An evaluation of risk factors impacting construction cash flow forecast

Abstract

Purpose

The purpose of this paper is to identify and assess the extent of occurrence and impact of risk factors responsible for the variation between the forecast and actual construction cash flow.

Design/methodology/approach

The study was conducted through a structured questionnaire administered to UK contracting organizations. Adopting a project‐by‐project approach, respondents were asked to provide opinions on the extent of occurrence of some identified risk factors and their impacts on cash flow forecast. Respondents were split into three groups of small, medium and large contracting firms based on their annual turnover so as to be able to investigate statistical differences of opinions between the groups. Statistical analyses were carried out using mean response analysis and univariate analysis of variance (ANOVA) in order to determine significant risk factors and also to investigate differences of opinions between respondents' groupings.

Findings

The research identified 11 significant risk factors out of 26 research risk variables. These significant risk variables can be grouped under three generic factors of “changes in the design or specification”, “project complexity” and “natural inhibition”. The significant risk variables are those ranking high in “extent of occurrence” and with critical impacts on cash flow forecast. The research further showed that there is no statistically significant difference in the opinions of different categories of contractors regarding the extent of risk occurrence and impacts on cash flow forecast.

Research limitations/implications

The research showed that the order of extent of risk occurrence is different from the order of impact in case of occurrence. This suggests that further work needs to be done to measure the impact more objectively on a ratio scale so as to provide an avenue for a more quantitative measure of risk impacts on cash flow forecast. This objective is the next focus of this study.

Practical implications

Based on the finding, it is evident that the knowledge of the identified significant risk factors provides invaluable information to the construction contractor as regards what risk variables to focus attention on in cash flow forecasting.

Originality/value

The paper makes an original contribution of exploring the extent of risk occurrence and its impact on construction cash flow forecast from an objective point of view rather that the usual subjective point of view. The epistemic nature of the investigation makes the finding of practical value to the construction contractor in cash flow forecasting.

Citation

Odeyinka, H.A., Lowe, J. and Kaka, A. (2008), "An evaluation of risk factors impacting construction cash flow forecast", Journal of Financial Management of Property and Construction, Vol. 13 No. 1, pp. 5-17. https://doi.org/10.1108/13664380810882048