A System for Forecasting and Monitoring Cash Flow: Phase I: Forecasting Payments on Construction Contracts

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The research on which this paper is based was performed as part of a study to develop a system for generating a one-to-two year forecast of monthly cash flows for the Virginia Department of Highways and Transportation. It revealed that presently used cash flow forecasting methods consistently underestimate ending cash balances. In addition, it showed that the behavior of individual contracts varies widely, with the percent paid out halfway to completion ranging from zero to 93%. Furthermore, contractors' schedules, upon which current forecasts are based, are not reliable indicators of the contracts' duration, payout patterns, or final cost, and by the end of the scheduled duration (contractual time limit not allowing for shutdowns) contracts are typically less than 70% complete. Cost overruns average 7.8% of the contract amount and seasonality is a critical determinant of construction payout as is exhibited by the fact that the proportion of payouts as a percentage of annual payout can be six times as high in September as in January. A simple technique, which emphasizes the effects of seasonality on payout and realistic estimates of contract duration, explained more than 93% of the variation in a retrospective test on the sample data base. The accuracy of the forecasting method in actual use will depend on the variability of the weather and on the prompt entry of information on contracts let and scheduled advertisement dates, into the forecasting database.

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