and Retention on Contractors Cash Flow
FEATURED PAPER
By Dr Reuben A Okereke
Department of Quantity Surveying
Imo State University
Owerri, Imo State, Nigeria
- ABSTRACT
Cash flow is the backbone of any successful construction project. Delayed payment andretention have much greater effect on contractors’ cash flow; as such proper cash flow management is also important. Also excess retention in a project holds back the contractor’s cash flow, which also prevents the contractor from completing the work within the stipulated time. Information was gotten from articles, books and other researchers’ works around the world. 350 questionnaires were administered and 100 responses fit for analysis were received, representing a 28.6% response rate which is typical of the norm of 20-30% response rate in most postal questionnaire surveys of the construction industry. Contractors were requested to score on a Likert-type scale of 0-5, their level of satisfaction with payment terms impacting cash flow forecast. Results show that contractors are satisfied under both design and build contracts and traditional procured contracts with ‘valuation intervals’, ‘time lag between being committed to making payment to nominated sub-contractors and actually paying’. Whilst sub-contractors expressed their dissatisfaction on all payment methods except for ‘valuation intervals’. Also a related study by Adeyinka et al. (2003) found that delayed payment to sub-contractors and suppliers has been identified as some strategies contractors employ to fund their deficit cash flow. In view of the fact that contractors and sub-contractors are dissatisfied with delayed payments and retentions, it is suggested that attention be focused on devising new innovative payment systems that will address these issues.
Key words: cash flow, delayed payments, retention, contractor, sub-contractor, supplier, construction industry.
- INTRODUCTION
Construction projects cash flow is a subset of cash flow for the organization. It is the inflow of cash to the contractor from the client and also the outflow of cash to the suppliers, sub-contractors and to direct costs (Kenley, 2003). Cash flow management has long been recognized as an important tool and proper cash flow management is crucial to the survival of a construction company because cash is the most important resource for its day-to-day activities (Peer, 2002; Singh and Lakanathan, 2002). A proper cash flow management is also important as a means to obtain loans, as banks and other money lending institutions are normally much more inclined to lend money to companies that can present periodic cash flow forecast (Navon, 2005).
According to Kenley (2003), the client-oriented flows of cash from the client to the contractor generally flows in from the client in periodic payments called ‘progress payments’. According to him, building contracts generally provide for such payments for two reasons:
- To provide a mechanism whereby the contractor may recover money for work in progress so that the contractor will not fund the project.
- To restrict these payments to set periods (usually of one month) in order to reduce the amount of administration required by all parties.
Cash outflow to suppliers, sub-contractors and direct costs is very different to cash inflows from the client. These payments according to Kenley(2003) follows the disparate contracts and agreements that exist between the contracted suppliers on the other, and also occur on an as required basis as labor and materials are called up and used during the construction of the project.
Payment is defined as failure of a paymaster to pay within the period of honoring of certificates as provided in the contract (Harris and McCaffer, 2003). The parties involved in the process of payment claim such as client, contractor, superintending officers, architect, quantity surveyor, banker and other construction players may cause a payment delayed. Construction delay can be observed by several indication factors. One significant factor is owners’ performance in making payment to contractors. The extra time required for payments is clear evidence that company is in financial difficulties (Ayudhya, 2012).
Retention is a percentage of the contract payment value which is held by the construction customer. Half is released at project completion. The other half is released following the expiry of a defect liability period. Holding retention money is a long-established way of providing insurance against project defects. However, anecdotal evidence and research has identified a number of issues associated with how retentions work in practice.
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How to cite this paper: Okereke, R.A. (2020). The Effect of Delayed Payments and Retention on Contractors Cash Flow; PM World Journal, Vol. IX, Issue VIII, August. Available online at https://pmworldlibrary.net/wp-content/uploads/2020/07/pmwj96-Aug2020-Okereke-effect-of-delayed-payments-and-retention.pdf
About the Author
Dr. Reuben A. Okereke
Owerri, Nigeria
Q.S. Dr. Reuben A. Okereke, PhD, QS & Sust. Dev., MSc. Const. Mgt., MSc. Env. Res. Mgt., FRQS, FIIA, FAPM, ACArb, CIPM, MAACEI., is a multi-talented and erudite scholar. A versatile professional with academic qualifications in Quantity Surveying, Project Management, Construction Management and Environmental Resource Management. His Quantity Surveying professional experience of almost three decades spans through his employment with consultancy and construction firms in Lagos, Nigeria, work as Project Manager in the Bank for eight years, services as in-house consultant Quantity Surveyor for several years for the Imo State University Owerri, Nigeria, experience as Consultant Quantity Surveyor in private practice as well as several years of teaching in both the University and Polytechnic. He is currently serving his second term as the head of department of Quantity Surveying, Imo State University, Owerri, Nigeria. He can be contacted at raphicaben2013@gmail.com
