Portfolio cash assessment and decision-making for construction contractors

Cash is the most liquid of a construction company’s current assets. 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. This may lead to a decrease in a firm’s liquidity level and an increase in the probability of project failures in the future. The financial health of a firm lies in maintaining a balance between current assets and liabilities of the project-portfolio. Prior research studies have investigated the use of different models to predict future cash-flows. However, these models are either limited to the project level or have relatively low levels of accuracy. There is a need to develop a framework to transform such models into tools for decision making and project control. This study proposes a methodology to predict and assess availability of cash for a portfolio of projects undertaken by contractors and utilize it to take company-level decisions regarding bid/no-bid reasoning, portfolio risk assessment and working capital management. The modeling framework is based on fuzzy systems theory and fuzzy inference using rule-base algorithm established on expert opinions obtained from construction contractors. In this study, interviews with highway construction contractors in the state of Indiana were conducted to obtain their expert opinions to create rule-bases for the aforementioned decisions. Standard cost-time curves (S-curves) were generated by simulating cost-time data using data from an actual highway construction project, followed by prediction of cash flows for probable future project portfolio. Based on the assessment of net cash flows, a decision-making tool for construction contractors was created in computer software: Matlab R2008. The research methodology was verified by using the cash assessment model and decision-making tool in a test case for a project portfolio with varying composition of highway construction projects. The validation process included presentation of the methodology and demonstration of the example to the same highway construction contractors who were initially interviewed for data collection, and recording their evaluation and comments different steps of the methodology and the results obtained for the test case