Article

Project Management Journal

Vol. 49(5) 48–63
Cash Flow Management of Construction ª 2018 Project Management Institute, Inc.
Article reuse guidelines:
sagepub.com/journals-permissions
Projects in Saudi Arabia DOI: 10.1177/8756972818787976
journals.sagepub.com/home/pmx

Ali A. Shash1 and Abdulaziz Al Qarra2

Abstract
Cash flow management entails forecasting, monitoring, and controlling practices of the cash inflow and outflow and arrangement
of deficits over a project’s duration. This article reveals, through a questionnaire survey, the techniques and practices that
construction companies in the Eastern Province of Saudi Arabia follow to forecast and manage cash flow at the project level. The
majority of the contractors perform cash flow forecasting for setting a cash flow baseline and determining the proper financing
method. They use credit financing for materials, subcontract a good portion of projects, and use company assets and credit
financing to pay for equipment and labor.

Keywords
cash flow, Saudi Arabia, management, practices, construction, deficit

Introduction in a project. Thus, to ensure a healthy and stable financial

performance for a firm, it is necessary to construct an effective
Cash flow is a term used to describe the pattern of cash move-
cash flow forecasting model (Halpin & Senior, 2009), followed
ment into (income) and out (expenditure) of a business and the
by proper management of cash inflow and outflow.
resulting availability of funds at any given time. Cash flow is
In a construction project, a contractor’s cash flow occurs
considered the main indicator of a business’s financial health.
over the construction contract duration, as shown in Figure 1.
Exercising proper cash flow management is crucial to the sur-
The construction contractor uses cash from equity, advanced
vival of businesses. Cash flow management refers to the prac-
payment, and/or debt to finance initial construction operations
tices that are adopted to balance income and expenses; it entails
and expected overdrafts whenever a contract dictates retention
forecasting (planning), monitoring, and controlling practices of
of a certain percentage of progress payments. The construction
cash inflow and outflow and the arrangement of deficits over
contractor uses available cash to purchase materials and to pay
the life of a business. Construction companies exercise cash
for labor, overhead, subcontractors, suppliers, and vendors. The
flow management at both the company and project levels. The
combination of these resources is transformed into a finished
latter is the concern of this study.
product. This finished product typically takes the form of a
Starting a partial or a complete project subjects a contractor
completed or partially completed construction work. The proj-
to a major risk emerging from the cash flow impact of this new
ect owner values the completed or partially completed con-
work. To ease this risk, according to many researchers, the
struction work, based on an agreed-upon valuation method,
contractor forecasts the cash flow, measures the amount of
and pays a certain amount of cash to compensate the contractor
needed investment before the project produces positive cash
for the finished goods. The ratio of the compensated amount to
flow, and manages the actual cash flow during the construction
process. Forecast analysis aids the contractor in selecting the
proper financial technique that corresponds to the predicted 1
cash flow of project expenses (Gatti, 2008). Proper cash flow Construction Engineering and Management Department, College of
Environmental Design at King Fahd University of Petroleum and Mineral,
management ensures the correspondence of actual cash flow Dhahran, Saudi Arabia
with the set cash flow baseline. Financial success for a firm 2
Dhahran, Saudi Arabia, JLL (Jones Lang LaSalle) MENA, Saudi Arabia
does not depend on the volume of the firm’s capital. Rather, for
a firm to be financially successful, it should have the ability to Corresponding Author:
Ali A. Shash, Construction Engineering and Management Department, College
fulfill its obligations in the various transactions it undertakes. of Environmental Design at King Fahd University of Petroleum and Mineral,
In other words, the firm should manage its cash in a way that Dhahran, Saudi Arabia.
can give it a further view of the different financial transactions Email: aashash@kfupm.edu.sa
Shash and Qarra
1 2
Equity
Cash
Advanced Payment
Flow
Debt In
Cash for
3
a Project
Progress Payments
Compensation
Finished
Processes Project
Figure 1. Cash flow cycle.
the contractor’s expended amount for a completed or partially
completed construction work is a function of the contractor’s
efficiency and the agreed-upon percentage of retention.
The payment amount is reduced by a retainage, a certain
percentage of the payment that has the effect of keeping a
contractor in negative cash flow for a long duration and, in
many cases, for the total duration of the project. High ratio
of payment to expenses means excellent recovery of expen-
ditures. As a matter of fact, recovering good amounts of
expenditures in terms of cash from progress payments leads
contractors to borrow minimum amounts of money that are
close to the amount of the retained money and allows them
to finance ongoing construction operations properly. A con-
tractor funds construction costs for a period that may
extend to 60 days before recovering such expenditure in
the form of progress payments from the owner. Contractors
commonly find themselves in a position where they have to
pay for labor, materials, and suppliers for longer periods
than the scheduled payments dates if there are delays in
receiving the progress payments.
Contractors follow certain procedures to manage income
(inflows), expenditures (outflows), and deficits in their proj-
ects. Proper management of these components is essential to
the survival of construction companies. For years, the unavail-
ability of cash as a result of cash flow problems has been a
major cause of insolvency for many contractors. This was iden-
tified in the 1970s and, since then, many researchers have
emphasized the importance of cash flow management to the
survival of construction companies, because cash is a crucial
resource to the contractor’s day-to-day activities and a means
to obtain loans from banks (Odeyinka, Kaka, & Morledge,
2003). Tarek and Yaqiong (2014) reported that inadequate
control of cash flow caused many construction companies to
leave the industry. Al-Barrak (1993) found that cash flow man-
agement is one of the major financial issues that cause contrac-
tors to go bankrupt in Saudi Arabia. Hence, researchers have
49
Cash Flow Out
Cash
Flow Purchase Fixed Asset
Out Purchase Raw Materials
Labor Salaries
Subcontractors’ Payments
Suppliers’ Payments
Direct Overhead
Transformation
Processes
offered techniques to manage cash flow properly. Unfortu-
nately, the offered techniques concentrated on the development
of models for forecasting cash flow over the duration of a
construction project, and very little work has been reported
on the practices that contractors follow to manage cash flow.
Although the literature is rich in cash flow and cash flow tech-
nique studies, the Saudi construction industry’s usage of these
studies and practices in managing cash flow has yet to be
investigated. This study is an attempt to reveal the practices
that are followed by construction companies in the Eastern
Province of Saudi Arabia to forecast and manage cash over the
duration of projects. It is hoped that such a study will lead to
more advanced treatments of contractors’ cash flow manage-
ment and, hence, prevent contractors in Saudi Arabia in
particular, and in other countries in general, from facing cash
flow-related failure.
Research Objective
The main objective of this study is to reveal and describe the
techniques and practices that construction companies in the
Eastern Province of Saudi Arabia employ to forecast and man-
age project cash flow.
Literature Review
Cash flow is the difference between cash spent and cash
received by a firm during a specific period of time (Tarek &
Yaqiong, 2014). Cash flow management mandates the applica-
tion of practices in managing project cash flow against a set
baseline. Actually, the accurate estimation of cash flow in the
early stages of a project is considered a vital factor that pro-
vides an indication of the project’s financial significance.
Cash flow planning is the charting of cash movement into
the production process, then into accounts receivable, and back
into cash. Cash flow planning is a crucial step in making
50
significant decisions concerning how to liquidate a project with
the cash. Cash flow forecasting guides the contractor to the
amount of cash needed for the project and to how to return this
amount to the account from which it was borrowed (Ross &
Williams, 2013). Halpin and Senior (2009) indicated that fore-
casting cash behavior over a project’s duration is a crucial key
for controlling project cash effectively. In addition, performing
a thorough cash flow analysis for a project is necessary to
eliminate or to minimize the possibility of financial failure
(Kenley, 2003).
Many researchers have developed probabilistic and mostly
deterministic models for cash flow forecasting, with some var-
iations in their accuracy and detail, the degree of automation in
compiling them, time and money integration methods, and so
forth (Mutti & Hughes, 2002). Bromilow (1978), Peer (1982),
Isidore and Back (2002), Boussabaine and Elhag (1999),
Tucker (1986), Kenley and Wilson (1986), Kaka and Price
(1993), Miskawi (1989), and Boussabaine and Kaka (1998)
developed deterministic models for forecasting and managing
cash flow at the project level. In contrast, Purnuş and Bodea
(2015) argued that projects are highly dynamic, and a determi-
nistic analysis does not provide a realistic view of the financial
efforts that a contractor has to make. They also discussed the
fact that focusing on the individual project level does not
reflect the overall risks at the corporate level, and that the
simple sum of an individual project’s risks can be significantly
different from the total corporate risks. Some researchers have
developed models for forecasting and managing cash flow at
the organizational level. Navon (1996) developed a cash flow
management system to forecast cash flow at the company level.
Cui, Hastak, and Halpin (2010) developed a system dynamics
model for project cash flow management. They used a ware-
house project to demonstrate the flexibility of the model in
incorporating cash flow management strategies and predicting
project cash flows. Purnuş and Bodea (2015) presented a prob-
abilistic cash flow analysis model, which allows integration of
risk events and uncertainties such that the model becomes a
true decision tool that can be applied at the project’s portfolio
level. They claim that when contractors apply the proposed
model, they avoid high financial exposures and losses. Further-
more, the modeling of the cumulative behavior of all projects
allows contractors to predict not only when but mostly what
amount of money should be borrowed or obtained from internal
or external sources and when and what amount of money
should be returned. Ross and Williams (2013) claim, however,
that many simple cash flow models, other than that presented
above, may not take into account uncertainties and the effects
of many factors on project cash flow.
The internal earnings of a construction company and/or
commercial banks’ financial facilities are two main sources
contractors use to finance the operations of a construction proj-
ect (Halpin & Senior, 2009). Selecting the financing method
depends mainly on the degree of accuracy with which a con-
tractor can estimate cash flow during the duration of the project
(Hendrickson, 1998) and the type of project delivery system
Project Management Journal 49(5)
and corresponding level of risk that may emerge from the use
of the financing technique (Crundwell, 2008). When it comes
to financing a construction project, the contractor’s goal will be
to finance the negative gap between project expenses and proj-
ect revenues with the aim of achieving the optimum possible
amount to finance; thus, the contractor’s loans cost will be the
least (Halpin & Senior, 2009). Although the project’s financial
nature is that an owner pays a contractor periodic (progress)
payments, the contractor may face various financial problems
along the project’s progress. The owner’s progress payments
may be delayed, which will affect the progress of the project,
unless the contractor has the financial ability to temporarily
cover this negative cash value. Project expenses that exceed
the cumulative progress payments paid by the owner to the
contractor cause this situation (Hendrickson, 1998). This gap
between revenues and expenses is referred to as working cap-
ital, which is a source of power for a contractor in commencing
a project. The term defines the remaining amount of available
cash that the contractor has after deducting the amount of
current liabilities (Steffan, 2008). This working capital is the
figure that will guide the contractor in the decision to use
available credit lines or look for new sources of capital by using
corporate finance (Yescombe, 2014).
Unfortunately, most of the previous research has suggested
techniques for setting baselines for cash flow, but very few
researchers have addressed the practices that contractors follow
to manage these cash flows. Odeyinka et al. (2003) surveyed
United Kingdom contractors on the approaches they use to
resolve deficit cash flow, their cash flow monitoring methods,
the frequency of cash flow updating, and the methods they used
for forecasting cash flow. They found that contractors resolve
deficit cash flow through different means including, in order of
priority, the company’s cash reserves, tender balancing,
delayed payment to subcontractors, delayed payment to sup-
pliers, use of company assets, and borrowed funds. On the other
hand, many researchers have addressed and reported on cost
control against set budgets. Readers interested in cost control
practices are referred to published work on this subject.
Research Methodology
This section presents the steps that were followed to achieve
the objective of the study, which is to identify and describe the
practices that construction companies in the Eastern Province
of Saudi Arabia follow to manage project cash flow. This study
employed a postal survey, the most popular method used by
many researchers in descriptive studies (Watson & Noble,
2007), to collect the necessary data from construction contrac-
tors. As compared to face-to-face interviews and the Delphi
method, the method used here is both cost and time effective.
The first step involved reviewing published relevant literature.
The review of pertinent published literature helped us study
various financial management systems. The literature review
also helped to develop the necessary tool—a structured ques-
tionnaire—for collecting the needed data. The questionnaire
Shash and Qarra
consisted of five sections. The first section contained questions
related to the company, such as size, location, number of cur-
rent projects, age, and so on. The second section contained
questions related to respondents’ (the information providers)
characteristics, such as educational background, experience,
position in the organization, and so forth. The third section
contained questions related to financial transactions and cash
flow management. The fourth section consisted of questions on
current financing techniques. The last section provided space
for the respondents to suggest new financial techniques.
The second step was collecting the necessary data via the
structured questionnaire from the top management of grades 1,
2, and 3 contractors located in the Eastern Province of Saudi
Arabia. The Classifying Directorate of the Ministry of Munici-
palities and Rural Affair classifies contractors into different
specialties (building, industrial, highway, etc.) and into five
grades based on qualification criteria for bidding on govern-
ment projects. Each graded contractor is given an upper limit
for the projects on which they may bid. Grades 2, 3, 4, and 5
building contractors, for example, have upper limits for proj-
ects with values of 280, 70, 21, and 7 million Saudi riyal,
respectively. Grade 1 contractors have no upper limit. Other
types of contractors are classified in a similar fashion with
comparable or different upper limits. The directorate lists 86
classified contractors in the Eastern Province. We used the
following statistical formula to determine the minimum suit-
able sample size to represent the population. This exercise
revealed a minimum of 20 contractors to comprise a represen-
tative sample of the above population:
pq
n0 ¼ 2
e summarize the characteristics of the participants and their
n0
n¼ n The results indicate that the majority of the participants are
1þ 0
N well educated with college degrees, with about (50%) holding
In the equation, p ¼ 0.5, q ¼ (1-p) ¼ 0.5, e (desired level of
precision) ¼ 10%, and N ¼ population (Lipsey, 1990).
The third step was to analyze the collected data using simple
statistical tools such as frequency, mean, and standard devia-
tion. Simple mathematical techniques, such as percentage and
average, were used in analyzing the data. However, in addition
to these techniques, importance and severity indices were cal-
culated to reflect the relative severity of the relevant factors
over the others. The indices were calculated as follows:
P5
1 ai xi
Importance Index ¼
5S x i
Where:
ai ¼ Constant expressing the weight given to i; xi ¼ variable
expressing the frequency of the response for i ¼ 1, 2, 3, 4, 5
(Likert, 1932). For measuring the level of effect of variables on
a project financing, a scale of 1 to 5 was used, where 1 repre-
sents a very severe effect and 5 represents no effect. For mea-
suring the suitability, finance effectiveness, cost, and involved
risk in various financing techniques, a scale of 1 to 5 was used,
51
where 1 represents very much suitable/very effective/very rea-
sonable/very low risk and 5 represents not suitable/very expen-
sive/very high risk.
Data Analysis and Results
Because the population is small, a structured questionnaire was
distributed in the last quarter of 2014 via email to the 86 con-
tractors. The contractors were asked to complete and return the
questionnaire to the researchers at their convenience but no more
than three weeks later. The questionnaire was followed up with
emails and telephone calls to remind and encourage financial
managers to participate in the study. Twenty-five financial man-
agers from different companies completed and returned the
questionnaires over 12 weeks. Improving the reliability of the
collected data mandated accepting only questionnaires that had
at least 80% of their contents duly completed. All the returned
questionnaires satisfied the above restriction and comprised the
total number of participants. This means that 29% of the popu-
lation participated in the study, which is considered a typical
norm of a 20% to 30% response rate in most postal question-
naires surveying the construction industry (Akintoye & Fitzger-
ald, 2000). In addition, the 25 participants are greater than the
calculated minimum sample size and, therefore, form a reliable,
acceptable, and representative sample.
Characteristics of Participants
This section presents the characteristics of the contractors and
personnel who completed the questionnaires. Tables 1 and 2
employers, respectively.
master’s or doctorate of philosophy degrees. The majority
(about 63%) of the respondents’ educational degrees are in
financial management and the remainder are in engineering,
with extensive experience and training in financial manage-
ment. The majority (54% of the participants) have more than
10 years of experience in the construction industry, and about
54% of these participants have been with their current
employers for more than five years. The results indicate that
almost one half of the respondents are from the contractors’
top management positions—that is, general manager, opera-
tions manager, project manager, or director. On the other
hand, it was found that about one third of the respondents are
managers and managers’ assistants in the finance departments
of their organizations.
The results indicate that the participants are employed in
contracting organizations, which, in the majority of cases
(67%), have been in existence for more than 10 years. This,
of course, ensures that the respondents represent well-
established firms. The head offices of most of the organizations
are located in the Eastern Province of Saudi Arabia and very
few are located in other cities, such as Riyadh and Jeddah.
52 Project Management Journal 49(5)

Table 1. Respondents’ Characteristics

Characteristics Distribution

Educational level Diploma Bachelor’s degree Master’s degree PhD

4% 62.50% 25% 8.50%
Education in finance Yes No
management 63% 37%
Years of experience Less than 5 5 to less than 10 10 to less than 15 15 to less than 20 20 to less than 25 Equal to or more than 25
in current position 50% 25% 12.50% 4% 0 8.50%
Years of experience Less than 5 5 to less than 10 10 to less than 15 15 to less than 20 20 to less than 25 Equal to or more than 25
in current organization 46% 20% 30% 0 0 4%
Years of experience Less than 5 5 to less than 10 10 to less than 15 15 to less than 20 20 to less than 25 Equal to or more than 25
in construction 25% 21% 16.50% 8.50% 12.50% 16.50%
industry

Table 2. Organization Characteristics

Characteristics Distribution

Organization age Less than 5 5 to less than 10 10 to less than 15 15 to less than 20 20 to less than 25
Equal to or
more than 25
20% 16% 16% 20% 8% 20%
Number of employees Less than 50 50 to less than 200 200 to less than 500 500 to less than 700 700 to less than Equal to or
1,000 more than 1,000
20% 20% 20% 4% 4% 32%
Average construction Less than 100 100 to less than 200 200 to less than 500 500 to less than 700 700 to less than Equal to or
contracts executed 1,000 more than 1,000
annually (million SR1) 25% 37.50% 4% 4% 12.50% 17%
Organization capital Less than 1 1 to less than 10 10 to less than 50 50 to less than 100 100 to less than Equal to or
(million SR) 500 more than 500
8% 46% 8% 8% 16.50% 13%
Organization location Dammam Khobar Jubail Dhahran Riyadh Jeddah
32% 28% 0 4% 32% 4%
Types of executed Building Industrial Infrastructure Special construction Utilities
projects 76% 44% 40% 36% 28%
1
Saudi riyal (US$1 equals 3.75 SR)

About 32% of these organizations employ more than 1,000
staff members. The combined extensive experience, rich
knowledge in the Saudi construction industry, and the large
staff size give these participating contractors the capability to
build large projects (buildings, industrial, highway, utilities,
and infrastructure) and to generate large annual revenues. The
results indicate that the majority of the participating organiza-
tions (37.5%) sign yearly contracts with an average amount
between SR100 and SR200 million. The results also show that
a significant portion of the participants (about 29%) signs con-
tracts with an average amount of more than SR700 million
yearly. This combination of the different sizes of the projects
undertaken by the participating contractors is a good factor,
which improves the quality of the results, as it provides
research findings representing a wider view of the industry.
Collecting the necessary data from personnel of such caliber,
with this level of experience in financial issues, lends confi-
dence regarding the quality of the information, and, hence, the
results and findings obtained.
Cash Flow Management
Cash flow commences with securing cash to fund project oper-
ations. Contractors must spend to purchase necessary materials
and equipment, pay laborers and management, and to receive
cash from the owner based on partially or completely finished
work. Cui et al. (2010) stated that contractors develop auto-
mated cash flows with the integrated cost-schedule method,
which involves a detailed project schedule with full costing
based on the bill of quantities. The following sections present
the methods that construction contractors in Saudi Arabia
implement to forecast and manage their projects’ cash flow.
Cash Flow Analysis
Cash flow analysis is an important financial activity for a proj-
ect and entails listing money flows into and out of a project.
Cash flow analysis enables a contractor to project future flows
of cash to determine the necessary budget for a project. Cash
flow analysis is not concerned with the amount of the cash flow
Shash and Qarra 53

Table 3. Purpose of Cash Flow Forecasting

Number of 5%
Purpose Responses Percentage
5%
5%
Determine the liquidity of the company 1 4
Set cash flow baseline for control purposes 22 85
Determine the financing method 18 70
15%
Determine the amount of money cost to 15 60
include in the bid price
Determine the amount of overdraft 11 45 60%
10%
alone, but also the timing of these cash flows. Most cash flow in
the construction industry is analyzed with monthly time peri-
ods. Cash flow analysis projects the cash balance at the end of
each month.
The results of this study indicate that the majority (76%) of None
Less than 5%
the participating contractors perform cash flow analysis or 5% to less than 10%
forecasting prior to bidding for a project. It was expected that 10% to less than 15%
all contractors would indicate that they perform cash flow 15% to less than 25%
analysis but, surprisingly, 24% of the participating contractors
responded negatively and stated that they do not analyze cash
Figure 2. Percentages of contracts that fail annually because of poor
flow for their projects. It seems that those contractors may cash flow management.
refrain from performing cash flow analysis for reasons related
to time and budget limitations during the pre-bidding stages
This may indicate that some contractors in Saudi Arabia may
and possibly because of previous unsuccessful experience with
apply poor financial practices.
cash flow analysis.
The results indicate that 40% of the participating contractors
The participating contractors delineated several benefits
encounter financial failure in their annual signed contracts,
from performing cash flow analysis. Table 3 presents the pur-
most likely as a consequence of their poor implementation of
poses of conducting cash flow analysis or forecasting, as per-
cash flow analysis and projections. This failure, resulting from
ceived by contractors in Saudi Arabia. Setting a cash flow
poor cash flow management, ranges from less than 5% to more
baseline for control purposes was cited by 85% of the partici-
than 25% of the annual signed contracts. The failure distribu-
pating contractors as one of the benefits they gain from cash
tion is shown in Figure 2. It is alarming to find this large
flow analysis. It seems that contractors are successful in setting
number of contractors facing sizeable project failures in their
cash flow plans, which they monitor and control over the life of
annual contracts because of poor cash flow management. The
a project. Moreover, 70% of the participating contractors
results of the study indicate that the majority of the contractors
reported that they benefit from cash flow forecasting or anal-
who encounter failures in their annual project contracts, attri-
ysis in determining the proper financing method for projects.
butable to poor cash flow management and forecasting, are
Working capital is an important part of a cash flow analysis.
those contractors who do not perform cash flow analysis prior
Computing the amount of working capital gives a contractor a
to submitting bids for projects.
quick evaluation of the liquidity of the project over its con-
Cash flow, as defined previously, is the process in which
struction period. Accordingly, the contractor decides on the
cash inflow and cash outflow are monitored and controlled.
source(s) for funding the working capital. Determining the
Accordingly, to manage the cash flow is to manage its compo-
working capital accurately helps contractors liquidate projects
nents—namely, cash flow out and cash flow in.
with ease and comfort.
Cash flow analysis, as reported by 60% of the participating
contractors, assists them in determining and including the cost
of financing in bid prices. Only 45% of the participating con- Cash Flow Out: Project Expenditures
tractors reported that they forecast cash flow to determine the A contractor expends available cash during the project con-
amount of overdraft. Calculating the overdraft amount plays a structing process. These expenditures are classified as either
vital role in determining a suitable financing method; less than direct or indirect costs. Direct costs consist of materials, equip-
50% of the participating contractors, however, conduct cash ment, labor, subcontractors, suppliers, and job overhead costs
flow analysis to determine the amount of the overdraft. It could that are traced back directly to the project. The direct cost
be inferred that the participating contractors conduct simple signifies the highest percentage of the total cost of a project.
cash flow models, which fail to determine the amount of over- Thus, the direct cost should be managed closely to maintain a
draft and, hence, decide on the suitable financial technique. positive financial status for a project. The indirect cost category
54
Percentage of Respondents 50%
40%
30%
20%
10% 13%
0%
4%
Less than 20% to less
20% than 30%
Figure 3. Materials cost contribution to total project cost.
includes cost items, such as office overhead, which are not
directly traced back to a particular project. Office overhead
includes costs that are generated by management and adminis-
trative activities. Unlike direct costs, indirect cost marks a
small percentage of the total cost of a project. Typically, over-
head accounts for less than 5% of the total project cost (Halpin
& Senior, 2009).
The participating contractors revealed the direct and indirect
costs (cash flow out) of their undertaken projects.
Direct Cost
The participating contractors identified as direct costs the pur-
chased materials and equipment, as well as payments to
laborers, subcontractors, and project management. These are
the primary sources of cash outflow and are considered and
accounted for as part of the project direct cost.
Materials
The constituents of a finished or partially finished product are
the sources of the material costs. The majority (44%) of the
participating contractors reported that the material costs
accounted for 30% to 50% of the total costs of projects they
constructed. Ross and Williams (2013) reported similar find-
ings and stated that the contribution of material costs in con-
struction projects typically ranges from 30% to 50% of the total
project cost. The results still indicate that about 30% and 13%
of the participating contractors reported that materials cost
comprised 50% to 70% and 20% to 30%, respectively, of the
total costs of the projects they constructed. It seems that the
participants contract for projects with different scopes of work.
For example, in some contracts, the contractor is responsible
for supplying all or most of the project materials, whereas in
other contracts, the owner participates in providing a signifi-
cant portion of the materials. This observation was clear from
the answers furnished by the remaining participating contrac-
tors. Interestingly, one contractor indicated that materials cost
Project Management Journal 49(5)
44%
30%
9%
30% to less 50% to less Equal to or
than 50% than 70% more than 70%
comprised less than 20% of the total cost of the projects he had
constructed. The researchers observed from this contractor’s
profile that he offers services that are limited to industrial
equipment installation and operation. At the other extreme, two
contractors (9%) stated that the materials cost represents more
than 70% of the total project cost. It was observed that these
two contractors construct special structures, such as railways
and precast concrete buildings, where materials have a very
high contribution to the total costs of the project. Material cost
contribution to a project total cost is presented in Figure 3.
The participating contractors indicated that they pay mate-
rials suppliers using a combination of various financing tech-
niques. It seems that contractors value the importance of
timely availability of materials and, hence, rely less on limited
sources to fund this cost item. The majority (56%) of the
contractors use credit financing for materials. Contractors
prefer credit financing because they pay for the delivered
materials after a certain period of the delivery date, which is
typically 30 days. This arrangement gives contractors ample
time until owners pay them against the incurred materials
cost. About 44% and 48%, respectively, of the contractors use
progress payments and advance payments to pay for materi-
als. Few contractors (16% of the participants) pay suppliers
from their own accounts.
Labor
Labor cost is the sum of all wages paid to laborers, as well as
the cost of labor benefits. Contractors in Saudi Arabia pay
workers monthly and usually at the end of the Gregorian
month. The majority (83%) of the participating contractors
reported that the labor cost contributes less than 30% to the
total cost of the project. Ross and Williams (2013) reported
similar labor cost contributions to total project cost. This per-
centage represents the contractor labor cost contribution and,
hence, could be marginally higher.
Contractors may engage subcontractors to execute parts of a
project. It seems that contractors in certain circumstances
Shash and Qarra 55

Percentage of Respondents 60%

50%
50%
40%

30% 33%

20%

10% 13%
4% 0%
0%
Less than 20% to less 30% to less 50% to less Equal to or
20% than 30% than 50% than 70% more than 70%

Figure 4. Labor cost contribution to total project cost.

prefer to hire subcontractors to provide laborers to execute Table 4. Techniques Used to Pay for Equipment in Construction
elements of the project rather than hire laborers directly. One Projects
contractor reported that the labor cost contribution ranges from
Techniques Number of Responses Percentage
50% to 70% of the total project cost. It seems that this contrac-
tor provides his services to owners who supply most of the Advance payment 4 16
needed materials; thus, the scope of the contractor in these Company assets 15 60
contracts is mainly limited to providing the needed workforce Bank loans 4 16
Progress payments 9 36
for the project. Labor cost contribution to total project cost is
Credit 6 24
presented in Figure 4.

Subcontractors of time. On the other hand, when a contractor needs equipment

The majority (78%) of the participating contractors reported
that subcontracting work typically contributes 20% to 50% of
the total cost of the projects they have constructed. However,
the amount of subcontracted work varies from one project to
another and from one contractor to another, depending on the
contractor’s internal policies, resource limitations, and
ongoing projects.
for a project for long periods of time, the results indicate that
36% of the contractors use periodical payments, which coin-
cide with the project progress payments, to pay for the equip-
ment. It seems that contractors are successful in selecting,
based on the need duration, suitable and cost-effective financ-
ing methods for acquiring needed equipment. Table 4 presents
the contractors’ schemes for financing needed equipment.

Equipment
A high proportion of the participating contractors—almost
83%—reported that the equipment cost (owning and operating)
comprises less than 20% of the total project cost, although
about 8% stated that their average equipment cost was between
50% and 70% of the total project cost. Because the nature of the
projects undertaken by the different contractors varies, it is
understandable that there would be such a high variance in
equipment cost. Most of the participating contractors construct
buildings, which are labor intensive rather than equipment
intensive. In addition, some contractors undertake projects that
rely mainly on providing costly types of special equipment.
The results indicate that the majority (60% and 24%, respec-
tively) of the participating contractors use company assets and
credit financing to pay for the equipment hired for short periods
Mobilization
The results demonstrated that about 88% of the participating
contractors reported that mobilization costs typically account
for less than 3% of the total project cost. The majority (80%) of
the participating contractors pay for mobilization costs using
the owners’ advance payments, when applicable. About 44% of
the participating contractors reported that they use their own
cash to liquidate mobilization costs. The other contractors
showed different financing modes, such as bank loans and lines
of credit.
Overhead
The results indicate that about 88% of the participating con-
tractors stated that the project overhead cost was less than 10%
of the total project cost. Similarly, about 80% of the
56
Table 5. Cost Items Amounts and Finance Sources
Cost Average Percentage of Major Finance
Category Cost Items Total Project Cost (%) Source
Direct Materials 43% Credit
Cost Equipment 10% Company assets
Manpower 15% Company assets
Subcontractor 20% Progress
payments
Mobilization 2% Advance payment
Indirect Overhead 10% Company assets
Cost
participating contractors indicated that the general overhead
cost was less than 10% of the total project cost. However, other
contractors reported that the overhead cost barely reached 30%
of the total project cost.
The participating contractors indicated that the direct costs
comprise 88% of the total project cost, whereas the indirect
costs account for 12% of the total project cost. Table 5 presents
the approximate contribution of cost items and the major
source of financing as reported by contractors in Saudi Arabia.
The approximate contribution is calculated as the sum of the
product of the respondents’ ratio and the midpoint of the per-
centage range.
The survey shows that contractors do not rely on banks to
finance projects. It seems that contractors invest accumulated
profit and cash obtained from other businesses, such as trades,
to finance their project operations. Contractors may believe
that self-financing contributes dearly to their companies’
competitiveness by offering cash at lower interest rates than
bank rates and, at the same time, they are rewarded directly in
their investments.
Cash Inflow Description and Sources
In construction, partial payments are made to a contractor at
different stages as the work progresses, instead of making
one full payment upon completion. It is common for an
owner to measure and value the work at designated time
intervals, mostly monthly, and pay the contractor accord-
ingly. At the completion of the project, a final payment is
made covering the value of the last completed work and any
retentions. In certain contracts, a contractor receives an
advance payment from the owner at the beginning of the
project. The advance payment, progress payments, and final
payment are the main sources of cash inflow. The main cash
flow concern of a contractor is to minimize outsourced
financial aids as much as possible, regardless of the cost
of the project.
Owner payments take different forms as the work progresses
and adapt to the different stages of a project. Figure 5 shows
these payments and their occurrences during a hypothetical
project’s life cycle. The participating contractors described
owners’ payment structures and processing methods.
Project Management Journal 49(5)
Advance Payment
In some construction contracts, an owner agrees to pay the
contractor an advance payment to finance early activities,
including mobilization and setting up work. The majority
(88%) of the participating contractors reported that they receive
advance payments when contracting with some owners. Some
of the participating contractors (41%) indicated that they
receive advance payments in 10% to less than 15% of their
contracts. Interestingly, other contractors (42%) indicated that
they receive the same percentage of advance payment in more
than 25% of their annual secured contracts. This variance in the
results can be explained by the fact that advance payment is
agreed upon based on the type and size of the project; thus, not
all of the executed projects by contractors need this type of
payment in the beginning of the project. Sometimes, the con-
tractor has the ability to finance the project easily at that stage.
The results indicate that 50% of the participating contractors
who receive advance payments reported that the average
amount of the advance payments they receive is between 5%
and 15% of the contract price. Almost all of the remaining
participating contractors who receive advance payments
(46%) reported that the amount of advance payments is
between 15% and 25% of the contract price. When asked if
they were content with the amount of advance payment
received, about 64% of the participating contractors reported
that they find the amount of the advance payments insufficient
for them to fulfill their financial requirements at the beginning
of the project. Contractors regularly utilize advance payments
to pay for their mobilization costs and pay their own advance
payments to subcontractors and/or suppliers engaged in a par-
ticular project.
The majority (64%) of the contractors stated that owners
redeem the advance payment by deducting an agreed-upon per-
centage from progress payments. About 32% of the participating
contractors reported that they repay the advance payment by
deducting an agreed-upon fixed amount from progress payments.
Progress Payments
The majority (76%) of the participating contractors reported
that they are paid progress payments every month of the project
duration. In comparison, about 16% of the participating con-
tractors stated that they are paid progress payments at set mile-
stones, such as completion of specific work, as designated in
the contract. The remaining 8% of the participating contractors
showed that the owners pay them progress payments at desig-
nated time milestones of the project. These findings signifi-
cantly match the reported studies in the literature. Respecting
the agreed-upon conditions in the contract between the con-
tractor and the owner, a contractor bills the owner for the work
done in the previously agreed-upon period, typically one
month. Subsequently, the owner reviews the invoiced work and
pays the invoice, once it is certified.
This method of paying construction expenses impacts the
way the contractor pays suppliers, subcontractors, and labor. In
Shash and Qarra 57

120%

100%
Percentage of Contract Price

80%

60%

40%

20%

0%

-20%

-40%
Project Project Project Project Project Project
Start Progress Progress Progress Progress Completion

Advance Payment Progress Payment

Retention Advance Payment Deductions

Figure 5. Owners’ payments’ locations and values over a hypothetical project duration.

60%
Progress Payments Delay
Percentage of Respondents

50% 53%

40%

30%

26.70%
20%

10% 13.30%
6.7%
0%
Less than 30 days 30 to less than 60 days 60 to less than 90 days 90 to less than 120 days
beyond their due date beyond their due date beyond their due date beyond their due date

Figure 6. Progress payments delay distribution.

general, the idea behind this credit system is to establish a
system that enables the owner to pay the project expenses in
a way that supports the contractor effectively while concur-
rently securing the owner.
The participating contractors reported that they are some-
what satisfied with the timing of owners’ progress payments.
Almost 52% stated that they receive payments on time,
whereas the other 48% showed that owners delay payments
beyond their due dates. Figure 6 presents the delay distribution
in owners’ progress payments as reported by the contractors
who receive payments beyond their scheduled times. In fact,
progress payment delay has major effects on contractors and
owners. The delay disturbs a contractor’s financial cash flow
and subjects the contractor to unnecessary stress from credi-
tors. The delay may increase the cost of the project through
additional charged interests on the amount of delayed prog-
ress payment.
The participating contractors indicated that owners delay
payments for several reasons. The majority (65%) of the con-
tractors stated that the approval process for invoiced work in an
owner organization is a significant factor in delaying payments.
It seems that invoices pass through many offices for approval.
58
Table 6. Reasons for Owners’ Payment Delays
Reasons Number of Responses Percentage
Disputes 1 5
Not enough budget 1 5
Bureaucracy 6 25
Corruption 0 0
Approval process 17 65
Table 7. Actions Toward Owners’ Payment Delays
Percentages of
S/N Action Respondents
1 Continue work and delay payments to labor, 13.3%
management, and suppliers.
2 Continue work by borrowing money from a 20%
bank with intention to claim the interest from
the owner.
3 Continue work by borrowing money from 40%
another ongoing project account.
4 Continue work by borrowing money from 33.3%
the organization’s available cash with the
intention of claiming an interest from
the owner.
5 Stop work until payments are made. 26.7%
6 Lower the rate of work and strongly follow up 6.7%
on the payment.
Al-Dulaijan (1987) reported that the number of approvals
needed for a contractor’s invoice might reach 15 in some proj-
ects. He indicated that these approvals might take more than
100 days in some projects. Bureaucracy is a major factor caus-
ing delays of progress payments, according to 25% of the
respondents. The results also indicate that about 5% of the
participating contractors find disputes and budget shortages
as major reasons for delay in owners’ payments. Some contrac-
tors mentioned the possibility of corruption inside owners’
organizations verbally rather than in writing because of the
sensitivity of this issue. Those contractors declared that corrup-
tion inside some organizations is one significant reason for
owners’ payments delay. Table 6 presents the reasons for own-
ers’ progress payments delay.
Contractors demonstrated several reactions, as presented in
Table 7, to progress payment delay. Interestingly, the majority
of the contractors stated that they continue to work during
payment delays and exercise different strategies to compensate
for the delayed payments. About 40% of the contractors borrow
money from the accounts of other ongoing projects. Under this
strategy, the contractors expose all of their projects to the risk
of failure because cash shortages will affect the quality of all
projects. A much more efficient group of contractors, repre-
senting about 33% of the participants, implement a better strat-
egy of borrowing money from a bank with the intention to
claim the charged interest from owners. About 13% of the
contractors delay their own payments to labor, management,
Project Management Journal 49(5)
and suppliers. This strategy is very harmful to the business of a
contractor. Labor productivity and reputation may suffer dearly
from the application of such a policy. Few contractors (about
7%) of the participants continuously and fiercely follow-up on
payment requests with owners and possibly slow down work.
About 27% of the contractors, after exhausting the above
actions, say that they stop work until payments are made. It
is apparent that the contractors incorporate these delayed pay-
ments into their financial model.
Retention and Final Payment
The results pointed out that 84% of the participating contrac-
tors stated that the retention provision is applied in their con-
tracts. The majority (68%) of those contractors reported that the
applied retention typically ranges between 5% and 10% of the
contract price, whereas about 23% reported that it ranges
between 10% and 15% of the contract price. These results
match closely what other researchers have discussed and
reported in the literature.
The participating contractors stated that owners usually pay
the retained amount at the completion of projects. However, own-
ers request contractors to submit several documents, as presented
in Table 8, before they will release the retained amount.
The majority (about 73%) of the participating contractors
reported that owners demand a hand-over report (certificate of
completion) and guarantee letters of a facility’s machines and
equipment. About 50% of the participating contractors identi-
fied the Zakat certificate—a governmental document certifying
that the contractor paid the Zakat—and the retention invoice as
documents demanded by owners before the release of retained
amounts. It is interesting that some owners request contractors
to show certificates that the salaries of the contractors’ staff and
laborers are paid. It seems that those owners want, for huma-
nitarian reasons, to make sure their contractors pay salaries to
laborers regularly. Some contractors in Saudi Arabia are known
to delay the salaries of their staff for several months.
The majority (59%) of the participating contractors stated
that owners usually release the retained money within 30 days
after the submittal of a retention request. Unfortunately, about
14% and 18% of the participating contractors reported that
some owners delay the retention money for more than 60 and
90 days, respectively.
The majority (75%) and about 20% of the participating
contractors indicated that they usually receive final payments
within 30 days and 60 days beyond receiving a certificate of
completion, respectively.
The results also indicate that owners vary in delaying the
final payment invoice. About 32% and 34% of the participating
contractors reported that owners pay final payment invoices 10
to 30 days and 30 days to 60 days after invoicing, respectively.
Another 24% of the participants indicated that some owners
pay final payments in 60 to 90 days.
The contractors reported that owners ask them to submit
supporting documents with their requests for final payments.
Shash and Qarra 59

Table 8. Requirements for Releasing Retention and Final Payments

Retention Final Payments

Requirements Respondents Percentage Respondents Percentage

Certificate of payments to firm’s employees 3 13.6 5 24

Zakat/income tax certificate 11 50 10 44
Guarantee letters 16 72.7 16 72.0
Retention/final payment invoice 10 46 11 48
Project hand-over 16 72.7 19 84.0

These requested supporting documents, as presented in Table 9. Deficit Financing

Table 8, are similar to those of the retention requests.
Financing Techniques

Respondents Self-Financing (%) Banking Facilities (%)

Project Deficit Funding
1 20 80
Contractors mainly have two options to generate cash to loosen 2 40 60
the capital lookup (the amount of work done by the contractor 3 50 50
and not yet paid by the owner). Contractors pay either from 4 70 30
their own cash (self-financing) and/or obtain a loan in the form 5 15 85
6 20 80
of cash from a lending organization such as a bank (debt- 7 20 80
financing). The participants were asked to indicate which tech- 8 60 40
niques their organizations apply to finance their projects. 9 25 75
Twenty-two contractors responded to this request. One respon- 10 60 40
dent (about 4.5% of the total respondents) reported that his 11 60 40
company depends fully on banks to finance cash flow deficits. 12 70 30
Six respondents (about 27%) indicated that they do not obtain 13 30 70
14 80 20
loans from banks but rather secure all needed cash for projects 15 70 30
from their companies’ own accounts. The remaining 15 respon-
dents (about 68%) indicated that they depend on self-financing
and bank loans to finance cash flow deficits. The self-financing reasonable/very low risk and 5 represents not suitable/very
ranges from 15% to 80%, with an average of 46%. On the other expensive/very high risk.
hand, the bank loans range from 20% to 85%, with an average The results showed that the participants secure 38%, 35%,
54%. It is believed that the self-financing technique is popular and 27% of the required cash from retained profit, equity, and
among contractors who have trading business and/or real estate trade credit, respectively. The participants rated retained profit
investments in addition to construction contracting. Table 9 and trade credit techniques very much suitable, very much
presents the reported amount of cash, in percentage of deficit, effective, of reasonable cost, and with acceptable risks. On the
which those contractors secure from self-financing and banks. other hand, they rated the equity technique very much suitable,
effective, high in finance rate, and moderate risk. It seems that
all self-financing techniques are equally popular among con-
Self-Financing Techniques tractors in Saudi Arabia because the respondents classified
The results indicate that the contractors who depend on self- their risks as moderate. The participating contractors tend to
financing use three techniques—namely, equity, shareholder utilize the amount of cash that remains after paying the taxes,
investment, and trade credits. Table 10 presents these tech- servicing interest, and shareholder dividends to finance cash
niques with qualification parameters. The table consists of six flow deficits. Ross and Williams (2013) reported that when this
blocks. The first block presents the different self-financing profit is considered relatively large, a contractor could utilize it
techniques and the second block presents the percentage of as working capital to fund the company’s ongoing projects. It
implementation. The third to sixth blocks present the respon- seems that numerous contractors in Saudi Arabia invest part of
dents’ evaluations of these techniques in terms of their suit- their realized profit in financing their projects, and sharehold-
ability, finance effectiveness, cost, and involved risk. The ers enjoy the investment returns. A trade credit technique,
respondents were asked to measure the performance of the where suppliers allow contractors to buy materials and equip-
applied financial techniques in terms of their suitability, ment now and pay later, is also used. Trade credit transaction,
finance effectiveness, cost, and involved risk using a scale 1 as reported in the literature, is commonly used in the construc-
to 5, where 1 represents very much suitable/very effective/very tion industry. Although the trade credit technique is external, it
60
Table 10. Analysis of Self-Financing Techniques
Suitability
Self-Financing Percentage of Standard Scale Standard Effectiveness Standard Finance Cost Standard Involvement Standard
Techniques Implementation Deviation (1 to 5) Deviation Scale (1 to 5) Deviation Scale (1 to 5) Deviation Scale (1 to 5) Deviation
Retained profit 38% 29.5 High 1.2
Equity 35% 30.5 High 1.1
Trade credit 27% 23.3 High 1 High
Total/average 100% - High
is considered a self-financing technique because banks are not
part of the financing; this occurs between contractors and their
creditors, such as material suppliers.
The participating contractors appreciated the self-
financing techniques and stated that they are highly suitable
for their businesses, highly effective in financing, and
involved average risk.
Debt-Financing Techniques
Banks furnish various types of facility services to contractors.
Commonly, once a bank committee approves a contractor’s
request for a banking facility, the contractor has access to cash
in accordance with a loan agreement between the contractor
and the financial institution (bank). This agreement states that
the bank finances the contractor with a specific amount of
capital and the contractor, in turn, provides guarantees to repay
the lent money with an interest charge.
Generally, the types of banking facilities can range from
short- to long-term financing. Short-term financing is usually
used to fund changes in a predicted amount of a working capital
of a project, while long-term financing is applied to fund the
general operations of the company (Ross & Williams, 2013).
The first column in Table 11 presents the various banking
facilities that banks commonly supply to contractors. Table
11 is similar to Table 10, but shows debt-financing rather than
self-financing techniques. The respondents were also asked to
measure the performance of debt-financing techniques in terms
of their suitability, finance effectiveness, cost, and involved
risk using similar measurements as those shown in Table 10.
Bank Loans
The results indicate that the contractors use all available bank-
ing facilities to fund their construction operations. The largest
amounts of funds that contractors secure from banks are the
loan facilities. Loans are typical forms of banking facilities
and consist of short-term, mid-term, and long-term loans. The
participating contractors reported that bank loans made up
44.2% of their banking facilities, with long- and medium-
term loans being the most popular, accounting for about
73% of the loans. Short-term loans make up only about 27%
of the loans used by contractors.
The nature of construction projects dictates the selection of
the loan type. It seems that for projects that take participating
Project Management Journal 49(5)
Finance Risk
High 1.4 High 1.3 Medium 1.6
Medium 1.2 Medium 1.1 Medium 1.5
1.4 High 1.4 Medium 1.4
High High Medium
contractors more than one year to construct, long- and mid-
term loans satisfy the financial requirements. The participat-
ing contractors believe that loan facilities are very suitable,
effective, reasonable in finance charges, and moderate in the
risk involved.
Overdraft Accounts
An overdraft allows contractors to borrow money through their
bank accounts based on a loan arrangement under which the
bank extends credit up to a maximum amount (called the over-
draft limit) against a current (checking) account through which
the contractor can write checks or make withdrawals. It is
simply an extension of credit from a lending institution when
an account reaches zero. It is, however, a demand loan; the
facility can be canceled and the entire outstanding amount may
be called at any time by the lender at its discretion, without any
warning or explanation. This type of banking facility is used
only for emergencies or short-term borrowing, and contractors
diligently schedule overdraft payments within a short period.
The participating contractors showed that they understand the
risk associated with this type of financing and, hence, only
utilize it, on the average, at a rate of 4.5% of the different
banking facilities. They believe that overdraft facility is appro-
priate because of its effectiveness, low interest charges, and
low risk. It seems that when contractors decide to use this type
of facility, they use extra caution not to exceed the credit limit
and pay the overdraft back on time.
Invoice Financing
Invoice financing is a form of short-term borrowing often used
to improve a company’s working capital and cash flow posi-
tion. Invoice financing allows a contractor to draw money
against its invoices of progress payments before the owner has
actually paid. In order to do this, the contractor borrows a
percentage of the value of its invoice from a bank, effectively
using the unpaid sales invoices as collateral for borrowing. The
participating contractors indicated that invoice financing com-
prises about 18% of the amount of cash they borrow to fund
their operations. It appears that contractors use invoice financ-
ing when owners delay progress payments, which is common.
The participating contractors believe that invoice financing is a
highly effective and highly suitable technique, despite its high
risk and high interest charges.
Shash and Qarra 61

Table 11. Analysis of Banking Facilities

Finance Finance Risk

Suitability Effectiveness Cost Involvement
Percentage of Standard Scale Standard Scale Standard Scale Standard Scale Standard
Banking Facilities Implementation Deviation (1 to 5) Deviation (1 to 5) Deviation (1 to 5) Deviation (1 to 5) Deviation

Loans Long term 11.80 18.8 Medium 1.5 Medium 1.5 Medium 1.3 Medium 1.1
Short term 26.20 34.5 Medium 1.4 Medium 1.2 Medium 1.0 Medium 1.0
Term 6.20 14.2 Medium 1.7 Medium 1.5 Medium 1.6 Medium 1.4
Overdraft accounts 4.60 6.0 Medium 1.2 Medium 1.3 Low 1.4 Low 1.2
Invoice financing 18.20 20.4 High 1.0 High 1.3 High 0.9 High 1.6
Bonds Bid 4.70 6.3 Medium 1.2 Medium 1.5 Medium 1.5 Medium 1.5
Advance 6.10 6.6 High 1.2 High 1.0 High 1.0 Medium 1.5
payment
Performance 4.80 5.4 Medium 1.5 Medium 1.2 Medium 1.4 Low 1.4
Retention 3.90 5.2 Medium 1.4 Medium 1.3 Medium 1.2 Medium 1.3
Letters of credit 11.40 13.2 High 0.9 High 0.9 High 0.8 Medium 1.3
Hire purchase/ 2.10 4.3 Medium 1.2 Medium 1.1 Medium 1.0 Medium 1.1
leasing
Total/average 100% – Medium Medium Medium High

Bonds Summary and Conclusion

An owner dictates that contractors furnish several types of
bonds to protect the owner, mainly from contractor failure. The
contractors in this study indicated that bonds constitute about
20% of their banking facilities. This is not a surprising amount
of banking finance because of owners’ requirements. Contrac-
tors have no option but to apply to a bank for bid bond, advance
payment bond, performance bond, and/or a retention bond.
Letters of Credit
A letter of credit is a document issued by a bank to guarantee
that a seller will receive payment in full as long as certain
delivery conditions are met. In the event that the contractor is
unable to make payment on the purchase, the bank will cover
the outstanding amount. The participating contractors indicated
that this type of banking facility represents 11.4% of the
obtained facilities. The contractors may use letters of credit
to purchase materials and/or equipment for a project. The con-
tractors find this banking facility highly effective and highly
suitable despite the medium amount of involved risk and high
interest charges.
Hire Purchase Facility
Hire purchase is a contract that a purchaser agrees to pay for
goods in part or a percentage over a number of months. It is
interesting to notice that some contractors in Saudi Arabia use
this facility to buy goods through making installment payments
over time. Under a hire purchase contract, the buyer leases
goods and does not obtain ownership of them until the full
amount of the contract has been paid. It seems that contractors
in Saudi Arabia use the hire purchase facility mostly to buy
vehicles.
This study, to the best knowledge of the authors, is the first to
discuss cash flow management issues in Saudi Arabia.
Although contractors in Saudi Arabia are fully aware of cash
flow into and out of their projects, only 76% of them analyze
their cash flows for better financial management. Even those
contractors who analyze cash flow, focus mainly on how to
temporarily survive rather than have a well-forecasted financial
view. They restrict cash flow analysis for control purposes and
for determining the most suitable financing techniques for the
prospective project. The majority of contractors in Saudi Ara-
bia conduct cash flow forecasting prior to bidding for a project
aiming mostly to set a cash flow baseline (for control purposes)
and to determine the proper financing method. Unfortunately,
more than half of the contractors surveyed do not benefit from
cash flow analysis in determining the amount of deficit and,
consequently, deciding on suitable financial techniques and
estimating the cost of deficit financing. The contractors who
perform no cash flow analysis, and very few of the contractors
who do so, encounter project failures in their annually signed
contract periods because of poor cash flow management and
forecasting.
The majority of contractors in Saudi Arabia receive
advance payments in some or all of their undertaken projects,
with an average value of 15% of the contract price. Owners
redeem the advance payment by deducting an agreed-upon
percentage from progress payments. Retention is applied in
the majority of construction contracts in Saudi Arabia, with an
average of 10% of the contract price. Contractors usually
receive retentions and final payments within 30 days after the
submittal of a retention request accompanied by supporting
documents, including a completion certificate, Zakat certifi-
cate, and certificates showing that the salaries of the contrac-
tors’ staff and laborers have been paid. The majority of the
62
contractors receive monthly progress payments, with delays
attributed to owners’ approval processes for invoiced work
and bureaucracy.
The contractors depend on self-financing techniques,
including retained profit, equity, and trade credit, rather than
bank loans to finance construction projects. The contractors
also use all kinds of banking services, especially those required
by contracts, in running their businesses. These self-financing
and banking services are used to pay for material costs and
labor salaries, equipment, subcontractors, overhead, and mobi-
lization costs. Materials, subcontractors, and labor costs com-
prise the highest portion of a project’s total cost. A significant
percentage of contractors in Saudi Arabia (40%) undergo a
financial failure as a result of poor cash flow management in
at least one of their annual contracts. Delays in advance payment
and/or progress payments and project delays have very severe
effects on cash flow over the duration of a project.
In conclusion, projects in Saudi Arabia are executed
according to the well-established cash flow baseline forecast
of cash inflow and outflow, used for control purposes. Some
owners make advance payments to help contractors start proj-
ects, pay progress payments to contractors on time, and pay
final payments, including retentions, on time. Contractors
apply certain practices to manage their cash outflows and
deficits. They tie their payments to suppliers and subcontrac-
tors to owners’ progress payments and make use of deficits
from either their own accounts and/or from banks. Unfortu-
nately, some contractors, apply poor practices that subject
their companies to bankruptcy situations. Some contractors
use cash from other ongoing projects to finance the activities
of a project with a deficit.
The contractors are advised to improve current cash flow
management practices by implementing detailed forecasting
prior to the bidding stage, and monitoring and updating the
forecasted model continuously over the stages of the project’s
execution. Following are suggestions that may improve the
cash flow process for contractors:
 Study the characteristics of projects under bid and
the contract conditions very thoroughly and ensure
that they are adequate for the contractor’s financial
status.
 Benefit from cash flow analysis in determining the
amount of deficit to decide on the proper financing tech-
nique and, thus, estimate the cost of financing.
 Consider contingency factors while preparing a cash
flow forecasting model. An owner’s payment delay,
project delay, and absences of certain financing sources
should all be accounted for in the forecasting process. In
other words, more “what if” models should be applied
prior to considering the final shape of the cash flow
forecast.
 Control project materials cost, ensure a good relation-
ship with project suppliers, and effectively utilize con-
tractor credit with them.
Project Management Journal 49(5)
 Monitor and control subcontracts and ensure on-time
progress payments.
 Restrict the available cash in a project account to its
construction activities only and refrain from moving
cash from one project to another.
Owners are advised to be prompt in paying contractors’ prog-
ress payments and to reconsider the implementation of reten-
tions in projects, especially in projects where performance and
payments bonds are applied.
Declaration of Conflicting Interests
The author(s) declared no potential conflicts of interest with respect to
the research, authorship, and/or publication of this article.
Funding
The author(s) received no financial support for the research, author-
ship, and/or publication of this article.
References
Akintoye, A., & Fitzgerald, E. (2000). A survey of current cost esti-
mating practices in the UK. Construction Management and Eco-
nomics, 18(2), 161–172.
Al-Barrak, A. (1993). Causes of contractors’ failures in Saudi Arabia,
Arabia (M.Sc. thesis). King Fahd University of Petroleum and
Minerals, Dhahran.
Al-Dulaijan, S. U. (1987). Construction financing in Saudi Arabia
(M.Sc. thesis). King Fahd University of Petroleum and Minerals,
Dhahran.
Boussabaine, A. H., & Elhag, T. (1999). Applying fuzzy techniques to
cash flow analysis. Construction Management and Economics,
17(7), 745–755.
Boussabaine, A. H., & Kaka, A. P. (1998). A neural networks
approach for cost-flow forecasting. Construction Management and
Economics, 16(4), 471–479.
Bromilow, F. J. (1978, March). Multi-project planning and control in
construction authorities. Building Economist, 208–213.
Crundwell, F. (2008). Finance for engineers: Evaluation and funding
of capital projects. London, England: Springer-Verlag.
Cui, Q., Hastak, M., & Halpin, D. (2010, April). System analysis of
project cash flow management strategies. Construction Manage-
ment and Economics, 28, 361–376.
Gatti, S. (2008). Project finance in theory and practice. San Diego,
CA: Academic Press.
Halpin, D. W., & Senior, B. (2009). Financial management and
accounting fundamentals for construction. Hoboken, NJ: John
Wiley & Sons.
Hendrickson, C. (1998). Project management for construction. Pitts-
burgh, PA: Prentice-Hall.
Isidore, L. J., & Back, W. E. (2002). Multiple simulation analysis
for probabilistic cost and schedule integration. ASCE Journal of
Construction Engineering and Management, 128(3), 211–219.
Kaka, A., & Price, A. D. (1991). Net cash flow models: Are they
reliable? Construction Management and Economics, 9(3),
291–308.
Shash and Qarra
Kaka, A., & Price, A. D. (1993). Modeling standard cost commitment
curves for contractors. Construction Management and Economics,
11(4), 271–283.
Kenley, R. (2003). Financing construction. London, England: Spon
Press.
Kenley, R., & Wilson, O. D. (1986). A construction project cash flow
model—An idiographic approach. Construction Management and
Economics, 4(3), 213–232.
Likert, R. (1932). A technique for the measurement of attitudes.
Archives of Psychology, 140, 1–55.
Lipsey, M. (1990). Design sensitivity: Statistical power for experi-
mental research. Thousand Oaks, CA: Sage Publications.
Miskawi, A. (1989). An S-curve equation for project control. Con-
struction Management and Economics, 7(2), 115–124.
Mutti, C. D. N., & Hughes, W. (2002, September 2–4). Cash flow
management in construction firms. In D. J. Greenwood (Ed.), 18th
annual ARCOM conference: Association of Research in Construc-
tion Management (Vol. 1, pp. 23–32). Northumbria, UK: Univer-
sity of Northumbria.
Navon, R. (1996). Company level cash-flow management. Journal of
Construction Engineering and Management, 122(1), 22–29.
Odeyinka, H. A., Kaka, A., & Morledge, R. (2003, September 3–5). An
evaluation of construction cash flow management approaches in
contracting organizations. In D. J. Greenwood (Ed.), 19th annual
ARCOM conference: Association of Researchers in Construction
Management (Vol. 1, pp. 33–41). Brighton, England: University of
Brighton.
Peer, S. (1982). Application of cost flow forecasting models. Journal
of Construction Division, AACE, 108(2), 226–232.
Purnuş, A., & Bodea, C. (2015). Financial management of the con-
struction projects: A proposed cash flow analysis model at project
portfolio level. Organization, Technology and Management in
Construction International Journal, 7(1) 1217–1227.
63
Ross, A., & Williams, P. (2013). Financial management in construc-
tion contracting. Oxford, England: John Wiley & Sons.
Steffan, B. B. (2008). Essential management accounting: How
to maximise profit and boost financial performance. London,
England & Philadelphia, PA: Kogan Page.
Tarek, Z., & Yaqiong, L. (2014). Cash flow modeling for construction
projects. Engineering, Construction and Architectural Manage-
ment, 21(2), 170–189.
Tucker, S. N. (1986). Formulating construction cash flow curves using
a reliability theory analogy. Construction Management and Eco-
nomics, 4(3), 179–188.
Watson, T., & Noble, P. (2007). Evaluating public relations: A best
practice guide to public relations planning, research and evalua-
tion (2nd ed.). London, England & Philadelphia, PA: Kogan Page.
Yescombe, E. R. (2014). Principles of project finance (2nd ed.).
Kidlington, England: Elsevier Science.
Author Biographies
Dr. Ali A. Shash is a Professor in the Construction Engineering
and Management Department of the College of Environmental
Design at King Fahd University of Petroleum and Minerals
(KFUPM), Dhahran, Saudi Arabia. He is also the director of
the Construction Industry Institute at KFUPM. He can be con-
tacted at aashash@kfupm.edu.sa or aashash854@gmail.com
Abdulaziz Al Qarra is a graduate student at the Construction
Engineering and Management Program, King Fahd University
of Petroleum and Minerals (KFUPM), Dhahran, Saudi Arabia.
He is also a Project Manager in the Project and Development
Services Department, JLL (Jones Lang LaSalle)—MENA,
Saudi Arabia. He can be contacted at asqarra@gmail.com or
Abdulaziz.AlQarra@eu.jll.com