IMPACT OF CASH FLOW ON CONSTRUCTION PROJECT DELIVERY IN EKITI STATE, NIGERIA

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Abstract

Appropriate cash planning techniques is necessary for adequate cost control and efficient cash management. Contractors cannot survive in the competitive environment without effective cash flow management. However, cash flow is the lifeline of project delivery, deficiency in cash flow may cause failure of the project. Therefore, this study aimed at assessing the contractor’s cash flows effect on the delivery of projects in Ekiti state, Nigeria. Thus, Explorative and questionnaire survey methods used to obtained data from literature and construction professionals. Data obtained were analysed using SPSS for descriptive statistics such as mean score and percentages. The findings of the study show that, delay payment (AMS=3.92), delay in settling of claims (AMS=3.88), loan repayment (AMS=3.87), consultant instruction (AMS= 3.82) and change in interest rate (AMS=3.77) are the main factors that are affecting cash flow on projects delivery in Nigeria.Hence, contractors should embark on project for which they have adequate fund to execute and all the claims made should be guinea and finally, client should honour certificate of payment as when due to avoiding improper funding of projects as well as settling verified claims within a reasonable time frame of the projects duration.

CHAPTER ONE

INTRODUCTION

1.1   Background to the study

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).

Cash flow is a series of income and expenditure over the life of an investment or project. The difference between the income (revenue) and expenditure (disbursement) at any point of time is term as net cash flow which could be either positive or negative (Hoseini, Andalib and Gatmiri, 2015). A negative net cash flow means disbursements are exceeding income which is a usual situation on even a highly profitable project during the greater part of its duration (Al-Mohsin, Alnuaimi and Al-Tobi, 2014). A positive cash flow is ultimately needed to generate profits, to pay employees’ salaries and wages, taxes and servicing interest on borrow funds, materials, plant, subcontractors’ accounts rendered and overheads expended during the progress of the contract (Odeyinka, Kaka and Morledge, 2003). The main factors affecting cash flow in a construction project is the widespread practice of delay and underpayment by the clients, inaccurate Cash Flow Forecasts (CFF) and lack of efficiencies in monitoring and controlling of construction cash flow (Hoseini, Andalib and Gatmiri, 2015). 

Cash flow management is a general process of planning, forecasting, manipulating and controlling of cash flows either at the project or corporate level (Ross and Williams, 2013). Cash flow monitoring and controlling entails adequate planning of fund utilisations, efficient monitoring of budget implementation and effective evaluation of results (Richter and Cantoria, 2011).   

Construction sector recorded high rate of business failure globally with 20.1% and more than 80% of these failure were attributed to lack of financial control (Emidafe, 2015).

The Nigerian construction sector which contributes about 70% of the country’s gross domestic product (GDP) is one of the highest employer of labour, labour cost are indeed a huge outlay for the contractors due to volume of manpower required to execute and delivered construction projects. Poor cash flow management can result in; financial improprieties, failure of the projects and business bankruptcy (Chukwudi and Tobechukwu, 2014). Contractors operating in developing countries including Nigeria were hugely affected by unprecedented financial difficulties in the wake of dwindling economy. These difficulties are compounded by the time lag between contractor’s expenses and payment collection, which impact negatively on the contractor’s cash flow and in many cases result in failure of a project and business insolvency (Emidafe, 2015). 

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 flowing 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, thecontractorneeds 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). The aim of this study is to investigate the factors that affects contractor’s cash flow on project delivery in Ekiti state, Nigeria.