Cash flow risk management across multiple construction projects using value at risk

Abstract

PURPOSE : Managing cash flow risk across multiple concurrent construction projects presents significant challenges due to inherent uncertainties and complexities, which can jeopardize a company’s financial stability and project success. This research aims to develop a robust and reliable model for effective cash flow prediction and risk management in the construction industry. DESIGN/METHODOLOGY/APPROACH : We propose a novel framework that integrates value at risk (VaR) with simulation-based optimization techniques to quantify and manage the impact of various financial risks on cash flow across multiple projects. This robust predictive method combines theoretical and practical approaches, advancing existing cash flow management practices in construction project management and finance. FINDINGS : The study demonstrates that traditional cash flow management methods often fail to account for the cumulative risks in multi-project environments. Our approach effectively mitigates the adverse effects of financial volatility by providing a probabilistic assessment of potential losses, ensuring alignment of cash flows with established baselines and thereby improving project outcomes and financial resilience. ORIGINALITY/VALUE : This research makes a significant contribution by introducing an innovative method that applies VaR to construction cash flow management for multiple concurrent projects – a novel application in this context. By addressing the major difficulties of quantifying and managing financial risks in complex project portfolios, our approach offers new insights and practical tools for enhancing financial planning, risk management and overall resilience in the construction industry.