An evaluation of contractors’ satisfaction with payment terms influencing construction cash flow

Journal of Financial Management of Property and Construction Volume 10, Number 3, pp171 - 180, December 2005

Printed in Great Britain

An evaluation of contractors’ satisfaction with payment terms infl uencing construction cash fl ow

HENRY A. ODEYINKADepartment of Quantity Surveying, Obafemi Awolowo University, Ile-Ife, Osun State, Nigeria

AMMAR KAKASchool of the Built Environment, Heriot Watt University, Edinburgh, EH14 4AS, UK

Summary

• Construction cash fl ow models developed in previous researches demonstrated that cash fl ow profi les vary for differing procurement methods. However, the issue of wheth-er contractors are satisfi ed or dissatisfi ed with payment terms impacting cash fl ows in differing procurement methods is yet to be investigated. This is the concern of this study. • The study identifi ed from literature, payment terms potentially thought to impact construction cash fl ow. Using a 6-point Likert-type scale, a questionnaire survey was administered to UK construction contractors in order to assess their level of satis-faction with identifi ed payment terms infl uencing construction cash fl ow. Responses from the survey, which focused on traditional and design and build procurement meth-ods were analysed using mean response analysis and one-way analysis of variance. • Results showed that while contractors were satisfi ed with most of the contractual factors investigated under both procurement systems, they were dissatisfi ed with two of the factors, namely, time lag between entitlement to receive and actually receiving cash payment and percentage of contract sum retained. This dissatisfaction calls for action to consider devising alternative means of dealing with retention and delay payments.

Keywords: cash fl ow, design and build contract, payment term, traditional procurement

Introduction

Construction project cash fl ow is a sub-set of cash fl ow for the organisation. It is the infl ow of cash to the contractor from the client and also the outfl ow of cash to the suppliers, sub-contractors and to direct costs (Kenley, 2003). Cash fl ow management has long been recognised as an important tool and proper cash fl ow management is crucial to the survival of a construction company because cash is the most important resource for its day-to-day activities (Peer, 1982; Singh and Lakanathan, 1992). A proper cash fl ow management is also important as a means to obtain loans, as banks and other money lending institutions are normally much more inclined to lend money to companies that can present periodic cash fl ow forecasts (Navon, 1995).Previous research by Kaka and Dawood (2000) showed that cash fl ow profi les take different shapes

© Glasgow Caledonian University

depending on procurement method employed and con-struction duration. Cash fl ow profi les for traditional, design and build as well as management contracts were investigated under varying construction duration and Kaka and Dawood (2000) concluded that there is a need to consider cash fl ow profi le in determining the type of procurement method to employ on a construc-tion project. Whilst the insight offered by this study is important to the construction industry, it is also of im-portance to examine the satisfaction level of contractors to payment terms under different procurement methods. According to Kenley (2003), the client-oriented fl ow of cash from the client to the contractor generally fl ows in from the client in periodic payments called ‘progress payments’. According to him, building contracts gen-erally provide for such payments for two reasons:• To provide a mechanism whereby the contractor may recover money for work in progress, so that the contr-

© GCU Journal of Financial Management of Property and Construction, 10 (3)

172 H. Odeyinka and A. Kaka

-actor is not funding the project• To restrict these payments to set periods (usu-ally of one month) in order to reduce the amount of administration required by all parties. Cash out fl ows to suppliers, sub-contractors and di-rect costs is very different to cash infl ows from the cli-ent. These payments according to Kenley (2003) fol-lows the disparate contracts and agreements that exist between the contractor on one hand and sub-contrac-tors and contracted suppliers on the other, and also occur on an as required basis as labour and materials are called up and used during the construction of the project. Whilst these cash infl ows and outfl ows are rec-ognised and regulated by the standard forms of build-ing contracts under the traditional and design and build contract, contractors’ level of satisfaction with the pay-ment terms dealing with cash infl ows and outfl ows is yet to be investigated. This is the concern of this study.

An overview of payment terms impacting con-struction cash fl ow

It is common practice in the construction industry for payment of the contract sum to be made by instal-ments, except on the smallest contracts and sub-con-tracts (Murdoch and Hughes, 2000). One of the main purposes of this according to Kenley (2003) is to re-duce the need for the contractor to fund the develop-ment of the project. This is because the total value of each contract forms a large proportion of a contractor’s annual turnover. Payment by instalments according to Murdoch and Hughes (2000) should eliminate the need for the contractor to borrow money pending fi nal pay-ment. According to Kenley (2003), the more common methods of payment by instalment in the construction industry is the monthly or stage payment. According to him, one method that is also becoming common may be described as turnkey, under which a single payment only is provided for at the conclusion of the project. The problems with the fl ow of cash along the chain of recipients had been formally recognised as early as the 1960s when the Banwell Report (1964) noted the im-portance of prompt payments and the need for a proce-dure to secure the proper fl ow of money. Three decades later, Latham (1994) and Egan (1998) echoed similar concerns. A consequence of the chain payment struc-ture is the repercussion of the failure of one party on the other parties. This is true about all actors: the failure of the bank to support the client, the contractor or the sub-contractor or the contractor’s failure to support work. These are examples of situations where all other parties

are affected, each to a various degree ranging from loss of income to a full-blown insolvency. Even in situations where there are no obstacles in the fl ow of cash along the chain, there is often a considerable delay before those at lower levels receive payments (Khosrowshahi, 2000). According to the Institute for Construction Training and Development (1992), payment term is something considered very important because it has an effect on the price and also on the effi ciency of the contractor. According to them, the cardinal principle is that the contractors should not be required to fund the construc-tion; there must be an appropriate fl ow of funds so that the contractor doesn’t have to commit his resources for the funding of the construction. At the same time, the fl ow of funds will not be such in which the contractor would be tempted, having got more than enough, to slow down. According to Abeysekera (2002), two issues of fundamental importance arise regarding payment pro-cedures: (a) the time lag between expenditure and pay-ments, and (b) cash retentions from progress payments. Regarding time lag between expenditure and payments Abeysekera (2002) highlighted the following comment: ‘Clearly, ‘work fi rst and then get paid’ is an age-old practice despite the fact that work is being car-ried out from the very fi rst day. However, to receive payment, a substantial amount of work has to be done. This means contractors must fi nd funds to pur-chase materials, pay wages, settle dues for services rendered, and for a host of other expenditure. This is extremely demanding as well as costly when contrac-tors are short of funds. The reason for all these artifi -cial diffi culties and cost increases are due to the ‘time lag’ between payment and expenditure. It is this rela-tively short ‘time lag’ between expenditure and pay-ment that drive contractors to the brink of collapse especially when it stretches beyond its ‘elastic’ range.’ Regarding retention, Abeysekera (2002) is of the opinion that its practice results in project funds being inadequate to fi nance the working capital required for construction project. According to Hughes et. al. (2000), retentions are widely believed to act as a performance catalyst and a deterrent against defective work. In the UK, such retentions appear to vary from about 3-5% (Murdoch and Hughes, 2000) whilst in New Zealand, it is much greater varying from about 1.75 – 10% with the higher percentages applying for smaller values of work (McLaughlin, 2000). These amounts according to Abeysekera (2002) are substantial especially if contrac-tors’ margins are similar to retention percentage. This implies that contractors would not have suffi cient cash until the project is complete. Since the Latham Report


An evaluation of contractors’ satisfaction with payment terms 173

(1994) there have been numerous calls in the UK to fi nd alternatives to cash retention (Construction News, 1997; Cook, 1997; Klein, 1997 and Latham, 1997). One reason for dissatisfaction with retention funds is the un-certainty that surrounds the status of a sub-contractor’s retention in the event of main contractor’s insolvency (McCartney, 1992). The problem identifi ed here is that if the main contractor goes insolvent during a project, it is very diffi cult for sub-contractors to obtain the funds held by the main contractor as retention, unless spe-cial arrangements have been made (Huxtable, 1992). Different standard forms of building contract under the Joint Contracts Tribunal (JCT) set out contract con-ditions, some of which attempt to regulate cash infl ows into the construction business. These include ‘valuation intervals’, ‘payment method’, ‘time lag between enti-tlement to receive and actually receiving cash payment’ and ‘percentage of contract sum retained’. The standard forms also set out contract conditions, which regulate the way money fl ows out of construction business. Examples of these include ‘time lag between being committed to making a payment to sub-contractors and actually pay-ing’ and ‘time lag between being committed to making a payment to nominated suppliers and actually paying.’ The JCT 98 (2003) states that valuation interval is to be mutually agreed between the contractor and the employer and if none is stated, it is to be one month. The JCT 98 with Contractor’s Design (WCD) states that interim payments shall be made by the employer to the contractor in accordance with clauses 30.1 to 30.4 and whichever of the alternatives A or B in Ap-pendix 2 applies to the contract. Alternative A accord-ing to the contract conditions refers to stage payments and alternative B refers to periodic payments. Ac-cording to JCT 98 WCD (2003), where the employer wishes payment to be made in accordance with a se-ries of stages, Appendix 2 contains a table in which a brief description of each stage is to be inserted. And another column in which the appropriate cumulative value of the stages is to be inserted. According to Chap-pell and Powell-Smith (1999), the cumulative value of the fi nal stage is to be equal to the contract sum. On the other hand, if the employer wishes payment to be made by periodic payments, this must be stated in Ap-pendix 2 and if no period is stated, the period between applications for payment will be one month (JCT 98 WCD, 2003). According to Chappell and Powell-Smith (1999), whichever of the alternatives is adopted, it is the duty of the contractor to apply to the employ-er for payment and he also carries out the valuation. The JCT 98 (2003) gives the time lag between is

suance of interim certifi cate and entitlement to receive cash payment to be 14 days. This payment time lag is the same under the JCT 98 WCD (2003) but with the difference that the 14-day interval is counted from the date of receipt by the employer of the contrac-tor’s application for interim payment. According to Chappell and Powell-Smith (1999), there is no provi-sion in the JCT 98 WCD for the quantity surveyor to value work carried out by the contractor and there is no provision for certifi cation by an architect of money due to the contractor. However, the contractor needs to make application for payment of work properly done. Regarding the issue of percentage of contract sum re-tained, both the JCT 98 (2003) and JCT 98 WCD (2003) made provision for allowance of 5% retention unless a lower rate shall have been agreed. However, whilst the JCT 98 made provision for the use of contractor’s bond in lieu of retention, the JCT 98 WCD has not incorpo-rated such an alternative. Time lag between when work is carried out by sub-contractors and their entitlement to payment is a payment term that seems to impact con-tractor’s cash outfl ow from the construction business. The Nominated sub-contract conditions (NSC/C), known as JCT 98 NSC/C makes provision for the pay-ment time lag to be 17 days from the date of issue of the relevant interim certifi cate. It makes further provision for payment of interest, which is set at 5% over the base rate of the Bank of England, which is current at the date the payment by the contractor became overdue. Whilst the JCT 98 WCD (2003) recognises the appointment of a named sub-contractor, it is however silent on payment time lag for money due to named sub-contractor from the main contractor. However, both forms of contract stipulate that the client has power to pay nominated sub-contractors directly if the contractor fails to pay on time. Moreover, time lag between work carried out by nominated suppliers and entitlement to receiving pay-ment is a payment provision that potentially impacts contractors’ cash outfl ow from the business. The JCT 98 (2003) entitles a contractor to a discount of 5% on all payments if the contractor makes payment in full within 30 days of the end of the month during which delivery is made. Again, the JCT 98 WCD (2003) has no such provision. Whilst all these identifi ed payment provisions have been recognised as potentially impact-ing construction cash fl ow, contractors’ level of satis-faction with the actual payment terms in practice is yet to be investigated. This then is the concern of this study.



Data and methodology

Data were obtained through a questionnaire survey of 350 randomly selected UK based subcontractors, small, medium and large-scale contractors. This was followed by a reminder letter. In all, 100 responses fi t for analy-sis were received, representing a 28.6% response rate which is typical of the norm of 20-30% response rate in most postal questionnaire survey of the construction industry (Akintoye and Fitzgerald, 2000). The ques-tionnaire identifi ed from literature and from discus-sion with industry practitioners, various payment terms thought to impact construction cash fl ow. Contractors were then requested to score on a Likert-type scale of 0-5, their level of satisfaction with payment terms im-pacting cash fl ow forecast. The measuring scale of 0 represents a situation where the contract-related factors are very unsatisfactory whilst the scale of 5 represents extremely satisfi ed. This then gives the measuring scale the property of an interval scale, which enables the col-lected data to be subject to various statistical analyses. The questionnaire elicited information regarding the fi rms’ annual turnover, which enabled their group-ings into very small, small, medium and large fi rms as shown in Table1. It is noteworthy that the very small fi rms function essentially as subcontractors. Informati--on regarding respondents’ designation was also obtai-

-ned and this is summarised in Table 2. From the table, it is obvious that 96% of respondents are in senior man-agement position with computed mean experience of 27.82 years and standard deviation of 9.39 years. This background information regarding the respondents in-dicates that responses provided by them could be relied upon for this study.

Data analysis and results

Data analyses were carried out using the Statistical Package for Social Sciences (SPSS). The analysis deals mainly with the ranking of the variables based on their mean values. This was followed by the Analysis of Variance (ANOVA) to test the null hypothesis that the mean values of the dependent variables are equal for all the sizes of construction companies considered. ASSESSMENT OF CONTRACTORS’ LEVEL OF SATISFACTION WITH PAYMENT TERMS UNDER TRADITIONALLY PROCURED CONTRACT

An analysis was carried out to assess contractors’ level of satisfaction with payment terms thought to impact construction cash fl ow under traditionally procured building contract. From Table 3 which summarises the result of the analysis, it is evident that overall, contrac-

Size Turnover Frequency Percent Cumulative (£ million) percentVery small Up to £5m(subcontractors) 30 30.00 30.00Small 5 - 25 24 24.00 54.00Medium 25 – 100 20 20.00 74.00Large Over 100 26 26.00 100.00Total 100 100.00

Table 1: Surveyed fi rms’ turnover in the last fi nancial year

Table 2: Respondents designation

Respondent CumulativeDesignation Frequency Percent PercentManaging Director 24 24 24.00Director 46 46 70.00Senior Manager 26 26 96.00Manager 4 4 100.00Total 100 100



-tors appear to be satisfi ed with ‘valuation intervals’, ‘time lag between being committed to making a pay-ment to sub-contractors and actually paying’, ‘time lag between being committed to making a payment to nominated suppliers and actually paying’ and ‘payment method’. From a closer look at Table 3, it is evident that contractors were unanimous in the expression of their satisfaction regarding ‘valuation intervals’ and ‘payment method.’ These are payment terms dealing with cash in-fl ows into the construction business and the unanimity of opinion expressed by the contractors is an indication that these payment provisions dealing with cash in-fl ows into construction business are work-ing well. Although, contractors under the traditionally procured contracts expressed satisfaction with ‘time lag between being committed to making a payment to subcontrac-tors and actually paying’ and ‘time lag between being committed to making a payment to nominated suppliers and actually paying,’ opinions among the different cat-egories of contractors were statistically different (p<5), using the F-statistic to test the hypothesis that there is no difference of opinion among the different categories of contractors. These two payment terms deal with cash out-fl ows and the signifi cant difference of opinion sug-gests that the method and approach of dealing with these payment terms vary from one category of fi rm to another. It is evident from Table 3 that whilst ‘time lag between being committed to making a payment to sub-contrac-tors and actually paying ranked 2nd overall, it ranked 1st under the large fi rm,’ it ranked 2nd under the medi-um fi rm, ranked 4th under the small fi rm and 3rd under the subcontractors. Odeyinka et. al. (2003) found that UK construction contractors utilise delayed payment to sub-contractors as one of the strategies to fund defi cit cash fl ow. However, since medium and large fi rms have qualifi ed personnel who are knowledgeable in cash fl ow management, the use of delayed payment to sub-contractors to fund defi cit cash fl ow is not one of their prime strategies to fund defi cit cash fl ow. It is there-fore not surprising that their satisfaction level with time lag between being committed to making a payment to nominated sub-contractors and actually paying ranked higher. On the other hand, it could be inferred that ‘time lag between being committed to making a payment to sub-contractors and actually paying’ as a payment term ranked lower under small fi rms and subcontractors (rank of 4 and 3 respectively) possibly because the payment to be made, being of some signifi cance to them, they may want to use it to improve their cash fl ow position in the short run. As such, it is not surprising that their

satisfaction level ranked lower under this payment term. An analysis based on fi rm size shows that while overall, contractors appear to be satisfi ed with ‘time lag between being committed to making a payment to sub-contrac-tors and actually paying,’ ‘time lag between being com-mitted to making a payment to nominated supplier and actually paying’ and ‘payment method’, subcontrac-tors appear to be dissatisfi ed with these payment terms. This is not a surprise because subcontractors sit at the bottom of a long contractual payment chain. As such, they suffer the most if client delays payment as con-tractors usually pay subcontractors after they get paid. Overall, contractors under traditionally procured con-tracts were dissatisfi ed with ‘time lag between entitle-ment to receive and actually receiving cash payment’ and ‘percentage of contract sum retained.’ Contractors’ dissatisfaction with these twin factors of delayed pay-ment and retention is not a surprise as these are two key issues that are known to be responsible for contrac-tors’ defi cit cash fl ow. According to Abeysekera (2002), given these issues of delayed payment and retention, coupled with the fact that contractors operate at a very low profi t margin, it is diffi cult to expect them to have surplus cash. As such, contractors would be forced to operate with negative cash fl ows, sometimes over the whole duration of a project. Not surprisingly, they turn to banks and other fi nancial institutions (i.e. external sources) to meet such shortfalls when internal sourc-es of funds fail to meet such requirements (Brownie and Harris, 1987 and Hamilton and Fox, 1998). Faced with these negative impacts on contractors’ cash fl ow, it is not surprising that overall; contractors were dis-satisfi ed with delayed payments and retentions. Another analysis based on fi rm size shows that while overall, contractors were dissatisfi ed with ‘time lag between entitlement to receive and actually receiving cash payment’, the large and medium fi rms appear to be satisfi ed. This is a surprise, given the generally held view that delayed payment impacts negatively on con-tractor’s cash fl ow. A possible explanation may be due to the fact that large and medium fi rms have established commercial department with qualifi ed personnel that deal with cash fl ow management. As such, they are ex-pected to have strategies in place for accommodating this delay payment in their cash fl ow calculations and also to have devised means of funding defi cit cash fl ow through other means. Odeyinka et. al., (2003) found that medium and large fi rms prefer to fund their defi cit cash fl ow through company cash reserves, tender unbal-ancing, etc. On the other hand, it is not surprising that small fi rms and contractors are dissatisfi ed with the de



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506



layed payment because their sole means of funding the project is through payment received from interim valu-ations. In many cases, they have to contend with lack of qualifi ed personnel to plan cash fl ow in advance such that the possibility of delayed payment is already an-ticipated. This lack of cash fl ow planning causes undue fi nancial stress to the contractor, which results in hav-ing to fund defi cit cash fl ow through borrowed funds. Further analysis based on fi rm size showed that contractors irrespective of fi rm size are dissatisfi ed with percentage of contract sum retained. This is not surprising because the negative impact of retention on contractor’s cash fl ow has widely been criticised. Since the Latham Report (Latham, 1994), which heav-ily criticised the adverse effect of the use of retention on contractor’s cash fl ow, there have been numerous calls in the UK to fi nd alternatives to cash retention (Cook, 1997; Klein, 1997; Latham, 1997). Again, the fact that the contractor is expected to fund the project while his money is held as retention is not an attrac-tive option among contractors. Further, the length of time the retention sum is held on a contract in which the subcontractor’s work comes early could be un-bearable. Besides, the diffi culty of securing the re-lease of retention in many cases makes it unattractive.Corroborating this view, National Specialist Contrac-tors Council (2003) in one of its quarterly surveys ex-pressed the opinion of one of its members as follows: ‘Our biggest problem is not with interim payments, which are generally paid, in a reasonable timescale. It is with the fi nal payment where the main contractor will try to get us to settle on a fi gure of less than our claim. Retentions are also very diffi cult to obtain without mon-umental effort. In short, we as a company will be shrink-ing in order to lessen our reliance on sub-contract work.’

ASSESSMENT OF CONTRACTORS’ LEVEL OF SATISFACTION WITH PAYMENT TERMS IN DESIGN AND BUILD CONTRACT

Another analysis was carried out to assess contrac-tors’ level of satisfaction with payment terms perceived to impact construction cash fl ow in design and build contract. Table 4 summarises the result of the analy-sis. From the table, it is evident that overall, contrac-tors were unanimous regarding their satisfaction with ‘valuation intervals’, ‘payment method’, ‘time lag be tween being committed to making a payment to nomi-nated sub-contractors and actually paying’, ‘time lag between being committed to making a payment

to nominated suppliers and actually paying’ and ‘pay ment method’. A cursory look at this list indicates that two of the payment terms, namely, ‘valuation intervals’ and ‘payment method’ are payment terms dealing with cash in-fl ows into the construction business. The fact that contractors were unanimous in the expres-sion of their level of satisfaction regarding these pay-ment terms is an indication that they are working well under the design and build contract. This is not a surprise because the JCT 98 with Contractor’s De-sign (WCD) seems to put the contractor in the ‘driv-ing seat’ regarding valuation intervals and payment method. Clause 30.1.1.1 of JCT 98 with Contractor’s Design (WCD) for instance states that interim pay-ments shall be made by the employer to the contrac-tor in accordance with clause 30.1 to 30.4 and which-ever of alternatives A or B in Appendix 2 is applicable to the contract. Alternative A according to the contract conditions refers to stage payments and alternative B refers to periodic payments. According to Chap-pell and Powell-Smith (1999), whichever of the al-ternatives is adopted, it is for the contractor to apply to the employer for payment and he also carries out the valuation. In that regard, as Chappell and Powell-Smith (1999) put it, he is in the driving seat. As such, it is not a surprise that overall, contractors are satis-fi ed with ‘valuation intervals’ and ‘payment method’ under the design and build procurement method. Moreover, a further observation of the list of pay-ment terms (Table 4) which contractors appear to be satisfi ed with overall, indicates that ‘time lag between being committed to making a payment to subcontrac-tors and actually paying’ and ‘time lag between being committed to making a payment to nominated suppli-ers and actually paying’ are payment terms dealing with cash out-fl ows from the construction business. Unlike the situation under the traditionally procured contracts, contractors under the design and build contracts were unanimous in their opinion regarding their satisfac-tion with these payment terms. This is not a surprise because the contractual arrangement under the design and build contract is different from that of traditionally procured contracts. For instance, under the design and build, subcontractors do function as domestic subcon-tractors, making the main contractor to perceive them as an integral part of their construction outfi t. On the other hand, the JCT 98 WCD is silent about the issue of nominated supplier. This may be due to the man-ner in which this is generally interpreted. According to Murdoch and Hughes (2000), a person is only a nomi-nated supplier where the goods or materials to be sup



plied are the subjects of a prime cost sum. This situa-tion obviously does not arise under the JCT 98 WCD. These major differences in the two procurement meth-ods may explain why contractors’ were unanimous in the level of their satisfaction to these two payment terms under the design and build procurement method. Although contractors were unanimous in scoring their level of satisfaction with the afore stated payment terms, the subcontractors only expressed satisfaction with ‘valuation intervals’ but appear dissatisfi ed with all other payment terms. This follows the same trend with subcontractors’ responses under the traditionally procured contracts (Table 3). This is not unexpected because subcontractors under the design and build con-tracts also get paid only when the main contractor is paid, as such, they suffer the most if client delays payment. Moreover, it is evident from Table 4 that overall; contractors irrespective of size as well as subcontrac-tors were dissatisfi ed with ‘time lag between entitle-ment to receive and actually receiving cash payment ’ (delayed payment) as well as ‘percentage of contract sum retained’. This trend is the same with the tradi-tionally procured contracts (Table 3). As such, con-tractors and subcontractors’ dissatisfaction with these twin payment terms of delayed payment and retention is not a surprise. This is because these are twin pay-ment terms that are known to be responsible for con-tractors’ defi cit cash fl ow. Given these twin payment terms, together with the fact that contractors operate at a very low profi t margin, it is diffi cult to expect them to have surplus cash. As such, it is not surpris-ing that overall, contractors as well as subcontractors were dissatisfi ed with delayed payment and retentions. Conclusion

This study has examined contractors’ level of satisfac-tion regarding various payment terms thought to impact construction cash fl ow under both traditionally procured and design and build contracts. The study concludes that overall, contractors seem to be satisfi ed under the two procurement systems with ‘valuation intervals’, ‘time lag between being committed to making payment to nominated sub-contractors and actually paying’, ‘time lag between being committed to making payment to nominated suppliers and actually paying’ and ‘payment method’. Out of these, two payment terms, namely, ‘val-uation intervals’ and ‘payment method’ deal with cash in-fl ow into the construction business whilst the other two payment terms deal with cash out-fl ows from the construction business. However, under the traditionally

procured contract, opinions were signifi cantly different among the different categories of contractors regarding their level of satisfaction with payment terms dealing with cash out-fl ows. This suggests that the method and approach employed in dealing with these payment terms vary signifi cantly from one category of fi rm to another. This is an issue that will benefi t from further research. Under the design and build contract, contractors were unanimous in their opinion regarding their satisfac-tion with ‘valuation intervals’ and ‘payment method’ which are payment terms dealing with cash in-fl ows. This is as expected because the JCT 98 WCD seems to put the contractor in the ‘driving seat’ regarding these payment terms. Unlike the situation under the tradition-ally procured contracts, contractors and irrespective of size were unanimous in their opinion under the design and build contracts regarding their satisfaction with ‘time lag between being committed to making a pay-ment to subcontractors and actually paying’ and ‘time lag between being committed to making a payment to nominated suppliers and actually paying.’ As these are payment terms dealing with cash out-fl ows, this sug-gests that contractors under the design and build pro-curement method seem to have a similar method and approach of dealing with these payment terms. This again is an issue that will benefi t from further research, especially when pitched against the fi nding of Kaka and Dawood (2000) who demonstrated that cash fl ow profi les take different shapes depending on procure-ment method employed and construction duration. Whilst contractors expressed their satisfaction with the afore listed payment terms under both the tradi-tional and design and build contracts, subcontractors expressed their dissatisfaction on all but ‘valuation in-tervals.’ Subcontractors sit at the bottom of a long con-tractual chain and only get paid after contractors are paid. As such, it is not unexpected that they are dissat-isfi ed with these payment terms. Besides, in a related study, Odeyinka et. al. (2003) found that delayed pay-ment to subcontractors and suppliers have been iden-tifi ed as some strategies contractors employ to fund their defi cit cash fl ow. Having to operate under this payment regime, it is not surprising that subcontrac-tors are dissatisfi ed with most of the payment terms. Finally, the study concludes that contractors, irrespec-tive of size as well as subcontractors were unanimous in expressing their dissatisfaction with the twin issues of delayed payment and retentions. These are payment terms that impact cash in-fl ows into construction busi-ness and Abeysekera (2002) has identifi ed them as pay-ment terms responsible for contractors’ defi cit cash fl ow.



Given these twin payment terms as well as the fact that contractors operate at a very low profi t margin, it is dif-fi cult to expect them to have surplus cash. It is therefore not surprising that contractors as well as subcontractors were dissatisfi ed with ‘delayed payment’ and ‘retention’. Recommendations

In view of the fact that contractors and subcontractors are dissatisfi ed with delayed payments and retentions, it is suggested that attention may need to be focused on devising new innovative payment systems that will address these issues. Two of such systems that have been suggested by Abeysekera (2002) are transpar-ent accounting and advanced payment (client fi nanced projects). This obviously is an area that needs further research in order to address this issue of dissatisfaction. In view of the dissatisfaction of the subcontractors to some payment terms that contractors were satisfi ed with, it is also suggested that innovative payment sys-tems be devised that will not put the subcontractor at a disadvantage by putting him at the end of a long pay-ment chain. This is because subcontractors are the small-est and most vulnerable. One such innovative payment system that has been proposed is transparent account-ing. In all, further research still need to be carried out in order to devise more satisfactory payment systems.

Acknowledgements

The authors wish to acknowledge the constructive com-ments of the anonymous referees on the fi rst draft of this paper.

References

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An evaluation of contractors’ satisfaction with payment terms influencing construction cash flow