Construction Cash Flow Risk Index

Hasan Mahmoud,Vian Ahmed,Salwa Beheiry

doi:10.3390/jrfm14060269

Hasan Mahmoud, Vian Ahmed + Show 1 more

Open Access

https://doi.org/10.3390/jrfm14060269

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Abstract

As investment increases in capital projects, financial risks increase, and cash flow prediction and control become more paramount. Higher risks could hinder project performance and increase the chances of failure in multiple aspects of a project. While there are models that aim to assess and forecast risks in the construction industry, none present a technique to include the impact of risks on a project’s cash flow. Therefore, cash flow forecasts tend to exceed the actual cash flow of a project due to inaccurate risk assessment. Thus, this paper presents the Cash Flow Risk Index (CFRI) development process quantifying the impact of risks on a project’s cash flow from an owner’s perspective. To that end, the study explored the literature to identify the risk factors that might impact a construction projects’ cash flow and uncovered 44 factors. The study also validated and consolidated these factors to build a CFRI via a Delphi exercise, which reduced the factors from 44 to 36. In further iterations, the 36 factors were also shared with 32 construction industry professionals to rate their relative importance on a five-point Likert scale, from which relative importance index and weights were obtained. As a result, the CFRI was developed to measure the impact of different risk factors on a typical construction project’s cash flow.

Highlights

The construction industry impacts labor markets and societies in general
A typical construction project starts with the inception of the concept by the project owner, which translates into designs by a consultant, and work by the contractor to execute the project
The first section discusses the risk factors validation and consolidation of the risk factor and the second section illustrates the results of the Relative Importance Index (RII) calculations to construct the Cash Flow Risk Index (CFRI)

Summary

Introduction

The construction industry impacts labor markets and societies in general. There has to be stringent procedures and regulations to ensure the monitoring of the performance of construction projects. A typical construction project starts with the inception of the concept by the project owner, which translates into designs by a consultant, and work by the contractor to execute the project. This multiparty involvement heightens the inherent risks that could jeopardize the performance of a project. These risks typically impact the important time and cost performance parameters of a project

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Conclusion