Financial risk management - cash flow forecasting in construction projects - a case study

Abstract

This paper, based on the literature of construction cash flow forecasting, develops a model which produces cash flow estimates using cost budget data and the work schedule. The forecasting method used is named as the “simpler method” with weighted means delay, where cost items are grouped into cost categories regarding each activity’s (cost) cash profile. Inadequate cash flow forecasting is among the most common reasons for contractors’ failures, and one of the main causes that insolvencies are higher than in any other industry. The model attempts to offer small construction companies in Greece with limited resources a simple model, developed fully in Microsoft Excel, that incorporates the relevant cash flow forecasting literature. Cash flow estimates from seven projects are compared with actual values but are not validated statistically, due to various risk factors occurrence. Sensitivity analysis showed that there exists a greater dependency of factors such as project duration and cost categories composition on cash flow. However, the model can serve as a useful project selection tool that shows sensitivity of credit policy and contractual payment terms to cash flow, assisting decision-making to firms.