CHAPTER ONE
1.0 Introduction
The construction projects are complex and risky, and it is a great employer of labour. Contractors cannot survive in the competitive construction industry without effective cash flow management, studies and investigations have shown that lack of liquidity is a major problem causing construction project failure (Al-Issa and Zayed, 2007). A model for accurately predicting trends in a project's cash flow prior to the construction phase has been so elusive. Therefore, advance knowledge of the factors affecting cash flow and understanding their impact is essential to the contractor. Cash flow is the actual movement of money in and out of any project. Therefore, money flowin may be termed positive cash flow while the one flowing out may termed negative cash flow. Recent studies by Yaqiong, Tarek, and Shujing, (2009) indicate that, cash flow varied approximately from 129% to 20.4% with a mean value of 16.7% considering the effects of all factors on the basis of 30% total cost variation. In addition, financial management has long been recognized as an important management tool, throughout the construction process, the contractor needs to be comparing the actual income and expenses against the forecasted values. If there area discrepancies between these values, the contractor needs to adjust the schedule and update the project plan to match the estimated situation as early on as possible. With real knowledge of cash flow, forecasting the contractor could more efficiently and accurately manage cash flow during the construction process to prevent extra expenses and avoid project collapse Yaqiong Liu, Tarek Zayed and Shujiung Li (2009). In – spite of the high number of studies on cash flow there is no consensus for the reliability and applicability of the existing techniques for obtaining efficient cash flow Serhat (2010). The aim of this study is to investigate the factors that affects contractor’s cash flow on project delivery in North- central parts of Nigeria with a view to enhancing construction productivity and timely project completion. The study become a necessity in order to identify the effect of contractors cash flow on construction project in order to increase the awareness to both employers and contractors in relation to their obligation of prompt payment and also to increase the output on timely project delivery. For the contractors, it will serve as an effective guide to site management of cash-in-flow and cash outflow and efficient management of resources to avoid project delay and abandonment. The finding of the study may also assist the stakeholders in the building industry to address the problems and effects of cashflow in a holistic manner for the benefit of all.
In construction industry, cash is the main engine of the companies for making new investments, starting up new projects and let the projects going on track. It has operational functions in business transaction to get essential resources for providing necessary goods and services used in construction industry. Cash shortage is one of the most dangerous problems that may appear while projects are in progress. If the contractor does not have any plan for covering the amount of cash shortage, the works will stop due the insufficient source of money for compensating the indirect and direct expense of the project such as labor cost, material cost, equipment and overhead costs. Even when the contractors decide to continue to project by lending money from suppliers, they will have to lend money usually with a high interest rate by increasing project cost. Therefore, it is very risky to get loan before identifying the working capital requirements of the project and without having a reasonable cash plan. The consequences of these unplanned loan and extra costs will not only threaten the completion and profitability of the project but will cause the great loss of money and bankruptcy of the company. According to
In construction industry, cash is the main engine of the companies for making new investments, starting up new projects and let the projects going on track. It has operational functions in business transaction to get essential resources for providing necessary goods and services used in construction industry. Cash shortage is one of the most dangerous problems that may appear while projects are in progress. If the contractor does not have any plan for covering the amount of cash shortage, the works will stop due the insufficient source of money for compensating the indirect and direct expense of the project such as labor cost, material cost, equipment and overhead costs. Even when the contractors decide to continue to project by lending money from suppliers, they will have to lend money usually with a high interest rate by increasing project cost. Therefore, it is very risky to get loan before identifying the working capital requirements of the project and without having a reasonable cash plan. The consequences of these unplanned loan and extra costs will not only threaten the completion and profitability of the project but will cause the great loss of money and bankruptcy of the company. According to
Kaka and Price (1991), Kenley (2003); the inadequacy or the absence of the cash is the main reason of construction companies going bankruptcy rather than lack of profit in the projects. Likewise, Singh and Lakanathan (1992) stated that cash is the most important resource for supporting the day to day activities of the ongoing projects so that absence of this resource will cause the failure of the company. Therefore, the construction companies should control and anticipate the financial situation of the projects and its effects on to the company in terms of cash during the tendering stage and while the projects are in progress. Cash Flow is one of the most common cash forecasting and cost control technique has been widely used by most of the construction companies for a long time. In economy, cash flow is described as “The pattern over time of a firm’s actual receipts and payments in money as opposed to credit” (Black, 1997) or “The flow of money payments to or from a firm” (Bannock et al. 1988). Basically, cash flow defines the expenses and revenues of the single project or whole company per time and reflects their present and future situations by demonstrating net cash conditions. Cash flow is a financial model necessary to count the demand for money to meet the project cost and the pattern of income it will generate (Smith, 2008). Therefore, the usage of cash flow technique is beneficial for both the projects in tender stage and while the projects are in progress since the contractors want to know in all stages of the project that if their predicted cash flow is sufficient for covering the possible financial deficit of the project.
1.1 Statement of the Problem
The level of insolvency in the construction industry is high, when compared to other sectors. Failure is undesirable and avoidable and it can be prevented by good cash flow management. Indeed, company failure has been widely researched. Knowledge about business failure can be useful in providing guidance to entrepreneurs who want to start a business. It indicates the risk factors in their industry and provides the benefit of experience in risk management. In recent years, in Britain, around 250,000 new businesses have been created every year. Many are destined to fail within the first two years. One key reason is the lack of a viable business plan for their operation. Argenti’s identified four main deficiencies that are characteristic of failed companies: cash flow forecasts, costing system, budgetary control, and asset valuation. Cash flow problems and shortage of working capital can, in extreme circumstances, push efficient and profitable firms into insolvency. It is also possible that a firm is pulled into insolvency by the failure of another firm. When observing failing companies, financial ratios, while widely used, may not be very reliable. Creative accounting practices are used by managers when attempting to hide the poor financial condition of the company from outside investors and creditors. Even under normal operating conditions, ratio analysis can be problematic, and not transparent enough. An important point is that company accounts are at least a year old and subject to revision. Sometimes, figures can be mistaken, as occurred recently in the UK with Morgan Sindall plc and Amey plc. These companies’ accounts problems were announced by the Construction News (2002) and Financial Times (2002a, 2002b, 2002c). This kind of incident only adds to the negative image that construction firms have with City analysts.
1.2 Research Question
a. To identify the benefit of cash flow in project delivery in the construction industry
b. To investigate the techniques needed for effective project cost control in the construction companies.
c. To investigate the barriers limiting effective project cost control in the construction companies.
d. To investigate the needed solution needed for adequate cost flow in the construction companies.
1.3 Aim of the Study
The aim of this project is to investigate the effect of cash flow forecasting on project cost control. This will allow us to know the benefit of effective planning to allow for cash flow ahead on project and to allow cost control principle.
1.4 Objectives of the Study
a. To identify the benefit of cash flow in project delivery in the construction industry
b. To investigate the techniques needed for effective project cost control in the construction companies.
c. To investigate the barriers limiting effective project cost control in the construction companies.
d. To investigate the needed solution needed for adequate cost flow in the construction companies.
1.5 Hypothesis
H0: Cash flow affects project delivery within the construction companies
H1: Cash flow does not affect project delivery within the construction companies
1.6 Significant of the study
Cash flow is one of the major tools required for controlling the cash movement of the company by determining the cash in and cash out in the project and demonstrating the possible results clearly. Due to importance of the cash flow in construction sector; many studies have been made by researches for developing a reasonable cash flow model for the construction projects. In construction industry, cash is the main engine of the companies for making new investments, starting up new projects and let the projects going on track. It has operational functions in business transaction to get essential resources for providing necessary goods and services used in construction industry. Cash shortage is one of the most dangerous problems that may appear while projects are in progress. If the contractor does not have any plan for covering the amount of cash shortage, the works will stop due the insufficient source of money for compensating the indirect and direct expense of the project such as labor cost, material cost, equipment and overhead costs. Even when the contractors decide to continue to project by lending money from suppliers, they will have to lend money usually with a high interest rate by increasing project cost. Therefore, it is very risky to get loan before identifying the working capital requirements of the project and without having a reasonable cash plan. The consequences of these unplanned loan and extra costs will not only threaten the completion and profitability of the project but will cause the great loss of money and bankruptcy of the company. The inadequacy or the absence of the cash is the main reason of construction companies going bankruptcy rather than lack of profit in the projects. Likewise cash is the most important resource for supporting the day to day activities of the ongoing projects so that absence of this resource will cause the failure of the company. Therefore, the construction companies should control and anticipate the financial situation of the projects and its effects on to the company in terms of cash during the tendering stage and while the projects are in progress.
1.7 Scope of the Study
For the scope of this project, the study would be restricted to the effect of cash flow forecasting on project cost control in the construction companies.
1.8 Methodology
The method of research to be use in this study for the generating of data is the survey method of research in the form of oral interviews and questionnaire administration to the Professionals, expert involved in the construction industry.
1.8.1 Research design
Survey method will be adopted through the use of questionnaires in order to collect the required data from the respondent perspective.
1.8.2 Study area
The study area of this research is Oyo state in the south west region of Nigeria due to the location and position, where there is relative concentration of construction.
1.8.3 Targeted population
The targeted population of this study is the professionals (Architect, Quantity Surveying, Engineer, Builder e.t.c) in construction industry.
1.8.4 Sampling frame
The sampling frame consists of registered professional in building industry such as: Architect, Builders, Quantity Surveyors, Engineers.
1.8.5 Sampling techniques
Sampling techniques of this study is randomly selection due to large population of professionals in construction Industry.
1.8.6 Sampling size
The sampling size will be determined using Nigeria registered professionals and research advisors 2006; this is done to ascertain the number of construction industry in Ibadan, Nigeria and the sample table to determine the number of questionnaires required for the sample size.
1.8.7 Data collection method
The Method that will be use for collecting Data in this study will be through personally administered Questionnaires to the targeted population.
1.8.8 Method of data analysis
The data collected will be analyze using statistical tools such as inferential, mean score, percentile and relative important index (RII) based on the number of sections in the questionnaires and the text of hypothesis. The tool that will be used is Statistical Packages for Social Sciences (SPSS).
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