Risk-integrated cash flow forecasting for overseas construction projects

Abstract

Construction firms have long attempted to forecast a project cash flow at the initial stage of a project, which is closely related to the payment conditions and financing schedules. There are, however, diverse risk factors influencing project cash flow, in particular for the domain of international projects, which often fluctuate because of a myriad of external as well as internal uncertainties. In this research, risk factors that impact the soundness of cash flow are classified into two categories: financial risks and project-specific risks. The former refers to the external economic conditions such as exchange rate, cost escalation, and interest rate which can be analyzed through a probabilistic financial algorithm. Then, the project-specific risks such as host country’s geotechnical conditions, weather and climate differences, and resource delivery conditions are further assessed through utility curves to represent the firm’s unique risk perceptions and thresholds to the amount of risk exposures. Results of cash flow forecasts by the proposed approach are compared with the actual cash flow of a retrospective case project. It is found that construction firms better decide on a decent level of cash contingency and the probable net-profit at completion by the adoption of the proposed approach.