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Analyzing the Impact of Negative Cash Flow on Construction Performance in the

Dubai Area

Article in Journal of Management in Engineering · October 2012

DOI: 10.1061/(ASCE)ME.1943-5479.0000123

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 1 Analyzing the Impact of Negative Cash Flow on Construction Performance in
2 the Dubai Area
3
4
5
6 Khalil I. Al-Joburi1, Raid Al-Aomar2 and Mohammed E. Bahri3
7

9
1
10 Assistant Professor, Department of Civil and Architecture Engineering, University of Bahrain,
11 Bahrain, Email: kjoburi@eng.uob.bh
12
13
2
14 Associate Professor, Director of Engineering Management Program, Abu Dhabi University,
15 UAE, Email: raid.alaomar@adu.ac.ae
16
17
3
18 Director, Zoning Authority Development Control, Dubai, UAE, Email:
19 mohamed.albahri@zoningauthority.gov.ae
20

21

22

23 Abstract

24 Cash flow impacts all aspects of the construction project implementation process. Cash shortage

25 can lead to project failure and business bankruptcy. Researchers have studied cash flow in

26 context of scheduling, project delay, business failure, and forecasting. However, negative cash

27 flow trends and patterns themselves have not been closely examined. This paper investigates

28 negative cash flow trends and patterns and their impact on construction performance. To this

29 end, the study reviews financial and scheduling data for 40 ongoing projects in the Dubai area

30 and selects 4 projects for in depth analysis. These projects represent the main categories of Dubai

31 construction industry in terms of type, budget, and business. Three elements of the project cash
32 flow are analyzed: (1) actual cash disbursements, (2) cash receipts, and (3) accumulated cash

33 flow. Results of data analysis have shown that the negative cash flow existed in each of the

34 selected subject projects, ranging from 30 to 70 % of their project durations. The high shortage

35 values have ranged from two to four times the average monthly expenses. The study has also

36 investigated how some contractors were able to reduce the extent and amount of negative cash

37 flow on their projects and complete them as scheduled by rescheduling construction activities

38 based on cash flow availability. The study shows that the amount, duration, and distribution of

39 negative cash flow are critical factors in construction performance. Finally, study results

40 underscore the essential need to plan for cash flow in all phases to ensure a successful and

41 profitable project.

42

43 Keywords: negative cash flow; project life-cycle; construction management; construction

44 performance; construction industry.

45

46 Introduction

47 Under the current financial crisis, securing sufficient cash flow at all phases of construction

48 project implementation is the most challenging and critical issue facing contractors. Sufficient

49 cash flow is essential for three objectives; to pay for overhead, labor, and material expenses; to

50 execute construction activities according to schedule; and to reduce financing liabilities. In other

51 words, effective cash flow management is at the core of running a profitable construction

52 business. During any period of a project, therefore, contractors avoid carrying out work that

53 exceeds available cash or credit, regardless of scheduling requirements. In other words,

54 contractors want to secure sufficient cash flow at all times. Research shows that the lack of
55 proper construction finance planning can lead to significant increases in cost and time and may

56 even lead to the financial collapse of the construction project (Singh and Lakanathan, 1992). As

57 Lord Denning famously said that cash flow is the lifeblood of the construction industry, cash is

58 typically considered to be the most important of a construction company’s resources (Hyung et

59 al., 2005, Arditi and Polat, 2010). Cui et al. (2010) presented a systems analysis approach of

60 project cash flow management strategies. Hence, it has now a day become essential to closely

61 examine the relationship between cash flow and construction industry performance.

62 Cash flow is viewed in two ways in construction management literature. The first defines

63 cash flow as the net receipt (cash in) or net disbursement (cash out) resulting from receipts and

64 disbursements occurring in the same interest period (Oxley and Poskitt, 1996). According to this

65 school of thought, a positive cash flow indicates a net receipt in a particular period or year, while

66 a negative cash flow indicates a net disbursement in that period. In the construction industry,

67 receipts (cash in) are mainly derived from funds received in the form of monthly payments, stage

68 of work payments, release of retention funds, and final account settlements. Disbursements (cash

69 out) relate to funds expended on a contract in order to pay wages and subcontractors, buy

70 materials and plans, and so forth. Figure 1 shows a typical relationship between receipts (cash

71 in), disbursements (cash out), and time, on one hand; and progress-payment contracts, on the

72 other (Hendrickson, 2008). The cash-out time curve is referred to as the S-shape curve and

73 sometimes as the cash-in-cash-out time profile curve.

74

75 Please insert Figure 1 here

76
77 The second construction management view of cash flow defines it as the actual movement or

78 transfer of money into or out of a company (Cooke and Jepson, 1986). According to this school,

79 money flowing into a business is termed positive cash flow (+ve) and is credited as cash

80 received. Money paid out is termed negative cash flow (-ve) and is debited to the business. The

81 difference between the positive and negative cash flows is termed the net cash flow. This study

82 adopts the first definition of cash flow because it is accepted by most contractors, widely used in

83 the construction industry, and affirmed by many recent researches.

84 Finally, and due to the key importance of the cash flow, several cash flow forecasting and

85 prediction techniques are proposed by researchers for both owners and contractors and for both

86 short and long term construction projects. Chen (2007) described simplified tools that will

87 facilitate the cash flow projection. O'Leary and Tucker (1996) discussed different approaches to

88 cash flow forecasting in the Australian construction industry. McInnis and Collins (2011)

89 investigated the effect of cash flow forecast on some accounting aspects of the project. Searched

90 literature collectively emphasizes the important role of cash flow forecasting in predicting cash

91 shortages and avoiding or at least reducing the periods of negative cash flow.

92 Cash flow impact on construction industry

93 It is universally agreed upon the serious impacts of cash flow on the success and failure of a

94 construction project and a construction company. We can summarize these impacts in terms of

95 failure, delay, and scheduling issues.

96 Cash flow and the failure of construction firms

97 It is typically clear that the lack of liquidity to support day-to-day activities is the foremost cause

98 of a construction company’s failure (Singh and Lakanathan, 1992). Failure is, of course,

99 undesirable for any business and should be avoided at all moral costs. Its consequences go
100 beyond the contracting company and affect the construction industry and society at large.

101 Obviously, both business owners and contractors work very hard to avoid failure. As such, cash

102 flow considerations must become a construction firm’s top-most management consideration,

103 since cash is the most important of a construction company’s resources.

104 Peer and Rosental (1982) state that a company can survive a transitional period without

105 showing profit or even with a loss, but it will collapse due to lack of cash flow. Mutti and

106 Hughes (2002) state that the level of insolvencies in the construction industry is high when

107 compared to other industries. Many authors have studied the causes of failure in construction

108 industry (Argenti, 1976; Arditi et al., 2000; James et al., 2010). Their results show that cash flow

109 problems and poor management are the main causes for failure.

110 Moreover, construction firm failure is universal. Examples include the high number and rate

111 of business failures in the United Kingdom (Mutti and Hughes, 2002) and the Unites States

112 (Altman, 1984). A slump in construction volume after 1998 resulted in the bankruptcy of many

113 construction companies in Hong Kong (James et al., 2010). In 2005, the Emirate of Dubai was

114 credited with the highest construction activity per square kilometer in the world (Faridi and El-

115 Sayegh, 2006). Just over four years later, between 2009 and 2010, numerous construction firms

116 in Dubai declared bankruptcy and scores of projects were abandoned, almost exclusively due to

117 lack of cash flow.

118 Cash flow and project delay

119 Project delay is among the most common problems in the construction industry worldwide.

120 Many researchers have tried to identify its causes (Assaf, 1995; Ogunlana et al., 1996; Kaming et

121 al., 1997; Mezher and Tawi, 1998; Al-Moumani, 2000; Frimpong and Oluwoye, 2003; and many

122 others). The literature identifies four main factors that cause construction delay, all of them are
123 money related: (1) late payment, (2) poor cash flow management, (3) insufficient financial

124 resources, and (4) financial market instability (e.g., Abdul-Rahman et al., 2009). Sambasivan and

125 Yau (2007) identified the 10 most important causes of delay from a list of 28 main reasons. In

126 addition, they categorized the six main effects of delay. Of these sources of construction delay,

127 four prove to be the most significant underlying factors: (1) The contractor’s unstable financial

128 background, (2) the client’s poor financial and business management, (3) difficulties in obtaining

129 loans from financiers, and (4) inflation.

130 Cash flow and project scheduling

131 Critical Path Method/Program Evaluation and Review Technique (CPM/PERT) is widely

132 accepted and employed by the construction industry to minimize total project duration. Elazouni

133 and Gab-Allah (2004) state that many heuristic, optimal, and suboptimal methods have been

134 developed to modify CPM/PERT, yet none consider cash flow availability as a variable in

135 balancing project expenditures. They state that traditional resource allocation models that treat

136 available cash flow as a constrained resource cannot be considered a substitute for finance–based

137 scheduling. Using integer programming, they propose finance-based scheduling for devising

138 CPM/PERT so that projects can be adequately financed at certain credit limits. Genetic

139 Algorithms were also utilized to devise finance-based schedules to maximize project profit

140 through minimizing financing costs and indirect costs (Elazouni and Metwally, 2005 and 2007).

141 Elazouni (2009) used a heuristic method to apply the finance-based scheduling for multiple

142 projects. The finance-based scheduling is further enhanced with the addition of the Strength

143 Pareto Evolutionary Algorithm (Abido and Elazouni, 2010). Liu and Wang (2008) state that

144 resource-based scheduling should be considered when dealing with constrained cash flow. In
145 summary, numerous researchers have examined the scheduling problem, but still there is no

146 agreement on the most suitable technique for most construction projects.

147 Overview of Dubai construction industry

148 The United Arab Emirates’ (UAE) construction industry has reached an unparalleled position in

149 the last decade (Faridi and El-Sayegh, 2006). In 2006, the Emirate of Dubai had the highest

150 construction activity per square kilometer in the world. In 2005, Dubai Economic Department

151 (DEC) estimated that the construction industry contributed 13.8% of the GDP, with more than

152 340,000 employees, or 16.5% of the total work force. Dubai’s population increased by 150%

153 between 2000 to 2009, with a projected 900% increase in land area in the 26-year period

154 between 1990 and 2016 (Curran, 2010). Direct Foreign Investments (DFI) funded 1,326 projects

155 from 2003 to 2009, of which 38% comes from European Union countries, making them the

156 largest project investors. The United States is second, with 26%. To oversee this unequaled

157 construction growth, the government of Dubai established a number of official and semi-official

158 agencies. It also created various free-zone areas established throughout the Emirates to facilitate

159 the construction process. The Zoning Authority Development Control (ZADC) is a semi-

160 governmental body which oversees some of the free zones in Dubai.

161 The Emirates has initiated hundreds of ongoing projects with budgets ranging from $1

162 million to more than $50 billion. Curran (2010) reviewed 866 ongoing construction projects. The

163 residential development forms the largest category in terms of number. The majority lie in the

164 range of $25 to $100 million. The status of the 866 projects reveals that the stopped or delayed

165 projects make up 54 percent of the total budget, posing serious and challenging problems to the

166 construction industry and to Dubai economy.

167
168 Research statement

169 As stated, a literature search demonstrates the importance of cash flow for the construction

170 industry. Yet despite a remarkable effort, the relationship between cash flow and construction

171 industry performance is still far from being fully understood. Several factors contribute to this:

172 1. Construction is a complex multi-dimensional process that, as such, is not easy to model.

173 2. Most researchers focus on mathematical modeling, using, in most cases, projected data.

174 Few consider actual cases.

175 3. The extent of negative cash flow and its patterns are rarely examined, or, at least,

176 addressed.

177 4. The underlying (theoretical) assumption is that cash flow is always available, from banks

178 and creditors, and/or in the contractor’s own resources.

179

180 The present study attempts to shed light on the relationship between negative cash flow and

181 construction performance (and thus decrease the industry’s knowledge gap) by interpreting

182 trends and patterns of accumulative negative cash flow throughout the life of a project using data

183 from actual construction projects. To this end, real-life, ongoing financial and scheduling data

184 has been collected from 40 ongoing projects in Dubai. Dubai city provides an ideal case study

185 due to its unprecedented construction activities and the presence of international contracting

186 firms throughout its construction landscape.

187 Research method

188 To investigate the impact of negative cash flow on the construction projects’ performance and to

189 explore their common trends and patterns, the following steps were performed on the selected

190 projects:
191 1. Plot the actual cumulative cost and income-time profile curves to inspect trends or

192 patterns among all cases. Compare obtained curves to the typical cumulative estimated

193 cost and estimated income curves profile of Figure 1. This aims to examine the extent to

194 which the similarities and differences between actual and estimated costs and time

195 (Figures 2, 5, 8, and 11)

196 2. Compare percentage of work completed to contractor’s receipts (cash in). This shows

197 how the financial management actually correlated to the work progress. It is also an

198 indication of the contractor’s cash flow management efficiency (Figures 3, 6, 9 and 12).

199 3. Analyze available cash flow at every stage of the project (Figures 4, 7, 10 and 13). This

200 step is a key reflection of the well being of the project’s financial status. Negative cash

201 flow for a long period results in serious problems and often leads to undesirable

202 consequences that range from project delay to bankruptcy. Three scenarios are considered

203 in this regard:

204 a. Safe or Green Zone: This is when the available cash flow balance is sufficient to

205 pay expenses for a period greater than the payment cycle (60-90 days).

206 b. Warning or Yellow Zone: This takes place when the cash flow is less than the

207 payment expenses for a period less than the payment cycle (60-90 days).

208 c. Red Zone: Where the cash flow becomes negative or less than the average

209 expenses of one month and extends for a period that is more than the payment

210 cycle (60-90 days).

211

212 These zones are established based on the limited survey of the interviewed contractors.
213 Data collection

214 To understand the scope and depth of the underlying problem, and to be able to make reasonable

215 recommendations, data across the construction spectrum needs to be collected and analyzed. This

216 is difficult and in some cases almost impossible to do for several reasons. The main one is that

217 contractors, owners, and governments are reluctant to release and share financial data, which is

218 viewed as extremely confidential. Moreover, in the data collecting process, it becomes clear that

219 contractors are not required to organize scheduling and financial data in any particular format.

220 Each contractor develops its own format arbitrarily using varying levels of detail. Some keep

221 well-organized data, and detailed in their conception, and others keep the bare minimum.

222 In addition, there are many government and semi-governmental bodies that maintain and

223 monitor construction records, but each has its own information sharing policies. The authors did

224 gain limited access to the data of ZADC. The ZADC database does not include detailed financial

225 data. The ZADC was, however, willing to share data of 40 ongoing projects, believing that these

226 projects represent the overall construction landscape within the Emirates.

227 These projects have been carefully examined and classified based on their type and estimated

228 budget. As shown in Table 1, the 40 projects closely resemble the general trends in Dubai

229 construction industry. Based on this, these projects can be used for the intended research

230 objectives. The next step was to obtain actual financial data from contractors. We set up personal

231 interviews with contractors, but most declined to participate (for reasons that seemed

232 unconvincing). Only a handful of contractors agreed to share partial data as it became available.

233

234 Please insert Table 1 here

235
236 Four projects were selected to represent each of the aforementioned categories. Financial and

237 scheduling data from each construction project were collected during this study over a period of

238 15 to 24 months (see Table 2). The following is a summary of the four selected projects:

239 1. DUBAI STUDIO CITY: This is a mixed commercial project of a ground floor plus 5 floors

240 (G+5) located in Dubai Studio City. Its value is $27,909,526, its duration, 18 months,

241 from September 2007 to completion in February 2009. Total built area is approximately

242 10,550 m2. The structural works consisted of RCC and the facade of the curtain wall. The

243 building is shell and core, which means that the internal finishing of the office areas will

244 be done by the tenants. The payment agreement was based on a 20% advance payment,

245 10% retention, and a 90-day payment cycle from the date of payment submission.

246 2. COMMERCIAL BUILDING: This is a commercial complex with two basements, ground floor,

247 and two buildings of eight typical floors each. It has two common basements with a

248 common podium. The two buildings are built on the common podium, and the enabling

249 works are excluded from the main contractor’s work. The project carried an estimated

250 cost of $98,227,900, with a planned duration of 21 months, from March 2008 to January

251 2010. The payment agreement was 10% advance payment, 10% retention, and a client

252 payment cycle of 60 days from the date of payment submission.

253 3. RESIDENTIAL VILLA: This project is a two-story villa with a medium range of finishing,

254 and a boundary wall for a total build area of 520 m2. The estimated cost was $1,790,790

255 with a 15-month scheduled project duration, from September 2007 to January 2008. The

256 payment agreement was 15% advance payment, 10% retention, and a client payment

257 cycle of 60 days from the date of payment submission.

258 4. RESIDENTIAL BUILDING: This project is two buildings of G+3 types, fully residential with
259 the ground floor for shops, substation, and parking garage. Initial estimates were

260 $78,099,217 and a 23-month project period, from February 2008 to January 2010. The

261 payment agreement was 10% advance payment, 10% retention, and a client payment

262 cycle of 60 days from the date of payment submission.

263

264 Please insert Table 2

265 Results analysis

266 The results of the four case studies are presented by developing three figures for each project.

267 Each figure sheds light on one or more angle of cash flow’s impact on construction performance.

268 The results of the four cases studies can be summarized as follows:

269 Dubai Studio City

270 Figure 2 shows that the cumulative cost-time profile curve is similar to the typical cumulative

271 estimated cost-time profile curve in Figure 1. The smoothness of the curve shows the

272 contractor’s progress regardless of owner payment. Investigation showed that this particular

273 contractor worked before with the same owner in more than one project and has been in business

274 for more than 10 years. This might explain the willingness to go ahead with the work, despite

275 delay in owner payments toward the end. On the other hand, the cumulative income and time

276 profile curve is different due to the advance payment arrangement and payment delay toward the

277 end of the project. In this case, it is noticeable that the advance payment is larger than any owner

278 payment throughout the project period, which indirectly reflects the scheduling plan from the

279 contractor’s side.

280 [Please insert Figure 2 here]

281 Figure 3 shows the relationship between the completed work and owner payments. At the

282 beginning, work done is 0% while owner payment is 20%. This is because of the advance

283 payment arrangement. Payment percentage continues to be greater than work completed and the

284 difference decreases as time increases. Both percentages become equal at about 40%. Then, the

285 percentage of work completed begins to eclipse payment, and the difference continues to

286 increase until they become equal toward the end. The rate of work progressing seems to be the

287 highest between September 2008 and December 2008. The contractor manages to complete the

288 work as scheduled.

289 [Please insert Figure 3 here]

290

291 Figure 4 is the most interesting. It provides a monthly view of the cash flow status for the

292 contractor at any point in time. It shows both the positive and negative cash flow and the

293 changing patterns. From August 2007 to the end of March 2008 the project is in the green zone,

294 which means the contractor has enough cash balance to cover expenses for a period equal or

295 greater to the payment cycle (90 days). During the period between April 2008 and June 2008, the

296 cash balance becomes more critical as it enters the yellow zone, which means that cash flow is

297 less than needed to pay expenses for 90 days. The cash balance goes into the negative (red zone)

298 from July 2008 to the end of the project. This is about 10 months, or about 56% of the project

299 life, with a maximum negative value of $4.3 million. This time is the most critical. If not well

300 planned for, it could hinder the entire project and perhaps lead to the collapse of the construction

301 company. The contractor’s relationship with the owner and previous experiences helped in the

302 successful completion of this project.

303 [Please insert Figure 4 about here]

304 Commercial Building

305 Figure 5 shows that the cumulative cost-time profile curve is similar to the typical cumulative

306 estimated cost-time profile curve in Figure 1. The cumulative income-time profile curve differs

307 from the typical curve due to the advance payment and the owner’s payment (contract income)

308 delay in July 2009. The contractor completes the project by July 2009, while the owner payments

309 continue for the next 7 months. This reflects the contractor’s financial strength and the good

310 relationship between the contractor and owner. A closer look at the contractor’s history reveals

311 that the contractor is from the gulf region and has special ties to the owner. This suggests his

312 determination to complete the work on time.

313 [Please insert Figure 5 about here]

314

315 Figure 6 shows the relationship between owner payments and the work completed. In

316 February 2008 the parties sign the contract, and the owner paid 10% as advance payment to the

317 contractor. In September 2008, the contractor accomplished 20% of the work, while the owner

318 paid the additional 10% in 7 months. In July 2009, the contractor completed 80% of the work

319 while the owner paid a total of 60% of the costs. Analyzing figures 5 and 6, it becomes clear that

320 the contractor paid for the tasks needed to complete the project in advance. This is why Figure 5

321 is flat after July 2009, while Figure 6 shows at that point only 80% of the work done.

322 [Please insert Figure 6 here]

323 Figure 7 reflects the status of the cash flow at any given point of the project duration. It

324 shows both the positive and negative cash flow and the changing patterns. This case is quite

325 different from the rest for the following reasons:

326 1. At no point in time did the contractor’s cash flow fall in the green zone, even at the very

327 beginning. The 10% advance payment (around $8.5 million) is not enough to cover the

328 project costs for more than one month, because the average monthly payment is around

329 $6.1 million.

330 2. Most of the time, the project was in the yellow zone (cash flow is less than the payment

331 expenses for a period less than the payment cycle, 60 days in this case). The periods from

332 March 2008 to December 2008, and from April 2009 to May 2009, and from September

333 2009 to November 2009, were all in the yellow zone. That is fourteen (14) of the 21

334 months of the project life. This represents 67% of the total project life.

335 3. The red zone (wherein the cash flow becomes negative or less than the average expenses

336 of one month and extends for a period that is more than the payment cycle) occurs twice,

337 from January 2009 to March 2009 and from June 2009 to August 2009. The project is in

338 the red zone 33% of the time.

339 4. The maximum negative cash flow is about $2.2 million, which occurred for one month

340 (July 2009). This is about 2% of the total project value, 26% of the advance payment, and

341 35% of average monthly expenses.

342 5. At no point in the project duration time did the contactor spend more than the advance

343 payment. This demonstrates good scheduling and outstanding financial planning and cash

344 flow management. The project was executed as planned without any major problem. This

345 can be attributed to correct financial planning and proper event scheduling. When the

346 contractor was interviewed, he stressed the cash flow issue, and stated that he planned his

347 work around cash flow as the most critical factor in ensuring project completion.
348 [Please insert Figure 7 here]

349

350 Residential Villa

351 Figure 8 shows that the cumulative cost-time and income-time profile curves start similar to that

352 of other two projects and to that of Figure 1, but terminate in August 2008 due to the contractor’s

353 default. The project stopped and the contractor could not continue operations. When interviewed,

354 the contractor stated that the main cause for his decision was that he could not secure cash flow,

355 and he expected the shortage of cash flow to worsen if he continued.

356 [Please insert Figure 8 here]

357

358 Figure 9 illustrates the relationship between the owner’s payments and work completed. In

359 September 2007, the contractor received the 15% advance payment as stipulated in the contract,

360 while the work completed was 0%. In April 2008, the percentage of work completed and owner

361 payment was equal. The period from April to August 2008, the rate of work completed

362 increased, but the contractor could not continue due to lack of cash, as shown in Figure 9.

363 [Please insert Figure 9 here]

364

365 Figure 10 reflects the status of the contractor’s available cash flow at any given point of the

366 project’s duration. The period between September 2007 and May 2008, cash flow continues

367 declining except in February 2008. This pattern of spending drains the contractor’s cash flow,

368 and he approaches the red zone by May 2008. In June 2008, the contractor made a huge payment

369 almost as big as the advance payment; this pushed the cash balance deeply into the red zone.
370 This poor financial and scheduling planning and cash flow management are the main reasons for

371 the severe shortage of cash flow. The contractor could continue no longer even though he had

372 completed more than 80% of the work. In August 2008, the contractor defaulted and the project

373 stopped. This contractor had limited construction experience and a limited number of

374 professional employees. Such a situation would normally be settled legally, but in this particular

375 case the owner took no legal action.

376 [Please insert Figure 10 here]

377

378 Residential Buildings

379 Figure 11 illustrates the relationship between the contractor’s actual expenses and the owner’s

380 payment. Actual expenses and income are similar to the typical pattern shown in Figure 1. The

381 owner’s payment went as expected until April 2009 when the owner declared he was no longer

382 capable of meeting his financial obligations. At that point, the project comes to a total halt, and

383 the case went to court and is still pending.

384 [Please insert Figure 11 here]

385

386 Figure 12 depicts the relationship between the owner’s payments and the contractor’s work

387 accomplishments. At the starting point, the owner paid a 10% advance payment, and the work

388 proceeded as planned. The owner’s unexpected default disrupted the entire implementation plan.

389 At the time of the owner’s default, the contractor had completed 70% of the work and the owner

390 had only paid 55 percent of the total payment.

391 [Please insert Figure 12 here]

392
393 Figure 13 shows the status of the contractor’s available cash flow. The curve shows that the

394 contractor has positive cash follow for only 2 months, between February and April 2008. The

395 amount is not enough to pay for 2 months expenses. This means that the project is in the yellow

396 zone from the very starting point. In March 2008, the contractor spent over $4.5 million on

397 construction activities. This is about 75% of the advance payment. The cash flow went into the

398 red zone from March 2008 to April 2009. This is 47% of the total project period. If the project

399 were to have continued as planned (all data beyond the default point is projected data not actual),

400 the contractor would have been in negative cash flow for 16 months (March 2008 to July 2009),

401 or about 70% of the project life. This reflects poor planning on the contractor’s part, and one

402 would expect the contractor’s default. The owner’s unexpected sudden default, left the contractor

403 in an extremely difficult financial position, and litigation ensued.

404

405 [Please insert Figure 13 here]

406

407 Research findings

408 The findings from the in-depth analysis and results of the four case studies can be summarized as

409 follows:

410 1. Scheduled cash-out time profile curves for all projects have similar patterns and

411 follow the typical trends of Figure 1.

412 2. Actual expenses and income profile curves in all projects have similar trends and to

413 a certain degree resemble the typical expenses and income profiles in Figure 1.

414 However, the initial payment alters this trend (refer to figures 2, 5, 8 and 11). The
415 degree of alteration varies depending on the amount of advance payment and

416 payment cycle. To fully understand this relationship, further study is recommended.

417 3. The actual expense trend is always less than the scheduled expenses.

418 4. All 40 ZADC investigated projects have advance or initial payments that range

419 from 10-20% of the total project value. This helps contractors in securing sufficient

420 cash flow in the early stage of the project to reduce the negative cash flow period.

421 5. It is notable that when the contractor schedules activities that cost more than the

422 advance payment, the chance of project failure increases (Figures 10 and 13).

423 6. There was no standard bookkeeping format for financial records. That is to say, the

424 government requires no accounting standard for contractors to provide financial and

425 scheduling data in a particular format or even maintain specific financial details.

426 Every contractor in the four projects used different software and kept financial

427 records at widely varying levels of detail.

428 7. The percentage of work completed and income received were equal to 20% for

429 three projects (refer to Figures 6, 9, and 12), but double that was received in the

430 Dubai Studio City project (refer to Figure 3) at 40%. Careful data analysis shows

431 that this is likely related to event scheduling.

432 8. All the projects had a period of negative cash flow, ranging from 30 percent to 70

433 percent of project life.

434 9. Figures 4, 7, 10, and 13, show the cash flow throughout the projects. Table 3

435 summarizes the cash flow of the four analyzed projects. Negative cash flow values
436 and length and distribution can be easily detected for each case study. The

437 following findings are extracted from these figures.

438 Please insert Table 3

439

440 a. Maximum negative cash flow took place in the 2nd half of the project’s life

441 (Figures 4, 7, 10, and 13). Its values range from two to four times the average

442 monthly expenses in three projects (Dubai Studio City, Residential Building, and

443 Residential Villa). This is quite different from the Commercial Building project,

444 where it is only 36% of the average monthly spending.

445 b. Length of negative cash flow ranges were between 30 percent and 70 percent of

446 the project’s life in three cases (Figures 4, 10, and 13), and seemingly continuous

447 in nature. This is extremely critical in cases of limited cash flow or credit line. In

448 the Commercial Building case (Figure 7), it has discontinued for only 15% of the

449 project life. This is a very manageable case because it is a shorter period.

450 10. Negative cash flow is directly associated with project activity scheduling. In cases

451 where expensive activities are taking place, this consumes cash flow. Since in most

452 cases the payment cycle is between 60 to 90 days (if no delay is encountered), this

453 has a direct and often dramatic impact on cash flow. This is clearly visible in three

454 cases (Figures 4, 10, and 13). In Figure 7, events are scheduled in a manner that

455 accounts for cash flow availability.

456 11. Client payment cycles are based on either 60 or 90 days after the submission of

457 payment in the four cases. The decision of payment cycle seems to correlate with
458 the increases in the negative cash flow period. However, this requires a deeper

459 study to understand more specifically the relationship between payment cycle and

460 cash flow.

461 12. Extended negative cash flow periods and amounts are critical to project viability

462 and can well cause project failure.

463 13. The relationship between contractor and owner proves an important factor in

464 construction performance. In cases were the relationship is healthy, friendly, and,

465 above all, built on professional trust (and the confidence of past mutual experience

466 is material here), this seems to reduce the chance of project failure. This was clear

467 in Dubai Studio City and the Commercial Building projects.

468 Conclusion

469 This paper aimed at investigating negative cash flow trends and patterns and their impact on

470 construction performance. Cash flow issues and literature are first discussed in the context of

471 their impact on project delay, schedule, and failure. Real cases are then used to address the

472 impact of advance payment and payment cycle on project cash flow and the trends and patterns

473 of negative cash flow. These issues are rarely addressed in the literature where most researchers

474 focus on mathematical modeling using, in most cases, scheduled data, and few consider actual

475 real-life cases. Results of data collected from the construction industry in Dubai showed that

476 negative cash flow exists in almost all construction projects. The shortage covers 30-70% of the

477 project duration and is most likely to occur in the second half of a project’s life. The study

478 showed that the advance payment is a good mechanism to reduce the negative cash flow and,

479 when utilized effectively, it helps preventing project failure. Scheduling construction activities

480 that cost more than the advance payment in the early stages contributes notably, in a negative
481 fashion, to cash flow depletion and increases the likelihood of delay and failure. The study also

482 showed that the length of negative cash flow period determines the contractor’s inability to

483 complete a project. The longer the negative cash flow period, the more likely the project will be

484 halted or terminated. Finally, it was found that the cooperation of owners and contractors has

485 helped salvaging projects and minimizing damage to themselves, subcontractors, workers, and

486 the industry. These finding should enable contractors to better understand the importance of

487 negative cash flow and properly and effectively schedule project activities. More practical

488 research using actual data is needed, however, to better understand the impact of cash flow on

489 contractors, owners, and the industry at large.

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562
563
564 JME MEENG 444 List of Figure Captions List

565 Figure 1: Typical expense vs. income profile

566 Figure 2: Expense vs. income profile (Dubai Studio City)

567 Figure 3: Percentage of Work completed vs. Payment amount (Dubai Studio City)

568 Figure 4: Monthly vs. Cumulative Cash Flow balance (Dubai Studio City)

569 Figure 5: Expenses vs. income profile (commercial building)

570 Figure 6: Percentage of Work completed vs. Payment amount (commercial building)

571 Figure 7: Monthly vs. Cumulative Cash Flow balance (commercial building)

572 Figure 8: Expense vs. income profile (Villa)

573 Figure 9: Percentage of Work completed vs. Payment amount (Villa)

574 Figure 10: Monthly vs. Cumulative Cash Flow balance (Villa)

575 Figure 11: Expense vs. income profile (Residential building)

576 Figure 12: Percentage of Work completed vs. Payment amount (Residential building)

577 Figure 13: Monthly vs. Cumulative Cash Flow balance (residential building)
578

579
580
581 Table 1: Categories and budgets of the 40 investigated construction projects
582
Type Budget range
Number Percentage
$Million
Commercial 75-100 9 23%
Residential 10-25 11 27%
Mixed 25-75 10 25%
Private residential 0-10 10 25%
583
584
585
586 Table 2: Data collected for the four selected construction projects
587
Project Project Duration Payment cycle % Advance Retention
Name value $ (Months) (Days) payment %
Dubai Studio
27,909,526 18 90 20 10
City
Commercial
98,227,900 21 60 10 10
Building

Villa 1,790,790 15 60 15 10

Residential
78,099,217 23 60 10 10
Buildings
588

589

590 Table 3: Cash flow summary of the four analyzed projects

Project Estimated Duration Average Max. Negative Percentage Remarks

name project (Months) monthly negative cash negative
value $ expense $ cash flow $ period cash flow
(months)
Dubai Studio
27,909,526 18 1,468,922 5,880,874 8 44% Completed
City
Commercial
98,227,900 21 6,139,244 2,239,341 6 Completed
Buildings 29%
Villa 1,790,790 15 119,386 222,959 6 40% stopped
Residential
$78,099,217 23 4,338,845 4,555,924 16 70% stopped
Buildings
591

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