The likelihood of subcontractor payment: Downstream progression via the owner and contractor

Abstract

Purpose

Subcontractor payments typically come through the contractor, though there can be exceptions to this, and their timing and quantum can be affected by the upstream payment practices of the owner to the contractor, as well as the payment practices of the contractor. The purpose of this paper is to study the linked effect of late and incomplete payments of both the owner and contractor on what the subcontractor receives.

Design/methodology/approach

The paper's analysis develops on an existing Markov chain formulation of owner payments. The probability of getting payment from an owner or contractor is represented as a function of time since claim submission. Such functions are established through goodness of fit tests using actual project data. The downstream progression of payment from owner to contractor to subcontractor is treated as a collection of series and parallel systems, for which the likelihood of payment is assessed.

Findings

A model that enables subcontractors to calculate the likelihood of getting their claims paid, based on owner and contractor historical payment practices, is developed. Subcontractors are able to calculate the conditional and unconditional probabilities of their claims being paid at any time after claim submission. The model may be used with historical payment records, or with identified typical owner and contractor payment types.

Practical implications

The paper presents a practical method by which a subcontractor is able to calculate age‐dependent probabilities of outstanding claim amounts being paid. Such information feeds into the subcontractor's tendering practices before entering a new project, and in the subcontractor's contract administration practices in terms of pursuing claims.

Originality/value

The modelling of the owner‐contractor‐subcontractor payment linkage is original. No similar modelling exists in the literature.

Citation

Tran, H. and Carmichael, D.G. (2012), "The likelihood of subcontractor payment: Downstream progression via the owner and contractor", Journal of Financial Management of Property and Construction, Vol. 17 No. 2, pp. 135-152. https://doi.org/10.1108/13664381211246589