Cash flow analysis in construction projects

by Gary W Garden II, Robert C Creese
Transactions of the American Association of Cost Engineers ()

Abstract

In construction projects, the profitability of the project is directly dependent upon the ability of the contractor to control project cost and schedule. Earned value management techniques offer useful performance measures that can signal potential problems in cost or schedule control. However, neither project profitability nor the cumulative cost and schedule performance measures of earned value management adequately capture the true risk of the project, namely, the potentially negative cash flow that arises if cumulative costs exceed cumulative revenues at any point during the project. In this article, the authors develop a break-even cost model that incorporates earned value management performance measures and use it to analyze the distribution of cash flow risk between the contractor and customer, based on the type of project contract. The results of the model are used to produce a dynamic graphical display for monitoring project progress and cash flow risk based on performance measures.

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