A stochastic model of cash flow forecasting considering delays in owners’ payments

Abstract

Delays in progress payments have always been one of the most aggravating difficulties, threatening the desired profit margin and should be considered based on the owners’ financial records at the bidding stage. However, previous models have often ignored the probabilistic nature of cash inflow. The conducted research endeavours to develop a new stochastic simulation-based framework for forecasting the cash flow of the construction projects considering the owners’ payment history in previous projects and intertemporal correlation between successive progress payments. This process involves introducing the Budget Realization Index, with probabilistic nature, whose underlying distribution is determined based on the owners’ behaviour. The model was applied to four real projects in Iran. The financing costs inflicted on the contractors stood in the range of the simulation results in the uncertainty level of 50–80%. Therefore, the proposed systematic framework would appropriately perform for forecasting contractors’ financial status through the project.

Keywords:

• Delay
• interim payments
• construction finance
• intertemporal correlation
• uncertainty