Optimizing contractor’s accruals under conditions of penalty imposition due to unforeseen delays

Abstract

This study aims to provide an optimal activity crashing-scheduling plan to maximize profit for the contractor under conditions of imposed penalty due to unforeseen delays. A large number of construction projects suffer from time overruns. A financial penalty is imposed when the delay is attributable to the contractor. Contractors often crash activities to complete projects on time to avoid penalties. However, the crashing of activities inflates the project cost, which the contractor bears. This leads to dwindling profit margins and losing economic justification for the contractor to complete the project. The contractor is often puzzled about how much delay to compensate by crashing, so there is still some profit to be made. To address this issue, the time-cost trade-off is restructured to maximize profit for the contractor in a constrained optimization formulation. The developed methodology integrates linear programming with the critical path method. Performance evaluation results show superior profit realization for contractors compared to traditional methods that crash activities on a predefined critical path. The method can find optimal crashing scheduling of activities to compensate for delays such that the cost overrun is minimized, and the profit earned by the contractor is maximized.