Negotiating win-win payment terms between construction contractors and subcontractors

Abstract

Outsourcing works to subcontractors has been a common practice in the construction industry. Because of the high competition in this industry, contractors always seek opportunities to reduce bid prices. This paper presents a process of negotiating win-win payment terms wherein the contractor offers shorter payment lags and in return solicits subsidized prices from subcontractors. Subsidized prices enhance the contractor's bid competitiveness while prompt payments reduce the subcontractors' financing costs. This provision, referred to here as “pay-before-paid”, represents a paradigm shift as opposed to the industry prevailing provision of “pay-when-paid”. A Genetic Algorithm (GA) model is proposed to assign project work packages to subcontractors based on the subsidized prices offered for contractor's predefined payment-lag options to minimize the contractor's bid price. Benchmarking the GA against the exhaustive enumeration proved the robustness of the GA. In addition, the scalability of the GA model was established by solving large-size problems.