A contractor's classification of owner payment practices

Abstract

Purpose

A common distraction to contractors is that of cash management, and particularly incoming payments. In the extreme, a failure to manage a project's cash flows may bring about business failure. A contractor's financial viability rests on how actual payments from an owner are received. The purpose of this paper is to present a method for contractors to evaluate the punctuality and fullness of owner payments based on historical behaviour.

Design/methodology/approach

Owners are classified according to their late and incomplete payment practices. The payment profile of an owner, in the form of aging payments received based on claims, is used as a basis for the method's development. Regression trees are constructed based on three predictor variables, namely, the average time to payment following a claim, the total amount ending up being paid within a certain period and the level of variability in claim response times.

Findings

The method will be of interest to contractors concerned with managing their cash positions, as well as those persons looking at contractor‐owner relationships.

Practical implications

The method is intended to be used internally within a contractor's organisation to assist in decision making. The method can also be used by subcontractors, suppliers, and consultants. Owners may use the method reflectively to improve their own practices, to save time and cost by reducing disputes, and to develop better owner‐contractor relationships.

Originality/value

This paper represents an original approach, and an original contribution to contractor pre‐tendering risk analysis practices, and an extension to contractor claim‐payment analysis.

Citation

Tran, H. and Carmichael, D.G. (2013), "A contractor's classification of owner payment practices", Engineering, Construction and Architectural Management, Vol. 20 No. 1, pp. 29-45. https://doi.org/10.1108/09699981311288664