Scheduling payments in projects: An optimization framework

In many project environments, contractors customarily receive payments when parts of the project are completed. However, payments to the contractor are expenses for the client, and the two parties involved in the contractual relationship have conflicting financial objectives. This dissertation examines the payment scheduling problem from multiple perspectives. The objectives of this thesis are as follows: (1) Develop models of the payment scheduling problem that consider some commonly observed practices with regard to the management of cash flows in projects; (2) Identify significant features of payment schedules that meet the contractor's objective (maximizing profit), and the client's objective (minimizing costs); (3) Design heuristic procedures that can provide payment schedules of good quality with reduced computational effort; (4) Investigate the impact of project characteristics (such as network structure, activity durations, the profile of expenses and profit margin) and payment schedule parameters (such as the number of payments, frequency of payment, the criterion by which the amount of each payment is determined) on the contractor's and client's optimal and heuristic payment schedules; (5) Incorporate bargaining and negotiation factors to develop models of the payment scheduling problem which result in payment schedules that are mutually agreeable to both the contractor and the client; (6) Examine the sensitivity of joint models and solutions to factors such as relative bargaining power and variations in cost of capital, in addition to other project and payment parameters such as network characteristics, number or payments and profit margin. Based on features of optimal schedules observed by solving the payment scheduling problem on networks of small size, I design several simple common-sense heuristics based primarily on the number of payments and project duration for the contractor's payment scheduling problem. The test results suggest that, on the average, it is best for the contractor to schedule payments each time expenses exceed a certain percentage (determined by the number of payments) of the total expenses on the project. Chapter 5 considers the payment scheduling problem from the client's point of view. This study of optimal schedules is a two part analysis. The first part examines features that follow from theoretical properties of the models. The second part reports the characteristics of payment schedules as observed from optimal solutions to 10 sample projects. The client obtains the greatest benefit from payment schedules that have no restriction on the time of payment. Although making payments at regular time intervals is a popular practice, such schedules increase the client's expenses, and may also delay the project beyond early completion time. The analysis suggest that there is great variation in NPV between the contractor's and client's preferred schedules. This suggests that a joint perspective that satisfies the requirements of both parties, is a practical approach to the management of cash flows in projects.