A Case Study on Optimization of Contractor’s Financing through Allocation of Subcontractors

Authors: Helen S. Ghali, Engy Serag, A. Samer Ezeldin

Abstract:

In many countries, the construction industry relies heavily on outsourcing models in executing their projects and expanding their businesses to fit in the diverse market. Such extensive integration of subcontractors is becoming an influential factor in contractor’s cash flow management. Accordingly, subcontractors’ financial terms are important phenomena and pivotal components for the well-being of the contractor’s cash flow. The aim of this research is to study the contractor’s cash flow with respect to the owner and subcontractor’s payment management plans, considering variable advance payment, payment frequency, and lag and retention policies. The model is developed to provide contractors with a decision support tool that can assist in selecting the optimum subcontracting plan to minimize the contractor’s financing limits and optimize the profit values. The model is built using Microsoft Excel VBA coding, and the genetic algorithm is utilized as the optimization tool. Three objective functions are investigated, which are minimizing the highest negative overdraft value, minimizing the net present worth of overdraft, and maximizing the project net profit. The model is validated on a full-scale project which includes both self-performed and subcontracted work packages. The results show potential outputs in optimizing the contractor’s negative cash flow values and, in the meantime, assisting contractors in selecting suitable subcontractors to achieve the objective function.

Keywords: Cash flow optimization, payment plan, procurement management, subcontracting plan.

References:

[1] Chen, Hong-Long, et al. “Assessing the Accuracy of Cash Flow Models: The Significance of Payment Conditions.” Journal of Construction Engineering and Management, vol. 131, no. 6, June 2005, pp. 669–676, https://doi.org/10.1061/(asce)0733-9364(2005)131:6(669)
[2] Zayed, Tarek, and Yaqiong Liu. “Cash Flow Modeling for Construction Projects.” Engineering, Construction and Architectural Management, vol. 21, no. 2, 11 Mar. 2014, pp. 170–189, https://doi.org/10.1108/ecam-08-2012-0082
[3] Abbasianjahromi, Hamidreza, et al. “A New Decision Making Model for Subcontractor Selection and Its Order Allocation.” Project Management Journal, vol. 45, no. 1, Feb. 2014, pp. 55–66, https://doi.org/10.1002/pmj.21394
[4] Hinze, Jimmie, and Andrew Tracey. “The Contractor‐Subcontractor Relationship: The Subcontractor’s View.” Journal of Construction Engineering and Management, vol. 120, no. 2, June 1994, pp. 274–287, https://doi.org/10.1061/(asce)0733-9364(1994)120:2(274)
[5] Martin, Loosemore, and Lim Benson. “Relationship Quality in Construction Projects: A Subcontractor Perspective of Principal Contractor Relationships.” International Journal of Project Management, vol. 39, no. 6, Aug. 2021, pp. 633–645, https://doi.org/10.1016/j.ijproman.2021.05.002
[6] K.W. Ng, Andy, and Andrew D. F. Price. “Optimising the Performance of Subcontractors in Building Construction Projects in Hong Kong” 18th Annual ARCOM Conference, Sept. 2002.
[7] Long Chen, Hong. “Empirical Behavioral Analysis of Project Contractors’ Supply‐Chain Payment Terms.” Supply Chain Management: An International Journal, vol. 17, no. 3, 27 Apr. 2012, pp. 277–289, https://doi.org/10.1108/13598541211227117
[8] Barbosa, Paulo S. F., and Priscilla R. Pimentel. “A Linear Programming Model for Cash Flow Management in the Brazilian Construction Industry.” Construction Management and Economics, vol. 19, no. 5, Sept. 2001, pp. 469–479, https://doi.org/10.1080/01446193.2001.9709623
[9] Elazouni, Ashraf M., and Ahmed A. Gab-Allah. “Finance-Based Scheduling of Construction Projects Using Integer Programming.” Journal of Construction Engineering and Management, vol. 130, no. 1, Feb. 2004, pp. 15–24, https://doi.org/10.1061/(asce)0733-9364(2004)130:1(15)
[10] Fathi, Habib, and Abbas Afshar. “GA-Based Multi-Objective Optimization of Finance-Based Construction Project Scheduling.” KSCE Journal of Civil Engineering, vol. 14, no. 5, 17 July 2010, pp. 627–638, https://doi.org/10.1007/s12205-010-0849-2
[11] Liu, Shu-Shun, and Chang-Jung Wang. “Profit Optimization for Multiproject Scheduling Problems Considering Cash Flow.” Journal of Construction Engineering and Management, vol. 136, no. 12, Dec. 2010, pp. 1268–1278, https://doi.org/10.1061/(asce)co.1943-7862.0000235
[12] Alavipour, S. M. Reza, and David Arditi. “Optimizing Financing Cost in Construction Projects with Fixed Project Duration.” Journal of Construction Engineering and Management, vol. 144, no. 4, Apr. 2018, p. 04018012, https://doi.org/10.1061/(asce)co.1943-7862.0001451
[13] Shiha, Ahmed, and Ossama Hosny. “A Multi-Objective Model for Enterprise Cash Flow Management.” CSCE Annual Conference, June 2019.
[14] Ammar, Mohammad A. “Optimization of Project Time-Cost Trade-off Problem with Discounted Cash Flows.” Journal of Construction Engineering and Management, vol. 137, no. 1, Jan. 2011, pp. 65–71, https://doi.org/10.1061/(asce)co.1943-7862.0000256
[15] Senouci, Ahmed, and Khaled El-Rayes. “Time-Profit Trade-off Analysis for Construction Projects.” Journal of Construction Engineering and Management, vol. 135, no. 8, Aug. 2009, pp. 718–725, https://doi.org/10.1061/(asce)co.1943-7862.0000031
[16] Assaf, Mohamed, et al. “A Mixed Review of Cash Flow Modeling: Potential of Blockchain for Modular Construction.” Buildings, vol. 12, no. 12, 23 Nov. 2022, p. 2054, https://doi.org/10.3390/buildings12122054
[17] Motawa, Ibrahim, and Ammar Kaka. “Modelling Payment Mechanisms for Supply Chain in Construction.” Engineering, Construction and Architectural Management, vol. 16, no. 4, 3 July 2009, pp. 325–336, https://doi.org/10.1108/09699980910970824
[18] Polat, Gul, et al. “Subcontractor Selection Using Genetic Algorithm.” Procedia Engineering, vol. 123, 2015, pp. 432–440, https://doi.org/10.1016/j.proeng.2015.10.081
[19] Elazouni, Ashraf M., and Fikry G. Metwally. “D-SUB: Decision Support System for Subcontracting Construction Works.” Journal of Construction Engineering and Management, vol. 126, no. 3, May 2000, pp. 191–200, https://doi.org/10.1061/(asce)0733-9364(2000)126:3(191)