Kaka, A P and Khosrowshahi, F (2009) A mathematical-based model for company-level budgeting incorporating future unknown contracts. Engineering, Construction and Architectural Management, 16(1), pp. 48-60. ISSN 0969-9988
Abstract
Purpose - One of the main challenges facing construction contractors is incorporating future unknown contracts into their annual financial budgets. This paper sets out to review current academic work in this area and to argue that computer-based simulation techniques are too complex to be adopted in the industry. Therefore, an alternative and a mathematically-based technique needs to be developed and evaluated. Design/methodology/approach - The paper proposes that, as the pattern of winning construction contracts lacks any seasonality, it may be possible to assume all future work to be starting at one point in time and, by using an average standard value build-up curve, average duration and the total value work needed, contractors will be able to estimate the total value of contracts needed to achieve a target turnover. Based on the total value of contracts to be won, a proposed mathematical equation is then used to assess the levels of working capital requirements. Findings - The paper evaluates the proposed mathematical model through a series of hypothetical scenarios (developed using a detailed and tested computer-based simulation model). Results demonstrated the validity and reliability of the models. Research limitations/implications - The working capital element of the proposed model applies to construction projects where traditional payment mechanisms have been applied (interim payments based on measurements). Practical implications - The model is very practical in nature and will allow construction companies (particularly large ones) to assess the level of work (in terms of number and values of contracts) they will need to win for them to meet targets for turnover. The model also allows contractors to assess the associated level of funding required. Originality/value - The mathematical model developed allows contractors to incorporate into their budgets future unknown contracts without the need for computer simulation.
| Item Type: | Article |
|---|---|
| Uncontrolled Keywords: | budgetary control; cash flow; simulation; working capital |
| Index terms: | construction contractor, methodology, construction project, computer simulation, construction company, budgeting, cash flow, turnover, mathematical model, estimate, duration, payment mechanism, interim payment, funding, construction contract, validity |
| Subjects: | business management, financial and cost management, economic analysis, modelling and simulation, practitioner, evaluation and assessment methods, contract type, mathematical modelling, organization, project controls, production management, financial management, research methods |
| Topics: | Cost Management, Business Strategy, Research Practice, Project Management, Roles and Professions, Procurement, Digital Applications, Time Control |
| Descriptive scope: | 4 PCTA |
N.B. Descriptive scope is a count of how many of the five facets of empirical research are indicated by the words used in title, abstract and keywords. It is not intended as a judgement on the research; merely a count of the kind of word we would expect to indicate Phenomenon, Concepts, Theoretical framing, Empirical techniques, Analytical techniques. If all five are present, then a code of “5 PCTEA” will indicate this. If you feel the coding for this record is questionable, we welcome discussion around the terms we matched or the way we categorized them. The facet you would expect may not be coded, or a facet may be coded inappropriately. This can also bear on a larger question, of which facets should be treated as defining in construction management research. Please get in touch, and we will look at it. More details here