Influence of the contractor’s payment method on the economic effectiveness of the construction project from the contractor’s point of view

Abstract

Abstract The scope of the paper is the problem of the economic effectiveness of the construction project from the contractor’s point of view. The two main construction contract types are taken under consideration: the unit price contract based on the bill of quantities and the lump sum contract. The net present value (NPV) is adopted in this paper as the basic economic efficiency criterion of the construction project. The NPV of the project for the contractor is calculated here as the sum of all future monthly contractor’s cash flows (both incoming and outgoing) discounted by using the monthly cost of contractor’s capital invested into the project. For the cash flow calculations, two basic payment methods are considered, depending on the type of the contract: the monthly payments in the case of the unit price contract and the payments for the WBS (Work Breakdown Structure) billing elements in the case of the lump sum contract. The contractor’s monthly cash flow analysis also makes it possible to determine the monthly cash requirements for the contractor to finance the works each month and the total cash requirement to finance the project as the whole. This allows the contractor to correctly plan the financing of the project depending on the type of contract and the payment method. Moreover, using the optimization techniques known in the scheduling theory, for example based on the priority rules as in the case of the RCSP, one may try to improve the economic effectiveness of the project or to lower the cash requirement for the project.However, as shown by the authors, it does not have bring the expected results in the case of the lump sum contract.