Impact of Cash Shortages on Project Performance

In recent years, an increasing number of construction projects have encountered problems because employers have paid contractors late and/or have unjustifiably undercertified payments—to the point where courts and arbitral tribunals have begun to take notice and even laws have been enacted. Generally speaking, late payment claims focus on interest payments, additional costs for extending bonds, financing fees, etc. However, they disregard the negative effects when late and/or insufficient payments result in actual cash shortages that spread throughout the construction supply chain, affecting the procurement schedule, the timely delivery of materials and resources, and contractors’ efficiency and productivity, as well as their ability to deliver quality projects on time and within budget. Without sufficient funds to proceed normally, contractors face operational and supply chain restrictions that can cause significant disruption and delay damages. Although contractors instinctively understand that payment delays can affect the management, procurement, and construction processes, it is extremely difficult for them to isolate the causes and quantify the magnitude of the disruption and delay damages. A system dynamics simulation model originally developed to replicate the performance of an actual construction project in the Middle East was repurposed to identify the disruptive and delaying impact of a cash shortage, revealing that a severe cash shortage lasting 6 months can cause direct labor overruns of almost 15% and project delays of up to 9 months. The system dynamics analysis also used to investigate the sensitivity of disruption and delay to the intensity and the duration of the cash shortages; a feature that is useful for calculating the range and confidence intervals for damage estimates, particularly in arbitrations.

In large complex projects, contractors often struggle to prove causal links between late and/or insufficient progress payments and disruptions or delays. Consequently, they often combine damages into global claims, invariably without a clear explanation of how the damages occurred; these claims are unlikely to succeed, especially in international arbitrations. The system dynamics method offers a solution by establishing causation and assessing damages quantitatively. This approach explains disruption and delay claims logically, leading to successful defense, as demonstrated in major claims involving major projects in the Middle East. It can be—and has been—used proactively to explore the impact of not making timely financial, managerial, technical decisions, enabling both contractors and employers to realize the full impact of their decisions, thus helping them avoid the kinds of problems addressed in this paper while playing a critical role in preventing disputes and resolving disputes—when they do arise—more effectively.