Analyzing Cash Flow Management of Contracting Firms on Payment Conditions in Public Construction Projects
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Abstract
In construction project, the cash flow analysis is crucial. The cash inflows are typically estimated using a multiplier to add the pro rata share to the periodical disbursement. Most of contracts in public sector, however, determine the payment conditions as progress payment that paid after the assigned activities done. This paper aims to analyze cash flow management of construction firms on payment conditions in public sector and to compare the results with the conventional method. Three construction firms comprising small, medium, and large size were studied by collecting their payment conditions paid for cash disbursement and received from project execution. The in-depth interview and document analysis were used. Project cash flows were analyzed by estimating cash outflows and inflows. Two approaches of cash inflows calculation were demonstrated the experiments consisting of the traditional and the conditional approach as pattern 1 and 2 respectively. The results showed that amount of cash inflow of all firms was different in each period. This is because inconsistent payment schedule caused low cash inflow or none in some periods. The maximum amount of overdraft calculated by pattern 2 was greater than that of pattern 1 which was 16%, 2.46% and 1.83% for small, medium and large firm respectively. From the analysis, it can be seen that the construction company should be systematic in analysis of project cash flow. Especially, small firms might have a chance of seriously inadequate cash, leading to bankruptcy.
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