A mathematical‐based model for company‐level budgeting incorporating future unknown contracts

Abstract

PurposeOne 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/approachThe 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.FindingsThe 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/implicationsThe working capital element of the proposed model applies to construction projects where traditional payment mechanisms have been applied (interim payments based on measurements).Practical implicationsThe 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/valueThe mathematical model developed allows contractors to incorporate into their budgets future unknown contracts without the need for computer simulation.