Assessing the Capabilities of Contractors in Monitoring and Controlling Construction Cash Flow in Nigeria

Assessing the Capabilities of Contractors in Monitoring and Controlling Construction Cash Flow in Nigeria

ABSTRACT

The construction sector experiences the highest number of bankruptcies compared to any sector of the economy, with many companies failing because of poor cash flow management. This study assessed the capabilities of Nigeria contracting firms in monitoring and controlling of construction cash flow. Quantitative approach was used to administered questionnaire survey to 246 contracting firms involved in building and civil engineering works in Nigeria. A total number of 112 questionnaires were filled and returned and the results were analysed using the arithmetic mean values and ranking of variables in Statistical Package for Social Sciences (SPSS). Essentially, the survey evaluates the extent of usage of some identified construction cash flow monitoring and controlling key practices. The findings show that; the Nigerian construction sector is currently at a low capability level and usage of the key practices in construction cash flow monitoring and controlling, the large size firms have high capability level and usage of the key practices in construction cash flow monitoring and controlling. Medium and small size firms which are the predominant category of firms in the construction sector in Nigeria have low capability level and usage of the key practices in construction cash flow monitoring and controlling and in dire need for improvement. The research work recommends that; for an effective cash flow monitoring and controlling practice, an assessment frame work should be developed by the contractors for use in contract administration, continuous education and training of the entire staff responsible for cash flow management through workshops and seminars in order to improve their skills in cash flow management and Contractors should involve the Quantity Surveyors, who are disciplined as cost managers to be responsible and accountable for cash flow management.

TABLE OF CONTENTS

Contents Pages
Cover Page – – – – – – – – – i
Tittle Page – – – – – – – – – ii
Declaration – – – – – – – – – iii
Certification – – – – – – – – – iv
Dedication – – – – – – – – – v
Acknowledgement – – – – – – – – vi
Abstract – – – – – – – – vii
Table of Contents – – – – – – – – viii
List of Tables – – – – – – – – x
List of Figures – – – – – – – – – xi
List of Appendices – – – – – – – – xii

CHAPTER 1: INTRODUCTION

1.1 Background to the Study – – – – – 1
1.2 Statement of Research Problem – – – – 4
1.3 Justification for the Study – – – – – 4
1.4 Aim and Objectives – – – – – – 5
1.5 Scope and Limitations – – – – – 6

CHAPTER 2: LITERATURE REVIEW

2.1 Theoretical Framework – – – – – 7
2.2 Cash Flow Management – – – – – 7
2.2.1 The element of cash flow management – – – 9
2.3 Key Best Practices in Cash Flow Management – – 10
2.3.1 Cash flow planning – – – – – – 10
2.3.2 Cash flow forecasting – – – – – 11
2.4 Key Best Practices in Cash Flow Monitoring and Controlling 22
2.4.1 General principles (knowing) – – – – – 23
2.4.1.2 Purposes of organisational cash flow monitoring and
controlling – – – – – – – 25
2.5 Practical Application (Doing) – – – – 27
2.5.1 The key best practices in cash flow monitoring
and controlling – – – – – – 27
2.6 Practical Considerations (Doing/Advising) – – 50
2.6.1 Items for consideration when analysing cash flow monitoring
and controlling – – – – – – 51
2.6.2 General Consideration – – – – – – 52
2.7 Organisational Portfolio of Project Cash Flows – – 55
2.8 Cash Flow and Construction Company Failure – – 55
2.8.1 Causes of construction company failure – – – – 57
2.8.2 The rates of failure – – – – – – 59
2.9 Capability – – – – – – – 60
2.9.1 Business capability – – – – – – 60
2.9.2 Organisational capability – – – – – – 61

2.10 Review of Related Studies – – – – – 63

2.10.1 Author’s on cash flow forecasting (CFF) – – – 63

2.10.2 Author’s on cash flow management (CFM)- – – 65

CHAPTER 3: RESEARCH METHOD

3.1 Research Design – – – – – – 68
3.2 Study Area – – – – – – 69
3.3 Population Sampling and Sample Technique – – – 69
3.3.1 Population – – – – – – – 69
3.3.2 Sampling size – – – – – – – 69
3.4 Data Collection – – – – – – – 69
3.4.1 Data collection instrument – – – – – 70
3.4.1.1 Literature review – – – – – – – 70
3.5 Data Analysis – – – – – – – 71

CHAPTER 4: DATA PRESENTATION AND DISCUSSION OF RESULTS

4.1 Introduction – – – – – – – 76

4.2 Characteristics of Respondents – – – – 72

4.3 Characteristics of Surveyed Organisations – – – 75

4.4 Assessments of the Results – – – – – 76

4.4.1 Assessment criteria – – – – – – 76

4.4.1.1 The Understanding and Knowledge of CFMC Principles – 77

CHAPTER 5: SUMMARY, CONCLUSIONS AND RECOMMENDATIONS

5.1 Summary of Findings – – – – – – 82
5.2 Conclusion – – – – – – – 82
5.3 Recommendations – – – – – – 83
5.4 Recommended Area for Further Studies – – — 84
5.5 Contribution to Knowledge – – – – – 84
REFERENCES – – – – – – – – 85

CHAPTER ONE

1.0 INTRODUCTION

1.1 Background to the Study

Cash flow is a series of income and expenditure over the life of an investment or project. The difference between the income (revenue) and expenditure (disbursement) at any point of time is term as net cash flow which could be either positive or negative (Hoseini, Andalib and Gatmiri, 2015). A negative net cash flow means disbursements are exceeding income which is a usual situation on even a highly profitable project during the greater part of its duration (Al-Mohsin, Alnuaimi and Al-Tobi, 2014). A positive cash flow is ultimately needed to generate profits, to pay employees’ salaries and wages, taxes and servicing interest on borrow funds, materials, plant, subcontractors’ accounts rendered and overheads expended during the progress of the contract (Odeyinka, Kaka and Morledge, 2003). The main factors affecting cash flow in a construction project is the widespread practice of delay and underpayment by the clients, inaccurate Cash Flow Forecasts (CFF) and lack of efficiencies in monitoring and controlling of construction cash flow (Hoseini, Andalib and Gatmiri, 2015).

Cash flow management is a general process of planning, forecasting, manipulating and controlling of cash flows either at the project or corporate level (Ross and Williams, 2013). Cash flow monitoring and controlling entails adequate planning of fund utilisations, efficient monitoring of budget implementation and effective evaluation of results (Richter and Cantoria, 2011).

Construction sector recorded high rate of business failure globally with 20.1% and more than 80% of these failure were attributed to lack of financial control (Emidafe, 2015). The Nigerian construction sector which contributes about 70% of the country’s gross domestic product (GDP) is one of the highest employer of labour, labour cost are indeed a huge outlay for the contractors due to volume of manpower required to execute and delivered construction projects. Poor cash flow management can result in; financial improprieties, failure of the projects and business bankruptcy (Chukwudi and Tobechukwu, 2014). Contractors operating in developing countries including Nigeria were hugely affected by unprecedented financial difficulties in the wake of dwindling economy. These difficulties are compounded by the time lag between contractor’s expenses and payment collection, which impact negatively on the contractor’s cash flow and in many cases result in failure of a project and business insolvency (Emidafe, 2015).

In an attempt to mitigate or alleviate the excessive rate of business failure within the construction sector, several researches were carried out to improve cash flow management of construction projects. And some of these researchers are; Mutti and Hughes (2002) explored the cash flow issues associated with company failures. The study revealed how cash flows are managed by various construction firms at the project level in United Kingdom (UK).

Odeyinka, Kaka and Morledge (2003) identified and examined the various approaches in resolving deficit cash flow. The study concluded that the Nigerian construction industry has not embraced the use of developed software to aid cash flow forecasting.

Odeyinka, Lowe and Kaka (2008) identified and assessed the extent of occurrence and impact of risk factors responsible for the variation between the forecast and actual construction cash flow. Aomar and Bashir (2012) investigated the negative cash flow trends, patterns and their impact on construction performance in various contracting organisations in United Arab Emirate (UBE) and the study revealed how contractors can efficiently and effectively plan cash inflows in all phases of projects to ensure a successful and profitable project. Kim and Grobler (2013) produced a prototype demonstrating how automated Cash Flow Forecasting (CFF) is possible based on the information from a Building Information Modelling (BIM) which is useful for business development strategies.

Hoseini, Andalib and Gatmiri (2015) developed a new stochastic simulation-based framework for forecasting construction projects cash flow at the tender stage, considering the effect of late payments from clients. Purnus and Bodea (2015) developed Cash Flow Analysis Model, which can be applied by the contractors at the Project portfolio level to avoid high financial exposure and loses during the construction phase.

In Nigeria, Famakin (2010) assessed forecasting techniques used by contractors. The study identified the primary issues in cash flow forecasting process and the most widely used forecasting techniques by Nigerian contractors. Aliyu (2012) investigated the application of cash flow forecasting models by Nigerian construction consultants (clients). The study revealed that the usages of CFF models by the consultants in the sector were on the average and in dire need for improvement. AbdulRazaq, Ibrahim and Ibrahim (2013) investigated cash flow forecasting practices by construction contractors in Nigeria. The study revealed that the practice of cash flow forecasting by contractors in Nigeria was not consistent or not in conformity with existing literature and there is need for improvement. Abdullahi (2014) assessed the capabilities of Nigerian contracting firms in CFF processes. The study revealed that the sector has high capability level in CFF processes but weak in term of advisory and management capabilities.

It is possible to mitigate the rate of failure in construction sector, since, the major causes are known. Cunningham (2013) reported that planning, forecasting, monitoring and controlling cash flow is a vital aspect of operating a successful construction business.

1.2 Statement of the Problem

The capabilities of Nigerian contractors in planning and forecasting construction cash flow have been explored in literature but this is not sufficient enough to understand cash flow. The capabilities of these contractors in monitoring and controlling construction cash flow have not been investigated and should be closely examined to shed more light on the Cash Flow Management (CFM) issues, hence the need for the study.

1.3 Justification for the Study

Contractors operating in developing countries including Nigeria were hugely affected by unprecedented financial difficulties in the wake of the dwindling economy. These difficulties are compounded by the widespread practice of delay and underpayments by the clients which impacts negatively on the Contractors cash flow resulting in CFM issues (Emidafe, 2015; Hoseini et al., 2015).

However, the inability of many construction firms to effectively and efficiently monitor and control cash flow forecasts (Ansah and Agyei, 2012; Tom and Paul, 2013; Abdullahi, 2014; Purnus and Bodea, 2015; Usman, Sani and Tukur, 2016). The capabilities of these contractors in monitoring and controlling construction cash flow need to be closely investigated.

1.4 Aim and Objectives

1.4.1 Aim

The aim of this research is to assess and evaluate the cash flow monitoring and controlling capabilities of construction Contractors in Nigeria.

1.4.2 Objectives

The specific research objectives are to:

i. Identify Cash Flow Monitoring and Controlling (CFMC) best practices in construction.

ii. Assess the knowledge capabilities of contracting firms in CFMC.

Iii Assess the practical capabilities of contracting firms in CFMC.

iv. Assess the advisory capabilities of contracting firms in CFMC.

1.5 Scope and Limitations

1.5.1 Scope

The emphasis of this research work is on assessing the capabilities of Nigerian contracting firms in construction cash flow monitoring and controlling. The research work covered contractors operating in Abuja, Kaduna and Niger. Different categories of contractors of small, medium and large size firms as categorised by the Corporate Affairs Commission (CAC) of Nigeria were considered in the study.

1.5.2 Limitations

Difficulties in accessing some of these contractors due to their tight schedules and attitude of some of their employees. Furthermore, the researcher did not have control over the possible subjectivity of the information supplied by the respondents.

References

Abdullahi, M. (2014). Assessing Contractors’ Cash Flow Forecasting Process Capabilities in Nigeria (Unpublished Master’s Thesis). Ahmadu Bello University, Zaria.

AbdulRazaq, M., Ibrahim, Y.M., and Ibrahim, A.D. (2013). Investigating the Practice of Cash Flow Forecasting by Contractors in Nigeria. 4th West Africa Built Environment Research (WABER), Conference, 47 – 54.

Ali, H. E.M., Al-Sulaihi, I.A., and Al-Gahtani, K.S. (2013). Indicators for Measuring Performance of Building Construction Companies in Kingdom of Saudi Arabia. Journal of King Saud University – Engineering Sciences, 25(2), 125-134.

Aliyu, F. A. (2012). Investigating the Application of Cash Flow Forecasting Models by Clients in the Construction Industry (Unpublished Bachelor’s Degree Project). Ahmadu Bello University, Zaria.

Aomar, R., Al-Joburi, K.I., and Bahri, M.E. (2012). Analysing the Impact of Negative Cash Flow on Construction Performance in the Dubai Area. Journal of Management in Engineering, 28(4), 1 – 12.

Ansah, S.K., and Agyei, E.B. (2012). Effectiveness of Monitoring Systems for Controlling Cash Flows in the Construction Industry. Department of Building Technology, Cape Cost Polytechnic, Ghana. Construction Papers,85 – 96.

Al-Tabtabi, H., and Diekmann, J.E. (2006). Judgemental Forecasting in Construction Projects. Journal of Construction Management and Economics (JCME), 10 (1), 19 – 30.

Attom, B.O. (2012) Cash Management Practices by Micro and Small Organisations in Ghana, Asian Journal of Business and Management Sciences (AJBM), 3(2): 2047 – 2528.