Impact of Delay and Escalation on Cash Flow and Profitability in a Real Estate Project

Abstract

Real estate projects are generally financed through advance instalments from prospective customers. Timing of these instalments is vital for maintaining project cash flow. Based on DHSS expenditure model, this paper proposes a cash flow forecasting model that integrates impact of schedule delays and cost escalations on cash flow, revenue generation and profitability. Data from an ongoing USD 600 million public project of real estate redevelopment is used. Characteristics of the project include appointment of a state enterprise as project developer at cost plus contract and financing of project by leasing out a portion of facilities being developed. Due to initial delay in the project, cash flow analysis is performed on its six subprojects over ten delay scenarios. The study reveals critical points in cash flow, subsequent strategic remedies for augmenting revenues, optimum structuring of instalment schedules and decreasing profitability for developer under schedule delays and cost escalation.