Systems analysis of project cash flow management strategies

Abstract

Cash flow management is one of the most important determinants of the success of construction project management. Overdraft, retainage, financing, payment and billing policies constitute the most significant financial issues that contractors must plan, control and manage for the successful completion of construction jobs. Particularly, in an attempt to reduce project costs, contractors must balance cost savings of material discounts due to early payments and extra interest expenses because of additional overdraft. Through identifying feedback loops in project cash flows, a system dynamics model is developed for project cash flow management. The model is flexible to incorporate typical front‐end and back‐end loading cash flow management strategies and provides an interactive predication of project cash flows. A warehouse project is discussed to demonstrate how various cash flow strategies improve overdraft financing requirements and profitability. Especially, the analysis shows an 11% reduction on overdraft requirements while using an overbilling strategy, and 30% reduction if the trade credit strategy is implemented.