Assessing the Accuracy of Cash Flow Models: The Significance of Payment Conditions
Publication: Journal of Construction Engineering and Management
Volume 131, Issue 6
Abstract
Cash flow forecasting methods have evolved to allow detailed predictions for individual projects. These methods, principally the cost-schedule integration (CSI) technique, make extensive use of project estimate and schedule data. An implicit assumption of these methods has been that accuracy is largely a function of the quality of data available to the model. To the writers’ knowledge, there has been no assessment of the ability of project specific cash-flow models to accurately predict cash flows given accurate input data. This paper makes two contributions. First, two complementary methods are presented—pattern matching logic and factorial analysis—that provide an ability to assess the accuracy of cash flow models. Second, through demonstration of these methods using data from two projects, a critique is made of the ability of existing CSI models to accurately predict cash flows. The paper concludes by recommending extensions of CSI models to include more detailed payment conditions, including differential payment lags, components for materials and labor, and payment frequency. A further conclusion is the call for more research to better understand the balance between managers’ need for information and the ability of predictive models to provide that information.
Get full access to this article
View all available purchase options and get full access to this article.
References
Abudayyeh, O. Y., and Rasdorf, W. J. (1993). “Prototype integrated cost and schedule control system.” J. Comput. Civ. Eng., 7(2), 181–198.
Ashley, D. B., and Teicholz, P. M. (1977). “Pre-estimate cash flow analysis.” J. Constr. Div., Am. Soc. Civ. Eng., 103(3), 369–379.
Bathurst, P. E., and Buttler, D. A. (1980). Building cost control: Techniques and economics, 2nd Ed., Heineman, London.
Carr, R. I. (1983). “Critique: Cost estimating and project management.” Proc. Conf. on Current Practice in Cost Estimating and Cost Control, ASCE, New York, 61–67.
Carr, R. I. (1993). “Cost, schedule and time variances and integration.” J. Constr. Eng. Manage., 119(2), 245–265.
Carr, R. I. (1991). “Integration of cost and schedule control.” Proc., Preparing for Construction in the 21st Century, Construction Congress 91, ASCE, New York, 687–692.
Chen, H. L. (2002). “Development of a systematic integration approach for multi-level cost flow prediction and management.” PhD dissertation, Univ. of Florida, Gainesville, Fla.
Chen, H. L., and Chen, W. T. (2000). “An interactive cost-schedule/payment-schedule integration model for cash flow forecasting and controlling.” Proc., 17th Int. Symp. on Automation and Robotics in Construction, Taipei, Taiwan, 659–663.
Fayek, A. R. (2001). “Activity-based job costing for integrating estimating, scheduling, and cost control.” Cost Eng., 43(8), 22–32.
Kenley, R., and Wilson, O. D. (1989). “A construction project net cash flow model.” Constr. Manage. Econom., 7(1), 3–18.
Kenley, R., and Wilson, O. D. (1986). “A construction project cash flow model—An idiographic approach.” Constr. Manage. Econom., 4(3), 213–232.
Kirkpatrick, H. H. (1994). “Using computer modeling for cash flow projection.” Real Estate Finance Journal, 10(2), 93–96.
Montgomery, D. C. (2001). Design and analysis of experiments, 5th Ed., Wiley, New York.
Navon, R. (1996). “Company-level cash flow management.” J. Constr. Eng. Manage., 122(1), 22–29.
Navon, R. (1994). “Cost-schedule integration for cash-flow forecasting.” Proc., 1st Congress on Computing in Civil Engineering, ASCE, New York, 1536–1539.
Navon, R. (1990). “Financial planning in a project-oriented industry.” Proj. Manage. J., 21(1), 43–48.
Navon, R. (1995). “Resource-based model for automatic cash-flow forecasting.” Constr. Manage. Econom., 13(6), 501–510.
Needles, B. E., Powers, M., and Anderson, H. R. (1999). Principles of accounting, 7th Ed., Houghton Mifflin, Boston.
Ott, R. L. (1993). An introduction to statistical methods and data analysis, 4th Ed., Wadsworth, Calif.
Sears, G. A. (1981). “CPM/Cost: An integrated approach.” J. Constr. Div., Am. Soc. Civ. Eng., 107(2), 227–238.
Trochim, W. (1989). “Concept mapping for evaluation and planning.” Evaluation and Program Planning, 12(1), 1–111.
Yin, R. K. (1994). Case study research: Design and methods, 2nd Ed., Sage, Thousand Oaks, Calif.
Information & Authors
Information
Published In
Journal of Construction Engineering and Management
Volume 131 • Issue 6 • June 2005
Pages: 669 - 676
Copyright
© 2005 ASCE.
History
Received: Mar 4, 2003
Accepted: Nov 15, 2004
Published online: Jun 1, 2005
Published in print: Jun 2005
Authors
Metrics & Citations
Metrics
Citations
Download citation
If you have the appropriate software installed, you can download article citation data to the citation manager of your choice. Simply select your manager software from the list below and click Download.