Cash Flow Forecasting Using Monte Carlo Simulation Method for Building Construction Projects
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Date
2018-06
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AAU
Abstract
Construction industry has the biggest role in the nurturing of country’s development and
prosperity. It gives tremendous basic benefits with the interrelationship with other industries
to the citizens of a country with vast undertakings. Having continual and intensive
transactions, Construction industry also needs plenty amount of finance for the desired
designs of buildings, roads, dams and irrigation projects and the like to transform them into
their physical state and to begin their operations then after. In relation to these huge financial
transactions though, the construction industry suffers the largest rate of insolvency of any
sector of the economy. Many construction companies fail because of poor financial
management, especially inadequate attention to cash flow forecasting. Accordingly, many
have also been trying to forecast cash flows with the help of models through which they can
easily forecast with relative accuracy.
This research has worked on cash flow forecast of a case study building construction project
using Monte Carlo simulation method. The thesis identified and ranked the Systemic cash
flow Risk variables through the intensive Literature Review and structured questionnaires.
Accordingly, the Top ten Systemic Cash flow Risks are found to be Receiving Advance
Payment, Materials and Equipment Shortage, Delay in Receiving Certified Interim Payment
Documents from Consultant, Poor Design & Inaccurate Bid Items, Consultant’s
Instructions/Change Orders, Buying Equipment and Machineries, Retention, Price
Fluctuation, Delays in Payment Issuance from Client, and Inflation in Resources used.
Upon selection of Seven Systemic cash flow risks and Project Specific risks selected only
based on applicability to the case study project, analysis of the project was done to determine
and forecast the probabilistic cash flows using Monte Carlo Simulation Method Tool i.e.
@Risk 7.5. As a result, the thesis revealed that the probabilistic cash flow results have
resembled to the actual cash flow of the case study building. Thus, confirming Monte Carlo
Simulation as a powerful and applicable method for similar and related cases by
incorporating systemic and project specific risks.
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Keywords
Cash Flow, Cash Flow Risks, Construction Finance, Deficit, Forecasting, Monte Carlo Simulation