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Contractors ' Perceptions of The e Ffects of Cash Ow On Construction Projects
Contractors ' Perceptions of The e Ffects of Cash Ow On Construction Projects
https://www.emerald.com/insight/1726-0531.htm
JEDT
18,2 Contractors’ perceptions of the
effects of cash flow on
construction projects
308 Emmanuel Dele Omopariola
Faculty of Engineering and the Built Environment, University of Cape Town,
Received 15 April 2019 Rondebosch, South Africa
Revised 8 July 2019
Accepted 28 July 2019
Abimbola Windapo
Department of Construction Economics and Management,
University of Cape Town, Cape Town, South Africa
David John Edwards
School of Engineering and the Built Environment, Birmingham City University,
Birmingham, UK and University of Johannesburg, Johannesburg, South Africa, and
Wellington Didibhuku Thwala
Department of Construction Management and Quantity Surveying,
University of Johannesburg, Johannesburg, South Africa
Abstract
Purpose – This paper aims to evaluate Nigerian contractors’ perceptions regarding the effects of positive
and negative cash flow during construction projects, with a view to establishing effective strategies for cash
flow management.
Design/methodology/approach – A desktop-based literature review is used to develop a cross-sectional
questionnaire survey which uses Likert items to elicit responses from construction professionals on: the
reasons for cash flow problems; the impacts of negative and positive cash flow; and the potential solutions for
improving cash flow on construction projects.
Findings – The study finds that delay in payments, difficulty in obtaining financial aid and
inadequate budgetary control are the causes of cash flow problems during construction projects.
Cumulatively, these issues result in project delays, reduced profit margins and in the worst scenarios,
abandoned projects.
Originality/value – There has been limited research into the effects of positive and negative cash flows on
construction projects in Nigeria and indeed, the wider geographical location of West Africa. This study
addresses this observed dearth and consequently advances methods and solutions to deal with the problem of
poor cash flow management in the Nigerian construction industry.
Keywords Cash flow, Construction industry, Construction projects, Contractors,
Project management
Paper type Research paper
1. Introduction
Journal of Engineering, Design
and Technology
Globally, construction projects are led and managed by various stakeholders (such as
Vol. 18 No. 2, 2020
pp. 308-325
clients, contractors, consultants, shareholders and regulators) who work together as a single
© Emerald Publishing Limited project management team entity (Aje et al., 2015; Navon, 2005; Salami and Mustapha, 2015).
1726-0531
DOI 10.1108/JEDT-04-2019-0099 The construction industry is not only essential for improving the quality of life of citizens
through the provision of social and economic infrastructures but also important in Cash flow on
generating wealth and contributes significantly to Gross National Product (GNP) (Oke et al., construction
2016; Windapo and Cattel, 2013). The industry is inextricably embedded within the whole
spectrum of an economy and has a multiplier effect that enables other industries (such as
projects
manufacturing) to prosper (Ameh and Odusami, 2002; Oforeh and Alufohai, 2000). Within
Nigeria, the construction sector accounted for 5.8 per cent of GDP in 1981 but declined to 1.4
per cent of GDP in 2013 (Nigeria Country Report, 2013). The notable decrease in the
contribution of the Nigerian construction sector towards its GDP reveals a deep-seated 309
problem. This is further emphasised by the fact that Nigeria’s total GDP has increased by
about 495 times its size since 1981, whereas the construction sector’s GDP contribution has
only grown by 125 times its size. Remarkably, the key drivers of Nigeria’s GDP over the past
three decades have remained largely unchanged, namely, agriculture (crop production),
crude oil production and wholesale and retail trade, while the contribution of the
construction sector is comparatively insignificant (Nigeria Country Report, 2013). Yet,
Nigeria’s construction industry continues to occupy a vital position in the nation’s economy
and as a provider of the buildings and infrastructure needed to ensure continued economic
growth and prosperity (Aibinu and Jagboro, 2002).
Against this backdrop, the industry is beset with the perennial problems of cost
overruns, abandoned projects and company failure (Benaitiene and Audrius, 2012;
Nwachukwu and Emoh, 2011). Indeed, the Nigerian construction industry seems to be
ensnared with the menace of abandonment (Alao et al., 2018). Completing projects within
cost is a primary objective of clients (Adediran and Windapo, 2017). “Project success” means
that certain aspects for a specified stakeholder are met (Alao et al., 2018), whether from the
perspective of the developer, engineer, contractor, promoter or members of the public
(Purnus and Bodea, 2017; Windapo et al., 2017). However, due to the complex project
procurement and implementation environment (Windapo et al., 2017) and unmanaged cash
flow problems (Odeyinka and Yusif, 1997; Odeh and Battaineth, 2002) construction projects
are often deemed unsuccessful in meeting the aspirations set at project commencement. A
major criticism facing the Nigerian construction industry is the failure to use methods and
techniques that will improve cash flow management (Abubakar et al., 2016). Acquiring a
comprehensive awareness of these methods and techniques is essential to the successful
management of a construction business (Nwanyanwu, 2015; Odeyinka et al., 2008).
The risk of contracting businesses becoming insolvent can largely be attributed to poor
financial management strategies, especially inadequate attention to cash flow management
at the organisational level (Abubakar et al., 2016; Arditi et al., 2000; Lowe, 1997; Ugochukwu
and Onyekwena, 2014). This concurs with the prior research of Sherif and Kaka (2003) who
find that cash flow management is critical for contractors to successfully deliver projects in
the construction industry. According to Peer (1982) and Singh and Lakanathan (1992), the
appropriate management of cash flow is a vital tool and essential to the continued health
and stability of the construction industry because liquidity serves as the primary resource
for running successful project organisations. Forecasting cash flow requirements and
setting aside suitable provisions is of critical necessity for providing financial stability
during periods of insufficient cash resources (Harris and McCaffer, 2001). According to
Harris and McCaffer (2006), cash flow forecasting provides an excellent early warning
system to ensure that the organisation continues to meet its financial demands, since
anything outside these demands could result in the company’s potential liquidation. The
issues that disrupt cash flow are myriad and include: payment delays; changes to orders;
profit margins; retention conditions; and credit arrangements with suppliers (Park, 2004).
These issues must be effectively and efficiently managed by parties to the contract.
JEDT This study seeks to evaluate the effects of cash flow on Nigerian construction projects
18,2 and the approaches used for its management. A concomitant objective is to determine
whether there is a significant difference in the perceptions of contractors regarding the
effects of positive and negative cash flow on construction projects. The overarching
ambition of this work is to educate construction practitioners, private investors and
government stakeholders on the risks posed and suggest acceptable solutions to these.
310
2. Literature review
2.1 The concept of cash flow
Cash flow represents the life-blood of an organisation because without it, outstanding
financial obligations cannot be met (Arafat and Skaik, 2016). A company must have
sufficient working capital to pay its creditors, suppliers, subcontractors and employees and
may be reliant on its clients’ payments to cover these expenditure items (Lowe and Moroke,
2010). Huggins (2013) aptly notes that whilst revenue is vanity, cash flow is sanity and cash
is king, constituting an essential construction company resource. The significance of cash
flow is related to cash as the primary source of every successful construction project (Sherif
and Kaka, 2003). A stable financial performance, achieved through productive cash flow
analysis, creates the potential for construction organisations to exploit their investment
opportunities (Seo et al., 2018). Finance is the fuel that energises business, and a firm’s cash
flow is one of the most significant indicators of that company’s financial strength as it
impacts upon both performance and profitability (Tam, 2002; Naoum, 2003; Beatham et al.,
2004).
Cash flow is of particular importance to the contractor because it is a reflection of a
project’s financial performance prior to the contract being completed and the final account
settled (Usman et al., 2016). Irregularities in cash flow can cause capital lock-up and
constitute a triggering factor for insolvency which may end up disrupting the planned
project programme (Lowe and Moroke, 2010). Cash flow comprises two components: inflows
and outflows (Omag, 2016). Cash inflows derive from the company’s operational, investment
and financing activities such as receipt of a bank loan; increased bank overdrafts;
shareholder investment; interest from savings and investments; and payment for goods or
services from customers (Lowe and Moroke, 2010). Cash outflows include payment of
wages; rent and daily operating expenses; purchases of stock, raw materials and supplies;
dividend payments or servicing any debt held; loan repayments; and the purchase of fixed
assets including plant, machinery, vehicles and office furniture (Bhandari and Iyer, 2013;
Berry, 2011). Jabbari et al. (2013) and Omag (2016) classify cash flow into two dichotomous
groupings: positive and negative. Positive cash flow occurs when the company’s cash inflow
exceeds its outflow, providing an indicator that the company is in good financial health.
Negative cash flow occurs when the cash outflow surpasses the cash inflow and is indicative
of a company in financial difficulty.
Other reasons proffered within extant literature include design changes and non-availability 311
of specified materials (Lowe, 1997; Onukwube, 2005; Lowe and Moroke, 2010). In response to
these financial challenges, Zainudeen et al. (2010) suggest that bank loans, retained profits
and hire purchase are common methods used to mitigate cash flow problems.
2.4 Effects of positive and negative cash flow on construction project delivery
Nwachukwu and Emoh (2011) proffer that the effect of positive cash flow on a construction
project is the successful and timely completion of that project. Positive cash flow ensures
that there is adequate funding for the procurement of construction resources, namely,
labour, materials and plant (Edwards et al., 2017). This is particularly pertinent for materials
that have to be ordered in advance, such as specialist materials, prefabricated units and
those that have to be imported (Omag, 2016). Reliability indicators provided by lending
institutions, such as financial stability and creditworthiness, help contractors to secure the
required cash flow to run their construction business and deal efficiently with unpredicted
situations (such as tax increases on materials) (Adjeil et al., 2018; Omopariola et al., 2017).
Preserving a good historical track record of adequate financial stability, stemming from
regular cash flow, enables the contractor to gain access to loans or overdrafts when
necessary (and at a preferential rate) (Seo et al., 2018; Zainudeen et al., 2010). Securing
regular cash flow throughout the project’s life-cycle promotes the forging of a stronger
contractor-client relationship and healthier long-term business relationship (Dahunsi, 2010;
Nwachukwu and Emoh, 2011). Regular and timely cash flows between the client and
contractor also safeguard the efficient delivery of the construction project (Abdul-Rahman
et al., 2006; Kumar et al., 2018). Hwee and Tiong (2002) further posit that proper cash flow
administration is the most important factor that can affect the profitability of a project.
According to Abdul-Rahman et al. (2006) and Abdul-Rahman et al. (2009) the effects of
irregular cash flow on construction projects comprise: delays in completion time; capital
JEDT lock-up; insolvency; litigation/arbitration; and project abandonment/failed projects.
18,2 Irregular cash flow therefore poses a significant threat to a successful project delivery
(Odeyinka et al., 2008; Mahamid et al., 2012; Sambasivan and Soon, 2007). Regarding capital
lock-up, contractors either have to borrow money to meet their obligations or remove funds
from the company’s reserves, thereby depriving the cash of its interest-earning capabilities
(Adjeil et al., 2018; Asante, 2014; Omopariola et al., 2017). Contractors become insolvent
312 when the business has insufficient assets to cover its debts, or when they are unable to pay
their debts when due (PriceWaterhouseCoopers, 2009; Lowe, 1997). Insolvency amongst
construction companies is attributed to inadequate financial management strategies and
lack of consideration towards cash flow management processes (Calvert, 1986; Clough and
Sears, 1994; Boussabaine and Kaka, 1998; Harris and McCaffer, 2001).
Contractual disputes also impact upon cash flow. Oke et al. (2016) establish that
construction projects are faced with numerous, simple to complex issues that range from
late payments to litigation. This supports the notion of Danuri et al. (2006) and Kennedy
(2005) that cash flow problems and poor management of cash flow are the main subjects of
disputes (Lowe, 1997). This can lead to financial adversity if these disputes result in
arbitration or litigation (Bob, 2005). Furthermore, late resolution of disputes will also result
in project abandonment and failed projects caused by the high level of interest rates that
give rise to cash flow problems (Khosrowshahi and Kaka, 2007).
3. Research approach
An empirical methodological approach was adopted to evaluate the effects of positive and
negative cash flow on construction projects. Primary data were collected using a well-
structured questionnaire that was distributed to 143 construction companies registered with
the Federation of Construction Industry (FOCI), Nigeria. This Federation represents the
construction companies that exhibit sustained excellence, sound practices and respect for
ethics in the Nigerian construction industry. Questionnaires were self-administered and
distributed via email. Phone calls and automated reminders were used to follow-up on the
respondents so as to ensure a timely response. The research proposed the following
hypothesis to guide the study’s direction:
Large 3 2 3 5 13
Medium 2 6 9 8 25
Table II. Small 8 8 17 25 58
Periodic usage of Total 13 16 29 38 96
cash flow analysis (%) 14 17 30 39 100
Large 9 4 0 13
Medium 16 9 0 25 Table III.
Small 41 17 0 58 Sources of capital
Total 66 30 0 96 used to augment cash
(%) 69 31 0 100 flow problems
5. Discussion of findings
The study reveals that while all participating firms perform cash flow analysis annually,
performance on a weekly or monthly basis occurs less frequently. Cash flow analysis
provides a useful forecasting system for ensuring that organisations can meet financial
demands. Moreover, it provides information to clients, creditors, management and others
that will assist them in evaluating the company’s ability to generate future cash flows
(Mulenga and Bhatia, 2017). The success of a project, i.e. if it is productive in the allocated
JEDT Level of
18,2 Effects of negative cash flow Size of companya No. Mean rank Kruskal–Wallis Hb Dfc significance
time and cost, is regularly determined by its cash flow analysis (Kumar et al., 2018; Maravas
and Pantouvakis, 2012). The implication is that when cash flow analysis is not undertaken
by firms at appropriate times, the result could be a breakdown or inefficiency of financial
systems, which could eventually lead to insolvency (Lowe and Moroke, 2010; Khosrowshahi
and Kaka, 2007). Moreover, when companies perform productive cash flow analysis, it assists
them in increasing investment on construction projects thus attracting the attention of major
stakeholders and availing the growth opportunity (Habib and Huang, 2019). The survey
analysis also suggests that to augment cash flow problems the majority of firms take a bank
loan. This indicates that they may not have analysed cash flows appropriately to adequately
anticipate the need for cash resources during the course of project execution, and therefore may
not have a good track record of adequate financial stability or collateral and a lower credit
rating. Previous research shows that lenders do not easily provide large capital to firms with no
track record/collateral and a lower credit rating (Seo et al., 2018). Payment for goods and services
from customers, and purchase of stock and raw materials were indicated by respondents to be
significant sources of cash inflow and outflow respectively, which implies that there is income
available to pay accounts and wages.
The study found that the top three major significant causes of cash flow problems are Cash flow on
delay in payment to the contractor; difficulty in obtaining financial aid; and inadequate construction
budgetary control. Delays in the payment of clients to contractors (for amounts due to them)
impede cash inflow into the contractor’s purse thus diminishing their resources to continue
projects
works. This situation is further exacerbated when contractors are unable to obtain bank
loans and/or overdrafts which in turn could lead to insolvency. Studies by Diamond and He
(2014) and Seo et al. (2018) show that construction organisations may pass up otherwise
profitable investment opportunities when they do not have adequate internal funds. A 319
robust system of budgetary control for construction projects is aligned to previous findings
by Onukwube (2005) and Ward (2000) who demonstrate that a lack of such will result in
cash flow problems.
The findings presented also suggest that positive cash flows are perceived to have
positive effects upon the delivery of construction projects, namely: adequate planning and
execution of the project; availability of sufficient cash to meet demands; timely completion of
the project; proper utilisation of cash resources; and reliability indicator to lending institutions
in. Earlier studies of Nwachukwu and Emoh (2011) support these findings and assert that
the most vital element to be prudently monitored is time. Cash is one of the most critical
aspects of success; not only is it needed for a company’s project to survive but positive cash
flow management will guarantee a timely completion of the works to the mutual satisfaction
of all parties. The greater the internal cash flow and net revenue, the larger the construction
company investment values (Tran et al., 2019).
Conversely, negative cash flows were found to have adverse effects upon cash flow
analysis in the form of: capital lock-up; delay in completion time; project abandonment;
reduction in profit margin; additional (increased) cost; and litigation/arbitration.
Mahamid et al. (2012) and Sambasivan and Soon (2007) argue that delays on site caused
by inadequate cash flows may be due to late payments to sustain construction outlays –
particularly for those contractors who are not financially buoyant. Firms’ financial
crisis may have a significant effect on the trade credit policies of individual firms
(Harris et al., 2019). When such occurs the project is delayed, which invariably results in
the extension of completion time, increased costs and reduced profit margin. In this
case, the contractor either borrows money to meet debt obligations or removes funds
from the company’s reserves, thereby depriving the interest-earning capability of the
cash. Omopariola et al. (2017) acknowledge that contractors will abandon projects when
payment certificates are not honoured by a client when due, as timely payment is
needed to avoid unnecessary outsourcing of funds which attracts high interest rates
and hence, has negative effects on profitability (Adjeil et al., 2018). However, project
abandonment could cause the contractor to suffer financial losses, which can also be
interpreted as a negative impact on cash flow. Moreover, there is impact upon the client
as they would have to complete the job using other contractors and often at a much
higher rate. These findings cumulatively corroborate the study by Lowe (1997), Arditi
et al. (2000), Abdul-Rahman et al. (2009), and Sankar and Kumar (2018) in the UK,
Malaysia and India which indicate that cash flow problems and poor management are
the main causes of the failure of construction project delivery. Therefore, ensuring
project viability necessitates the effective management of cash inflows and outflows
which will indirectly improve the performance of construction organisations.
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Corresponding author
David John Edwards can be contacted at: drdavidedwards@aol.com
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