.e., the probability that budget would be sufficient given the cost distribution) should be used for establishing the budget. The proposed method looks at a portfolio of such projects being funded by the same owner. The owner can establish a target probability with respect to its annual budget. The model can help the owner establish confidence level for individual projects and also examine the effect of changing the confidence level of the portfolio budget on the budget and the confidence level of individual projects. The paper is relevant to practitioners because it provides a methodology for establishing confidence levels by the owner agencies in the emerging field of cost risk assessment for infrastructure projects. A numerical example is provided using actual transit project data to demonstrate the model application.     

Integrated Methodology for Project Risk Management

This article presents a generic project risk management process that has been particularized for construction projects from the point of view of the owner and the consultant who may be assisting the owner. The process could also be adapted to the needs of other project participants, and many points referred to in the article can be directly applied to them. Any project risk management process must be tailored to the particular circumstances of the project and of the organization undertaking it. First, the article explains a complete or generic project risk management process to be undertaken by organizations with the highest level of risk management maturity in the largest and most complex construction projects. After that, factors influencing possible simplifications of the generic process are identified, and simplifications are proposed for some cases. Then the application to a real project is summarized. As a final validation, a Delphi analysis has been developed to assess the project risk management methodology explained here, and the results are presented.     

Option Pricing Model to Analyze Cost–Benefit Trade-Offs of ADR Investments in AEC Projects

Alternative dispute resolution (ADR) techniques are adopted by architecture, engineering, and construction project participants to help achieve reasonable settlement of claims and change orders (CCOs) that arise during a project’s life cycle without having to resort to protracted litigation for final determination of merit. Since such ADR techniques require resources to prepare, review, and resolve CCOs, the managerial decisions regarding the investments for these resources need to be economically justified. The application of the net present value approach to determine the value of any ADR investment is limited because the future cash flows resulting from such an investment cannot be estimated a priori as they will vary with the nature of the CCOs, the amounts claimed, and the effectiveness of the ADR in addressing these CCOs. This paper presents a conceptual and mathematical model to evaluate ADR investments by drawing an analogy from theories of financial and real option pricing. The objective is to provide the owner with a decision framework that accounts for the uncertainty in estimating the ADR investment cash flows during the project planning phase, and provides realistic results regarding the value of this investment. The model presented in this paper is applied to a real case study involving a seismic retrofit of a bridge project to demonstrate the parameter estimation and the practical application of the model.     

Nature of Engineering Consulting Projects

Engineering consulting firms usually collect data such as cost and man-hour expenditures. Although these data help analyze project profit and productivity, they lack the information on the project nature to examine work and analyze the root causes of performance. This study investigates the nature of engineering consulting projects in terms of uncertainty and equivocality (U&E). A questionnaire was designed to collect project U&E data from 108 project managers. The U&E scores were analyzed, further linked to and tested on a consulting firm’s profit, productivity, project type, phase, duration, and owner data. It is found that project nature does not affect profit or productivity; engineering design work needs more data acquisition and analysis than problem definition and interpretation. Other results show insightful patterns about engineering projects that can be useful references to the engineering services industry.     

Optimizing Cash Flows for Linear Schedules Modeled with Singularity Functions by Simulated Annealing

The ability of construction contractors to plan and manage cash flow is critical for their economic success. The cumulative interaction of outflows (labor, materials, and equipment costs) and inflows (progress payments less retainage) creates a profile with a complex zigzag shape. This could only be modeled by simplification, e.g., as values tabulated at discrete times; averaged S-curves without peaks; or envelopes of all possible constellations. Neither is suited for a fully integrated model that dynamically links schedules with their cash flows for optimization. Therefore, singularity functions, whose components define ranges of behavior between cutoffs, are used to flexibly yet accurately model cash flow profiles and their various payment terms. The new approach augments construction project management toward an integrated planning model and is validated with an example from the literature. Optimization with a simulated annealing algorithm shifts activity positions in a randomized but directed search for maximizing profits.     

Estimation of Minimum Working Capital for Construction Projects in Malaysia

Forecasting cash requirements is essential for all contractors during the tendering stage since cash flow at the beginning of the project is a major cause of construction companies’ failure. Unfortunately, estimating minimum working capital (MWC) is not the mainstream practice of the majority of contractors in Malaysia, who find that the present models for estimating MWC are cumbersome and seldom give an accurate estimate. Therefore estimates of MWC made during the tendering stage need to be simplified so they can be prepared quickly with minimum input. It is important for the developer or owner to select a qualified contractor with competent financial backing. This paper establishes the relationship among the factors that contribute to MWC requirements and presents a simple model that could be used as a guide to estimate MWC for housing construction projects in Malaysia. The estimation is based on percentages of variables of contract value based on the historical data that influence MWC; the MWC obtained is then expressed in terms of percentage of contract value.     

Simple Services, Inc.: A Project Management Case Study

This hypothetical case study provides a vehicle for illustrating typical project cash flows and the day-to-day events that can influence these flows. The case study also shows the interaction between project cash flows and a firm's overall financial condition. As the title implies, it is a simplified caricature of what actually happens in more complex and realistic setting, where a project manager has to worry about a multitude of problems, including the concerns of project scope schedule, and budget, plus the technical challenges of getting the job done. Isolating the management of the cash flow from the rest of these concerns allows an examination of what a project manager might need to contend with respect to cast and financial management of a project. Three industry experts-Robert J. Berg, Francis D. Leathers (Member ASCE), and Mark C. Zweig-provide analysis of the case study.     

Budgeting Owner’s Construction Contingency

This paper attempts to find ways to reduce an owner’s construction contingency budget such that just enough contingency is allocated that will allow the owner to deal with uncertainties but at the same time not tie up valuable funds that can be used for other activities. It is suggested that the common practice of allocating a fixed owner contingency (e.g., 10% of the contract value) to all projects contracted out by an owner is not appropriate. Instead, a methodology is proposed whereby the owner (1) analyzes historical project data; (2) identifies the line items that are problematic; (3) takes the necessary measures at the preconstruction stage to streamline these line items with respect to site conditions, time constraints, constructability issues, and project scope; and (4) finally budgets contingency funds based on this information. A case study was conducted to analyze the contingencies budgeted and actually spent by an owner in nine parking lot projects. The findings indicated that a systematic approach such as the methodology proposed in this paper is likely to minimize the owner’s contingency budget.     

Forecasting Construction Staffing for Transportation Agencies

When the volume of construction projects let to contract increases significantly, state departments of transportation must critically examine internal construction project management staffing capabilities and accurately forecast the manpower required to execute future projects. This paper describes the development of a model or process to forecast manpower requirements as a function of project type and cost for selected employee classifications. Using data from 130 recently completed highway construction projects and over 11,000 employee payroll entries, regression analysis plots were generated to predict overall manpower requirements for projects of a given type and cost. These overall requirements were then adjusted to predict manpower requirements for individual employee classifications using typical task allocation percentages obtained from questionnaire data. The output from the model serves as input into commercially available critical path method scheduling software to facilitate manpower planning and resource leveling.     

Contractor’s Opportunistic Bidding Behavior and Equilibrium Price Level in the Construction Market

The competitive bidding system has been to blame for abnormally low bids, which are considered as one of the main causes of poor project quality. Previous studies have regarded the pricing of bidders as an optimum decision based on contractor’s cost and market competition level. However, the sell to produce characteristic of construction projects may induce contractors to offer a low bid and then make up the amount initially sacrificed from beyond-contractual reward (BCR) gained through cutting corners and claims. System dynamics was adopted in this study to develop a contractor’s pricing model with consideration of the dimensions of cost, market competition, and BCR. The model was then examined by statistical analysis of data collected from 44 highway projects in Taiwan. It was found that the equilibrium market price is significantly associated with BCR, which is assumed to be determined by the strictness of the owner’s construction management, including both soundness of contract and tightness in construction supervision. Research results suggest that contractors divide the market into different segments according to the owner’s strictness of construction management and the equilibrium price level of each market segment varies. The price level for projects with a strict owner is remarkably higher than for those with relatively less strict owners. Improvement in the construction management system of projects is crucial to lower the possibility that contractors gain BCR and do opportunistic bidding, and to further enhance project quality.