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International Journal of Project Management 29 (2011) 604 – 614

www.elsevier.com/locate/ijproman

An empirical examination of project contractors' supply-chain cash flow

performance and owners' payment patterns
Hong Long Chen⁎
Department of Business and Management, National University of Tainan, No. 33, Sec. 2, Shu-Lin St., Tainan 700, Taiwan

Received 31 August 2009; received in revised form 31 March 2010; accepted 8 April 2010

Abstract

Supply-chain (SC) cash flow performance is an essential component of SC performance management. Despite the panoply of approaches to SC
cash flow modeling, relatively few published studies assess the effect of SC cash flow performance on a project contractor's financial
performance. Little research thus explores the behavioral patterns in the project owner–contractor dyad in the context of payment-term negotiation
for improving the SC cash flow performance of a project contractor. Using data from 42 Taiwanese construction project contracting corporations,
this paper systematically quantifies the effects of SC cash flow performance on the financial performance of construction project contractors.
Further analysis using data from 118 returned, usable surveys reveals important behavioral patterns of project owners regarding payment terms
with project contractors during the contracting phase of construction projects. These behavioral patterns provide project contractors with a base for
supporting implementation efforts for improving SC cash flow performance.
© 2010 Elsevier Ltd. and IPMA. All rights reserved.

Keywords: Project contractor; Supply-chain performance; Cash flows; Financial performance; Payment behavior

1. Introduction contracting industry. The first objective of this study, therefore,

Hendricks and Singhal (2003) herald supply-chain manage-
ment (SCM) as the next source of constructing, supporting, and
winning competitive advantage. Many studies focus on
improving supply-chain (SC) performance through synergistic
integration of SC components (e.g., Andersen and Christensen,
2005; Dainty et al., 2001; Elmuti et al., 2008; Hill et al., 2009;
Lee et al., 2007; Zailani and Rajagopal, 2005), but others claim
that strong correlations exist between excellence in financial
performance and management of SC material, SC information,
and SC cash flows (e.g., Christensen et al., 2007; Comelli et al.,
2008; Ellram and Liu, 2002; Farris and Hutchinson, 2002;
Lanier et al., 2010; Fawcett et al., 2007).
Even though previous evidence supports most of those claims,
little evidence exists that systematically links SC cash flow
performance to financial performance in the construction-
⁎ Tel.: +886 6 260 6123x7741; fax: +886 6 260 6173.
E-mail address: along314@mail.nutn.edu.tw.
0263-7863/$ - see front matter © 2010 Elsevier Ltd. and IPMA. All rights reserved.
doi:10.1016/j.ijproman.2010.04.001
is to examine and quantify systematically the effects of SC cash
flow performance on financial performance of construction
project contractors so that stakeholders can better measure the
financial impact of improved SC cash flow performance.
The second objective of this study is to analyze how the project
owner–contractor dyad behaves in the context of payment-term
negotiations for improving the SC cash flow performance of
construction project contractors. Such analysis especially benefits
construction project contractors by providing appropriate strate-
gies to negotiate with the owners regarding payment terms that
expedite cash inflows and improve SC cash flow performance.
The rest of the paper is organized as follows. Section 2 reviews
related studies. Section 3 presents the research questions and
methodology. Section 4 describes the collection of the samples.
Section 5 presents a useful relationship between SC cash flows
and financial performance, followed by a robust regression-
modeling procedure. Section 6 presents the behavioral analysis of
project owners' payment terms. Section 7 discusses the implica-
tions of the research results. Section 8 summarizes the paper.
 H.L. Chen / International Journal of Project Management 29 (2011) 604–614
2. Background
A supply chain (SC) is an integrated process wherein raw
materials are manufactured into final products, then delivered to
customers through distribution, retail, or both (Cohen and Moon,
1990). Supply-chain management (SCM) is the process of
planning, executing, monitoring, and controlling the operations
of the SC (Lee et al., 2007). Along this chain, three major flows
exist, including material, information, and cash flows. These SC
flows have drawn much attention from researchers and practi-
tioners alike because of their important impact on SC performance.
Despite the equivalent importance of these flows, most
published SC studies focus on material and/or information
flows (e.g., those published studies concerning information flows
include Anand and Goyal (2009), Bayraktar et al. (2010), Chae
et al. (2005), Fawcett et al. (2009), and Lin et al. (2002); those
concerning material flows include Richey et al. (2008), Arnold
et al. (2009), Sheu (2005), and Vachon and Klassen (2002); and
those concerning material and information flows include
Baghdasaryan et al. (2010), Hill et al. (2009), and Naylor et al.
(1999)). Relatively few published studies address SC cash flows.
Furthermore, most of the published studies that propose to
study cash flows in SCM focus on cash flow modeling (e.g.,
Comelli et al., 2008; Kaka and Lewis, 2003; Tsai, 2008; Motawa
and Kaka, 2009), as reliable cash flow estimation provides the
groundwork for effective management of working capital. For
example, Badell et al. (2005) develop a cash flow model to
optimize cash flow and cash position in the end of each period
based on a mixed-integer linear program (MILP) scheduling
algorithm for batch-chemical-process industries.
More recently, Tsai (2008) uses an autoregression model to
develop a cash flow model that assesses the SC-related cash flow
risks for a manufacturing firm measured by the standard
deviations of cash inflows, outflows, and net flows of each
period in a planning horizon. Comelli et al. (2008) estimate a
multinational company's cash flows created by SC tactical-
production planning based on a combined Architecture of
Integrated Information Systems (ARIS) and Activity-Based
Costing (ABC) modeling methodologies. Comelli et al. (2009)
further develop a mathematical model for optimizing cash flow
and value sharing in the context of SC planning.
In particular, the construction-contracting industry is a project-
based industry where a product (project) represents a large
proportion of a firm's total sales and expenses (Kaka and Lewis,
2003). This unique characteristic differentiates the industry from
manufacturing and service industries. One group of authors (e.g.,
Chen et al., 2005; Cheng et al., 2009; Hwee and Tiogn, 2002;
Kaka and Lewis, 2003; Motawa and Kaka, 2009) thus proposes to
model SC cash flows using S-curve models, which employ
historical project data to determine the relationship between
project construction time and project cumulative sales and/or cost
in percentage, and therefore generate cash flows by combining
that relationship with the project contract values.
For example, Kaka and Lewis (2003) devise a cash flow
estimation model that accounts for both known and unknown
individual projects at the time of the forecast. Chen et al. (2005)
investigate the influence of construction SC payment terms on
605
cash flows. They conclude that payment lags, components, and
frequency significantly affect cash flows from the test results of
three-way factorial experiments. More recently, Chen (2007)
models cash flows using the combined methods of transformed
time-series data, multivariate regression analysis, Yule–Walker
estimates, and incomplete-principal component regression anal-
ysis. Recently, Görög (2009) develops a comprehensive model to
allow contractors to plan and control project cash flows, as well as
estimate the optimal competitive contract price of a project.
Although a large number of studies acknowledge the
importance of SC cash flow modeling (e.g., Hwee and Tiogn,
2002; Kaka and Lewis, 2003; Motawa and Kaka, 2009), limited
studies explore the relationship between cash flow and financial
performance in SCM. Recent research performed by Ellram and
Liu (2002), Lanier et al. (2010), Lo et al. (2009), and Tsai (2008)
recognizes a trend in which more corporate executives are
extending the SC manager's accountability from functional
efficiency to organizational efficiency such as financial
performance.
As a result, understanding the relationship between SC cash
flow and financial performance better is essential to SC and
financial managers. The establishment of such a relationship is
particularly important to construction contracting because the
industry not only has been characterized by low and unreliable
profitability, but has long been recognized as an industry with
more aggressive manipulation of cash flows in SCs (Chen, 2007;
Chen et al., 2005; Kaka and Lewis, 2003; Sorrell, 2003). Thus, the
first objective of this study is to systematically examine and
quantify the effects of SC cash flow performance on the financial
performance of construction project contractors, enabling con-
struction SC and financial managers to better measure the impact
of improved SC cash flow performance on financial performance.
The second objective of this study is to analyze the behavioral
patterns in the project owner–contractor dyad in the context of
payment-term negotiation for improving SC cash flow perfor-
mance of construction project contractors.
3. Research questions and methodology
To support the analysis of the relationship between SC cash
flow and financial performance, this study selects the cash
conversion cycle (CCC) and the return on sales (ROS) metrics to
measure their corresponding performance. Though ROS, return
on assets (ROA), and return on stockholders' equity (ROE) are
common measurements of financial performance (Wild, 2003;
Wild et al., 2004), this study uses ROS because ROA and ROE are
heavily subject to the manipulation of a company's total assets
and financial leverage, respectively, which could bias the research
findings.
CCC is a composite metric that describes the average number
of days required to turn a dollar invested in raw materials into a
dollar collected from a customer (Stewart, 1995). CCC comprises
days-in-payable, days-in-inventory, and days-in-receivable,
where days-in-payable is the number of days' credit before a
firm pays its suppliers and subcontractors, days-in-inventory is
the length of the manufacturing process and the number of days
that the finished goods remain in the firm before they are sold, and
606 H.L. Chen / International Journal of Project Management 29 (2011) 604–614
days-in-receivable is the average collection period from the firm's
customers (Wild, 2003; Wild et al., 2004).
The CCC metric is a key performance indicator of SC cash
flows because the metric not only bridges across inbound material
and service activities with suppliers and subcontractors, through
manufacturing operations, and to the outbound sales activities
with customers, but the metric also indicates the value of net cash
flows (Farris and Hutchinson, 2002; Lanier et al., 2010; Lo et al.,
2009; Tsai, 2008).
Thus, in accordance with the first objective of this study, the
first research question was posed:
Research question 1: What percentage change in a
construction project contractor's financial performance is
explained by a change in the contractor's SC cash flow
performance?
The performance of a firm's SC cash flows is measured by
CCC, whereas ROS is used to measure the financial performance
of that firm. The methodology to answer the research question is
threefold. First, after developing a test hypothesis, this study uses
Pearson's correlation tests to examine the cross-sectional
longitudinal relationships between the ROS and CCC metrics.
Because CCC is expressed in a different unit of measurement
than ROS, a common measure is needed to compare the two.
Because the basic rationale of this study is that changes in a
contractor's ROS are correlated with changes in CCC, a change-
ratio method is therefore used. The mathematical expression of
the change ratio and the test hypothesis are shown in the
Hypothesis and results section.
Second, multivariate robust regression analysis is used for
initial model building, followed by heteroskedasticity and
specification-error tests. Use of robust regression analysis not
only dampens the influence of outlying observations but also
ensures that the forecasts and estimation of the model are unbiased
when the normality of the residuals is violated (Neter et al., 1996).
Third, for the purposes of model restructuring due to
autocorrelation and multicollinearity, the study uses a subsequent
application of Yule–Walker estimates (Shumway and Stoffer,
2000) and incomplete-principal component analysis (Littell and
Freund, 2000).
To further investigate how project owners in construction
SCs might respond to the negotiation of payment terms as a
consequence of contractors' cash flow manipulation during the
contracting phase of projects, the second research question was
posed:
Research question 2: How do project owners behave
regarding payment terms with contractors during the
contracting phase of projects?
This study uses contractors rather than project owners as the
basic unit of analysis because a contractor is likely to work for
several project owners. Each of these project owners typically has
payment terms specified in its contract with the contractor,
creating a data set that contains a range of possible conditions
regarding payments from project owners. Thus, querying
contractors would likely provide more effective and reliable
results.
The methodology to answer the research question is twofold.
First, this study develops a series of test hypotheses concerning
the behavioral patterns of project owners negotiating payment
terms with contractors. Second, this study uses the combined
categorical experiments and Pearson's correlation tests to
examine these hypotheses (Ott, 1993).
4. Data sources
This study carried out the data collection in two phases. In the
first phase, the financial data collection focused on the publicly
owned construction-contracting companies listed on the con-
struction sector of the Taiwan Stock Exchange, because the
balance sheets and income statements of the private companies
were difficult to obtain. For each sample firm, the balance sheets
and income statements were hand-collected from 1999Q1 and
2008Q4. Data was gathered using case-study research protocols
(Yin, 2003), including use of multiple data sources (where
possible) to ensure quality of the data collected.
In total, 52 firms were listed on the construction sector of the
Taiwan Stock Exchange between 1999Q1 and 2008Q4. Some of
these firms were excluded from the sample. Six firms were
excluded because their primary activity was consulting or agency
rather than construction. Another four firms were excluded due to
missing or unavailable financial data. Hence, the sample for
analysis was reduced to 42. Because the disclosure of monthly
financial statements is not mandatory for public companies in
Taiwan, this study uses quarterly data as the basis for analysis.
The search generated 40 observation data sets for each sample
firm.
In the phase two, the data collection was by survey and focused
on gathering information about the common payment terms
construction project contracting firms had with project owners,
especially regarding the payment lag, components, and frequency
variables of those payment terms, which significantly affect cash
flows in a SC (Chen et al., 2005). Payment lag is defined as the
time between the approval of an application for payment and the
actual disbursement of funds; payment frequency is the number of
payments made per month; payment component is the proportion
of payment attributable to labor or materials. The payment lags for
these percent-labor and percent-material variables are further
defined as labor time lags and material time lags, respectively.
5. Relationship between SC cash flow performance and
financial performance
5.1. Hypothesis and results
The study uses the balance sheet and income statement data of
the 42 firms collected from the Taiwan Stock Exchange to
investigate and model the cross-sectional longitudinal relation-
ships between the SC flow and financial performance. Before
building the model, developing a test hypothesis for statistically
verifying that changes in a firm's SC cash flows significantly
correlate with changes in the firm's financial performance is
 H.L. Chen / International Journal of Project Management 29 (2011) 604–614
necessary. Derived from the change ratio defined in the previous
“Research questions and methodology” section, the change ratio
that measures changes in the level of performance can be
mathematically expressed as the following:
Vjt −Vjðt−1Þ
ΔCRjt = ð1Þ
jVjðt−1Þ j
where Vjt and Vj(t − 1) denote the values of the tth and (t − 1)th time-
series observations of variable j, respectively, and jVj(t − 1)j is the
absolute value of Vj(t − 1). Together with the CCC and ROS metrics
shown in Table 1, the following null hypothesis was established.
Ho. Nonsignificant correlations exist between changes in the
contractors' financial performance at time period t (ΔCRjt,
where j = 1) and those of the contractors' SC cash flows at time
period t in the construction-contracting industry (ΔCRjt, where
j = 2, 3, 4, 5).
The left-hand side of Table 2 lists the results of Pearson's
correlation tests of the null hypothesis. Correlation is judged to
be significant when the probability value is smaller than the
threshold value of 0.05. As seen in the table, the Pearson
correlation coefficients of ΔCR2t, ΔCR3t, ΔCR4t, and ΔCR5t are
− 0.16 with a p-value of b 0.01, − 0.16 with a p-value of b0.01,
0.06 with a p-value of b 0.05, and − 0.10 with a p-value of
b 0.01, respectively. The null hypothesis is therefore rejected,
implying that significant correlations exist between changes in
contractors' financial performance and the contractors' SC cash
flows. Specifically, a significant positive correlation between
ΔCR4t and ΔCR1t suggests that when a contractor's days-in-
payable for time t has increased (that is, the performance of the
contractor's days-in-payable has improved), the probability of
an increase in ROS for time t is high.
A significant negative correlation between ΔCR2t and ΔCR1t
suggests that when a contractor's days-in-receivable for time t
decreases (that is, the contractor's days-in-receivable improves),
the probability of an increase in ROS for time t is high. Likewise, a
significant negative correlation between ΔCR3t and ΔCR1t
indicates that as a contractor's days-in-inventory for time t
decreases (that is, the contractor's days-in-inventory improves),
Table 1
ROS and CCC metrics.
Variable Definition
V1t Return on sales for time t, where the return on sales = net income / net
sales
V2t Days-in-receivable for time t, where days-in-receivable = ending
accounts receivable / (net sales / 90), which is the average collection
period from the firm's customers.
V3t Days-in-inventory for time t, where days-in-inventory = ending
inventory / (cost of goods sold / 90), which indicates the length of
the manufacturing process and the number of days that the finished
goods remain in the firm before they are sold.
V4t Days-in-payable for time t, where days-in-payable = ending accounts
payable / (cost of goods sold / 90), which is the number of days' credit
before a firm pays its suppliers and subcontractors.
V5t Cash conversion cycle for time t, where cash conversion cycle = days-
in-receivable + days-in-inventory − days-in-payable
Note: Vjt denotes the value of the tth time-series observation of variable j. The
definitions of Vjt are based on Stewart (1995), Wild (2003), and Wild et al. (2004).
607
the probability of an increase in ROS for time t is high. A
significant negative correlation between ΔCR5t and ΔCR1t
implies that as a contractor's CCC for time t decreases (that is,
the contractor's CCC improves), the probability of an increase in
ROS for time t is high.
5.2. Cross-sectional time-series regression model building
As suggested by the test result of the null hypothesis,
significant correlations exist between changes in contractors'
financial performance at time t (ΔCR1t) and contractors' SC
cash flows at time t (ΔCR2t, ΔCR3t, ΔCR4t, and ΔCR5t) in the
construction-contracting industry. The robust regression anal-
ysis with a maximum R-squared improvement procedure was
further used to model these significant correlations, minimizing
the sum of the absolute deviations of the dependent variable's
observations from its mean and resulting in the maximum value
of R-squared. The right-hand side of Table 2 summarizes the
analysis results.
As seen in the table, the optimal cross-sectional model at step
1 (Model 1) is the one with the ΔCR3t variable, where 2.03% of
the variation in the ROS data is explained. At step 2, the optimal
cross-sectional model (Model 2) is composed of ΔCR3t and
ΔCR5t, capable of explaining 1.57% of the variation in the ROS
data, which is 0.46% less than that of Model 1. The optimal
cross-sectional models at steps 3 and 4 (Models 3 and 4) are
composed of (ΔCR3t, ΔCR5t, and ΔCR2t), and (ΔCR3t, ΔCR5t,
ΔCR2t, and ΔCR4t), respectively. The corresponding R-squares
of Models 3 and 4 are 2.14% and 2.13%, suggesting that Model
3 is the optimal model.
The bottom of Table 2 shows the chi-square values of the
White test (White, 1980) for Models 1 to 4. The White test
establishes whether the residual variance of a variable in a
regression model is constant (homoscedasticity) or not (hetero-
skedasticity). Diagnostics for heteroskedasticity in regression
models are essential because heteroskedasticity leads to ineffi-
cient parameter and covariance-matrix estimates. As seen in the
table, the chi-square value for the White test of Model 3 is 13.33,
and the associated p-value is larger than 0.05, suggesting the
acceptance of the null hypothesis of no heteroskedasticity in the
residuals at the 0.05 level.
Further, model-specification error often creates biased esti-
mates of parameters. This error occurs when the model is
incorrectly specified; patterns involving groups of residuals
versus fitted values (Littell and Freund, 2000) usually reveal the
error. As seen in Fig. 1, the plot of the residuals versus predicted
values for Model 3 reveals an approximate linear pattern,
suggesting that specification errors are not present in the model.
Consequently, the study selects Model 3 as the optimal cross-
sectional model for the construction-contracting industry.
Furthermore, aside from seasonal cycles (or autocorrelated
errors) that occur when a correlation exists between two or more
consecutive error terms—which results in inefficient parameter
estimates (Belsley et al., 2004)—multicollinearity in which two
or more independent variables in a multivariate regression
model are highly correlated may impair the usefulness of the
model's estimated parameters by inflating their variances
608 H.L. Chen / International Journal of Project Management 29 (2011) 604–614

Table 2
Null hypothesis test and cross-sectional time-series regression model created with robust regression analysis using a maximum R-squared improvement.
Variables and Null hypothesis Cross-sectional time-series regression model
sources test
Mean Pearson's Dependent variable: ΔCR1t
correlation
Model 1 Model 2 Model 3 Model 4
with CR1t
Coefficient Chi-square Coefficient Chi-square Coefficient Chi-square Coefficient Chi-square
Step 1
Intercept 0.00 0.01 0.00 0.00 − 0.00 0.00 0.00 0.01
ΔCR3t 7.68 − 0.16 ⁎⁎ − 0.01 6152.48 ⁎⁎ − 0.01 1245.45 ⁎ − 0.01 8.65 ⁎⁎ − 0.01 8.68 ⁎⁎
Step 2
ΔCR5t 0.74 − 0.10 ⁎⁎ 0.02 32.17 ⁎⁎ − 0.01 256.33 ⁎⁎ 0.04 256.60 ⁎⁎
Step 3
ΔCR2t 7.41 − 0.16 ⁎⁎ 0.04 8.24 ⁎⁎ − 0.00 8.22 ⁎⁎
Step 4
ΔCR4t 0.11 0.06 ⁎ − 0.01 0.39
R2 (%) 2.03 1.57 2.14 2.13
Changes of R2 (%) − 0.46 0.57 − 0.01
The White test 6.08 ⁎ 8.33 13.33 15.97
Durbin–Watson statistic 2.04 2.04 2.04 2.04
Notes: The total observations are 1638 because the study contains 42 firms, each of which contributes 39 observations; decimal numbers are rounded to the nearest
hundredth.
⁎⁎ p b 0.01.
⁎ p b 0.05.

(Freund and Wilson, 1998). Hence, this study uses the Durbin–
Watson statistics (Vinod, 1973) and the eigenvalues (Freund
and Wilson, 1998), the variance of principal component
regression analysis, to determine if the effects of seasonal
cycles and multicollinearity are present in the model,
respectively.
The Durbin–Watson statistic for Model 3, also in the bottom of
Table 2, is 2.04 and the associated p-value is larger than 0.05,
implying no autocorrelation in Model 3. However, the multi-
collinearity diagnostics, shown in the left-hand side of Table 3,
reveal that the third eigenvalue of Model 3 has a condition number
of 46.1952, and the ΔCR3t and ΔCR2t variables have variation
proportions of 0.9986 and 0.9986, respectively. This result
suggests that 99.86% of the variance of the ΔCR3t parameter
estimate is associated with the third eigenvalue. Similarly,
99.86% of ΔCR2t is associated with the third eigenvalue.
Therefore, this study concludes that ΔCR3t and ΔCR2t are
correlated.
The right-hand side of Table 3 describes the result of the
incomplete-principal component regression analysis for Model 3,
where the PCOMIT column specifies the number of deleted
principal components; the TYPE column provides information
about what the observation contains; PARMS and SEB identify
the ordinary least-square estimates and their standard errors; IPC
provides parameters to the ordinary-least-squares method by the
incomplete-principal analysis; and IPCSEB produces standard
errors of the regression coefficients by the incomplete-principal
analysis.
As seen in the table, the residual standard deviation (Root
MSE) decreases from 13.516 to 13.512 as one principal
component is deleted, indicating that deleting one component
may alleviate the multicollinearity. The result of further
restructuring Model 3 is shown in row 3 of Table 3, where the
R-square value improves from 2.14% (in Table 2) to 2.73%
(shown in the notes to Table 3). This result suggests that 2.73% of
the improvement (change) in a contractor's financial performance
is explained by the improvement (change) in the contractor's SC
cash flow performance.

6. Behavioral analysis of project owners' payment terms

Following case research involving two construction project

Fig. 1. Plot of the residuals versus fitted values of model 3.
contracting firms, which provides a basic understanding of
payment terms for formulating survey questions, a draft
questionnaire was devised using a combined open-end and
multiple-choice format.
Prior to data collection, the survey instrument was pretested for
content validity in three stages. First, several experienced
researchers and a panel of experts from Taiwan's Chinese
National Association of General Contractors (CNAGC), a
professional association in Taiwan with over 1000 members,
 H.L. Chen / International Journal of Project Management 29 (2011) 604–614 609

Table 3
Multicollinearity diagnostics and incomplete-principal component regression analysis of model 3.
Multicollinearity diagnostics Incomplete-principal component regression analysis
Principal Eigenvalue Condition Variation proportion Observation PCOMIT TYPE Response Root Intercept ΔCR3t ΔCR5t ΔCR2t
component number variable MSE
ΔCR3t ΔCR5t ΔCR2t
1 2.6622 1.0000 0.0003 0.0480 0.0003 1 – PARMS ΔCR1t 13.516 1.0143 − 0.0070 0.0465 − 0.0116
2 0.3365 2.8126 0.0011 0.9509 0.0011 2 – SEB ΔCR1t 13.516 0.3347 0.0459 0.0357 0.0460
3 0.0013 46.1952 0.9986 0.0011 0.9986 3 1 IPC ΔCR1t 13.512 1.0149 − 1.0149 0.0465 − 0.0093
4 1 IPCSEB ΔCR1t 13.512 0.3344 0.0017 0.0356 0.0017
5 2 IPC ΔCR1t 13.539 1.0241 − 0.0052 − 0.0484 − 0.0052
6 2 IPCSEB ΔCR1t 13.539 0.3350 0.0008 0.0078 0.0008
Notes: Model 3 after restructuring: ΔCR1t = 1.01485 − 1.01485 ΔCR3t + 0.04654 ΔCR5t − 0.00931 ΔCR2t, where R-squared = 2.73%.

were asked to critique the questionnaire for structure, readability, lag (as low as one day and no more than 30 days) but payments for
clarity, and completeness. These researchers and experts were materials have a longer time lag (as low as 31 days and no more
also asked to appraise the extent to which the indicators than 121 days).
sufficiently addressed the subject area. Based on the feedback
from these researchers and experts, the instrument was then
modified to strengthen its validity. 6.1. Hypotheses
In the second stage, several contractors were contacted to help
pilot test the instrument. A contact person in each participating The variables associated with the project owners' payment
firm was asked to distribute the instrument to contract managers in terms (time lags, components, and frequency) typically display
their firms. Participants were asked to complete the instrument a range of values (Chen et al., 2005), suggesting that asking
and provide comments, particularly with regard to the under- respondents to indicate a point on a point scale would be more
standability and lack of ambiguity of the items (Kerlinger, 1986). appropriate. The categorical experiment was thus chosen for
The responses indicated only minor changes were required. data analysis, given that the categorical experiment investigates
In the third stage, following the minor changes, a second pilot the relations of variables whose levels are identified by name or
test was conducted involving a small sample of 20 contractors. rank (Ott, 1993). Because the objective of the experiment is to
The instrument was given to two contract managers in each identify the behavioral patterns of project owners through the
participating firm to test for response bias. A simple paired t-test payment lag, component, and frequency variables, the follow-
yielded no statistically significant differences between the two ing overall hypothesis was established: The variables of time
sets of scores, suggesting that response bias was not a problem. lags, components, and frequency of project owners to
The final version of the survey questionnaire comprises two contractors are independent.
sections based on the second research question posed. The first To determine the independence of variables, the experiment
section, comprised of open-end questions, seeks to identify the must indicate that the alternative hypotheses are unlikely. The study
common payment terms contractors have with project owners. uses the chi-squared statistic for independence in two-way
The second section examines how the payment variables contingency tables (Montgomery, 2001) to test the hypotheses.
interact with one another. Section 2 consists of multiple-choice Eight individual hypotheses were developed for testing the overall
questions in which respondents are asked to choose the likely hypothesis (shown in Table 5). All the responses to these individual
extent to which the payment variables had been used by hypotheses were statistically analyzed for independence, and
indicating a point on a five- or ten-point scale. Because of space
limitations, complete survey questionnaires are not presented
Table 4
here but are available from the author on request.
Survey results.
The sample population is limited to construction project
Response, revenue, and age of the firm Construction project contractors
contracting firms in Taiwan. Four hundred firms were randomly
selected and then contacted, and each received a copy of the Responses
questionnaire. Table 4 lists the results of the respondent Questionnaires issued 400
Questionnaires returned 118
contracting firms, along with their revenues and ages. In total, Questionnaire return rate (%) 30
118 usable returns were received, representing a response rate of Annual revenue (in US$ millions)
30%. Compared with similar surveys of the Taiwan construction Less than 1 30
industry, the response rate of 30% was considered good. 1–5 52
In summary, across all firms, a wide range of time lags from 5–10 14
Over 10 22
project owners exist (from a minimum of one day to a maximum Age of the firm (in years)
of 121 days). Though frequency of payments to the contractors Less than 5 39
varies between zero and twice monthly, the project owners 6–15 43
commonly either split payments or lump materials and labor 16–25 22
payments together. Notably, payments for labor have a short time Over 25 14
610 H.L. Chen / International Journal of Project Management 29 (2011) 604–614

Table 5
Test hypotheses and the results of chi-squared tests for the categorical experiment.
Overall hypothesis Individual hypothesis Chi- p- Test result
square value
OHo: The variables time lag, components, and frequency Ho1: The variables time lag and frequency of 22.21 0.01 Rejection
of project owners to contracting firms are independent. project owners to contracting firms are independent when NPSPO exists.
OHa: OHo1 is not all true. Ha1: Ho1 is not all true.
Ho2: The variables frequency and components of 12.48 0.13 Acceptance
project owners to contracting firms are independent when PSPO exists.
Ha2: Ho2 is not all true.
Ho3: The variables frequency and labor time lag of 1.51 0.83 Acceptance
project owners to contracting firms are independent when PSPO exists.
Ha3: Ho3 is not all true.
Ho4: The variables frequency and material time lag of 11.52 0.32 Acceptance
project owners to contracting firms are independent when PSPO exists.
Ha4: Ho4 is not all true.
Ho5: The variables percent labor and labor time lag of 8.43 0.39 Acceptance
project owners to contracting firms are independent when PSPO exists.
Ha5: Ho5 is not all true.
Ho6: The variables percent labor and material time lag of 64.09 b0.01 Rejection
project owners to contracting firms are independent when PSPO exists.
Ha6: Ho6 is not all true.
Ho7: The variables percent materials and material time lag of 95.41 b0.01 Rejection
project owners to contracting firms are independent when PSPO exists.
Ha7: Ho7 is not all true.
Ho8: The variables percent materials and labor time lag of 8.43 0.39 Acceptance
project owners to contracting firms are independent when PSPO exists.
Ha8: Ho8 is not all true.
Notes: OH = overall hypothesis; PSPO = payment split from project owners; NPSPO = no payment split from project owners.

respondents were asked to indicate the most likely level of payment
variables. The rating was based on scales of 1–5 or 1–10, measured
in units of ten days, 20%, or one time per month.
Table 5 lists the chi-squared test results of the eight
individual hypotheses. A chi-squared value is significant if
the value exceeds Xα,df 2
, where α denotes the acceptable
probability of incorrectly rejecting the null hypothesis, and df
represents the degree of freedom for the factors. In this study,
the acceptable probability of incorrectly accepting the null
hypothesis is at the α = 0.05 level. This probability of 0.05 is a
stringently accepted level, although some researchers prefer a
looser probability of 0.10 (Montgomery, 2001; Ott, 1993).
6.2. Relationships between payment lags, components, and
frequency of project owners to contractors
Table 6 shows the data and results of the chi-squared test for
hypothesis 1 of the overall hypothesis. The data are from 118
usable survey responses and falls into LAG and FREQUENCY
groups, which represent the payment time lag and frequency
variables, respectively. Preliminary analysis reveals that
“FREQUENCY: (b 1)” (payment frequency is less than once a
month) tends toward the “b21 days” subcategory of LAG.
“FREQUENCY: (= 1)” (payment frequency is once a month)
tends toward the “21–30 days” and “51–60 days” subcategories
of LAG, and “FREQUENCY: (= 2)” (payment frequency is
twice a month) tends toward the “31–40 days” subcategory of
LAG. This study thus concludes that an association exists
between the LAG and FREQUENCY variables.
As the bottom of Table 6 shows, the chi-squared value is 22.21
and the associated p-value is 0.01, confirming a significant
association. The null hypothesis is therefore rejected, implying
that the variables time lags and frequency of payments to
contractors are not independent when project owners do not split
payments.
The study conducts similar analyses of rejected null
hypotheses for hypotheses 6 and 7 of the overall hypothesis.
Rejecting hypothesis 6 suggests that the variables percent labor
and material time lags are not independent when project owners
split payments. Likewise, rejecting hypothesis 7 indicates that the
variables percent materials and material time lags are not
independent. (Due to space limitations, only the data and result
of the chi-squared test for hypothesis 1 of the overall hypothesis
appears in this paper. The remaining test results of the hypotheses
are summarized in Table 5).
As a consequence of the rejection of hypotheses 1, 6, and 7,
the overall hypothesis is rejected. This study concludes that the
time lags, components, and frequency variables related to
payments from project owners to contracting firms are not
independent. Specifically, when a project owner does not split
payments, the owner's decisions regarding time lags and
frequency related to the payments are interdependent (hypoth-
esis 1). When a project owner splits payments, the owner's
decisions regarding percent labor and material time lags related
to the payments for its contractors are interdependent
(hypothesis 6), and likewise the owner's decisions regarding
percent materials and material time lags related to the payments
for its contractors are interdependent (hypothesis 7).
 H.L. Chen / International Journal of Project Management 29 (2011) 604–614 611

Table 6
Chi-squared test of independence for the variables time lag and frequency of project owners to contracting firms when NPSPO exists.
Source LAG
b21 daysa 21–30 days 31–40 days 41–50 days 51–60 days N61 days Total
FREQUENCY: (b1) 12.00 8.00 6.00 5.00 6.00 1.00 38.00
FREQUENCY: (=1) 7.00 18.00 3.00 8.00 18.00 4.00 58.00
FREQUENCY: (=2) 5.00 6.00 7.00 1.00 1.00 2.00 22.00
Total 24.00 32.0 26.00 14.00 25.00 7.00 118.00
Chi-square statistic Degree of freedom Value Probability
10.00 22.21 0.01
a
Considering the validation of the chi-squared tests, this study decided to combine some data points while running the chi-squared tests. For example, point scales 1 (1–
10 days) and 2 (10–20 days) are combined as b21.

Pearson's correlation tests are further performed to analyze
the relationship between the variables in the rejected null
hypotheses, shown in Table 7. As seen in the table, no
significant correlation exists (Pearson's correlation coefficient
0.13 with a p-value of 0.17) between the time-lag variable and
frequency variable (hypothesis 1). The lack of correlation
suggests that these two variables affect each other; however, no
clear behavioral patterns exist regarding how project owners
determine one from the other while contracting with contrac-
tors. However, as seen in Table 7, a significant negative
correlation (Pearson correlation coefficient − 0.24 with a p-
value of 0.01) exists between the percent-labor variable and
material time-lag variable (hypothesis 6). The negative
correlation suggests that a trade-off relationship exists between
the variables, implying that when a contractor bargains with the
project owner to increase the percent labor that accompanies
labor time lags (and results in a shorter days-in-receivable to the
contractor), the probability of having increased material time
lags that results in longer days-in-receivable in return is high.
As also seen in Table 7, a significant positive correlation
exists between the percent-materials variable and the material
time-lag variable (hypothesis 7), where the Pearson correlation
coefficient is 0.23 and the associated p-value is 0.01. This
correlation indicates that during the contracting phase of a
project, as a project owner tries to increase percent materials that
accompany material time lags and result in longer days-in-
receivable for the contractor, the project owner is likely to
simultaneously increase material time lags that result in a longer
days-in-receivable for the contractor.
7. Practical implications
Low and unreliably profitability characterize the construction-
contracting industry (Sorrell, 2003). Levy (2009) and Teerajetgul
et al. (2009) further note that contractors work on slim profit
margins due to fierce competition. Though researchers continu-
ally develop methods and approaches for reducing construction-
contracting costs (e.g., Dainty et al., 2001; Humphreys et al.,
2003; Yeo and Ning, 2002), some authors (e.g., Hwee and Tiogn,
2002; Kaka and Lewis, 2003; Motawa and Kaka, 2009) have
focused on improving the profitability of construction contracting
by improving the efficiency of SC cash flows.
Despite the panoply of approaches to modeling SC cash flows,
limited research exists that assesses the relationships between SC
cash flow and financial performance. In this respect, this study
poses a research question to investigate and model their
relationships statistically. A cross-sectional longitudinal analysis
of the Taiwanese construction-contracting industry suggests that
significant correlations exist between SC cash flow performance,
measured by CCC, and financial performance, measured by ROS.
Development of a cross-sectional time-series regression model on
these correlations further implies that 2.73% of the variation in
contractors' ROS is explained by the contractors' SC cash flow
performance. In other words, an important implication of this

Table 7
Descriptive statistics and correlations between the variables in the rejected hypotheses of the overall hypothesis.
Individual hypothesis Variable Mean Standard Correlation with the other Probability
deviation variable in the hypothesis (2-tailed)
Ho1: The variables time lag and frequency of project owners to contracting firms Time lag 3.0 1.61 0.13 0.17
are independent when NPSPO exists.
Ha1: Ho1 is not all true. Frequency 1.9 0.68 0.13 0.17
Ho6: The variables percent labor and material time lag of project owners to Percent 2.5 1.36 − 0.24 0.01
contracting firms are independent when PSPO exists. labor
Ha6: Ho6 is not all true. Material 4.1 1.66 − 0.24 0.01
time lag
Ho7: The variables percent materials and material time lag of project owners to Percent 3.5 1.36 0.23 0.01
contracting firms are independent when PSPO exists. materials
Ha7: Ho7 is not all true. Material 4.1 1.66 0.23 0.01
time lag
612 H.L. Chen / International Journal of Project Management 29 (2011) 604–614
model is that while a contractor is improving SC cash flows, the
potential performance improvement of ROS in return is 2.73%.
Although CCC can be improved by either increasing the
days-in-payable or reducing days-in-receivable or days-in-
inventory, this study focuses on the potential improvement of
days-in-receivable by analyzing the behavioral patterns of
project owners on the important variables of payment terms that
affect cash flows. The results provide contractors with
appropriate strategies for negotiating payment terms that
expedite cash inflows and improve SC cash flow performance.
Using the combined categorical experiments and Pearson's
correlation tests, this study finds several important behavioral
patterns in the project owner–contractor dyad in the context of
payment-term negotiation. These behavioral patterns have
implications for practitioners. Specifically, those accepted
individual hypotheses of the overall hypothesis (Table 5)
suggest that the paired variables in each of the hypotheses are
independent. This independency implies that while negotiating
the value of one of the paired variables in each of the hypotheses
during the contracting phase of a project, the probability of the
other of the paired variables increasing or decreasing is low. For
example, as a contractor bargains with the project owner who
splits payments between labor and materials to increase
payment frequency to expedite its cash inflows, the probability
of having increased percent-material that has longer lags and
thus slows down its cash inflows in return is low (hypothesis 2
shown in Table 5).
Likewise, those rejected individual hypotheses imply that the
paired variables in each of the hypotheses significantly depend
on each other, suggesting an interpretation totally opposite from
those accepted hypotheses. In particular, Pearson's correlation
tests of the paired variables in the rejected hypotheses 6 and 7
further indicate the paired variables (Table 7) move in the same
or opposite direction, revealing important behavioral patterns of
the parties involved in the contracting phase.
Specifically, a significant negative correlation exists between
the percent-labor variable and material time-lag variable
(hypothesis 6), suggesting a trade-off relationship between the
variables. The left of Fig. 2 depicts this relationship, where error
bars show 95% confidence interval of mean; the point scales of
Fig. 2. Plots of material time lags versus percent labor (left) and material time lags versus percent material (right).
material time lags 1, 2, 3, 4, 5, and 6 represent b 21, 21–30, 31–
40, 41–50, 51–60, and N 61 days, respectively, and those of
percent labor 1, 2, 3, 4, and 5 represent 100%–81%, 80%–61%,
60%–41%, 40%–21%, and 20%–0%, respectively. Thus, when
a contractor bargains with a project owner to increase the
percent labor that has shorter time lags to expedite its cash
inflows, the probability of having increased material time lags
that slow down its cash inflows in return is high.
A significant positive correlation exists between the percent-
material variable and material time-lag variable (hypothesis 7),
implying a relationship of moving in the same direction
between the variables, shown in the right of Fig. 2, where the
point scales of percent material 1, 2, 3, 4, and 5 represent
100%–81%, 80%–61%, 60%–41%, 40%–21%, and 20%–0%,
respectively. Namely, when a contractor bargains with a project
owner to decrease the percent material that has longer time lags
to expedite its cash inflows, the probability of having increased
material time lags that slow down its cash inflows in return is
high.
8. Conclusions
Although SC cash flow management has been a key
determinant of SC performance, little research assesses the
impact of improvements in SC cash flows on financial
performance. Thus, this study investigates the relationship
between improving SC cash flow and financial performance,
which suggests that as a construction project contractor's SC
cash flows improve, the probability of the contractor's financial
performance also improving is high. Development of a cross-
sectional time-series regression model on these correlations
further reveals that 2.73% of the variation in financial
performance is contributed by SC cash flow performance.
This result in turn implies that as a contractor improves SC cash
flows by reducing CCC, the potential improvement of ROS is
2.73%.
To further support the implementation of improving SC
cash flows by reducing the days-in-receivable variable of CCC,
this study further analyzes the behavioral patterns of project
owners regarding payment terms. The combined categorical
 H.L. Chen / International Journal of Project Management 29 (2011) 604–614
experiments and Pearson's correlation tests reveal several
important behavioral patterns that provide contractors with an
ability to evaluate the potential responses of project owners to
payment terms during the contracting phase of a project. More
broadly, the research and methods of this paper not only provide
management with a practical means to measure the impact of
the SC cash flows improvement on financial performance, but
contribute to a larger discussion about behavioral patterns of
payment terms in a SC.
As an extension of this research, a study of the relationships
between project contractors' annual sales and project owners'
payment patterns would be beneficial because incorporating
contractors' annual sales might significantly change the
behavioral patterns of project owners regarding payment
terms during the contracting phase of projects. Another
extension of the research in this paper to a broader evaluation
of SC payment terms that includes suppliers and subcontractors
will provide management a total picture of how the entire SC
behaves under different conditions.
Acknowledgment
The author would like to thank the Taiwan National Science
Council for financially supporting this research.
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