The Integration of Supply Chain Finance in the Construction Industry and Its Influence on the Contractor’s Cash Flow

Abstract

In a traditional construction project, there tends to be a negative cash flow as the contractor might need to pay advance payments to suppliers prior to receiving payment from the owner. If the contractor awaits payment from the owner to pay the suppliers, the project could be delayed. Consequently, contractors resort to financial institutions such as banks to finance their negative overdraft. However, banks typically require collaterals which small and medium enterprises (SMEs) might not be able to provide. Also, banks impose high interest rates, which reduces the contractor’s profitability. This study investigates how the integration of supply chain finance (SCF) tools can influence the cash flow of construction projects. The proposed study compares the traditional financing cycle to an alternative cycle that involves SCF as a means of materials financing. The comparative analysis is conducted by developing two multi-objective optimization models with the aim of maximizing the profit margin and minimizing the negative overdraft. The two models are tested on five hypothetical construction projects. Results of the study indicate that SCF could act as a valuable tool for enhancing the overall health of a contractor’s cash flow.