Development of transparent payment systems

Development of transparent payment systems

DR IBRAHIM MOTAWA (author for correspondence) Lecturer, School of the Built Environment, Heriot Watt University, UK [email protected]

PROF AMMAR KAKA Professor, School of the Built Environment, Heriot Watt University, UK [email protected]

DR CHEE HONG WONG Researcher, School of the Built Environment, Heriot Watt University, UK

Keywords: AHP, pricing systems, payment systems, cash flow

1

Development of transparent payment systems

Abstract Purpose – Several types of pricing and payment systems are used in the construction industry. However, the current practice is failing to utilise the potential of a link between project performance and clients’ satisfaction on one hand and stakeholders’ cash flow on the other. Therefore, a paradigm shift in cash flow research is both timely and necessary. The purpose of this paper is to promote and facilitate the use of appropriate payment systems that satisfy all project members. Design/methodology/approach – The research first investigates how payment systems are being selected, and the drivers for selecting innovative payment systems. A simulation and selection ITsystem is then developed that can be used to facilitate project stakeholders’ satisfaction by selecting the most appropriate payment system for each project member. The proposed system considers alternative payment terms and conditions across the supply chain and in a transparent and negotiated manner. Findings – The outcome should result in planning cash flows that satisfy all team members. The planned cash flow profiles are then used to monitor the implementation of the agreed payment system. Originality/value – The main conclusion of the paper is that appropriate payment systems can act as a performance enabler and the provision of the simulation tool would result in project teams taking a more conscious and rational decision in selecting or designing these systems. Keywords Payments, Cash flow, United Kingdom, Contracts, Construction industry, Project management Paper type Research paper Introduction Over the years, contractors have come up with innovative ways of enhancing cash flow. Some of these ways have been found in more efficient management processes and information systems. Such systems allow contractors to minimise the outstanding balances owed by clients. Some have been found through pricing policies (e.g. unbalancing and front-end loading) or the somewhat unfair procedures such as over-measurement and delaying payments to subcontractors and suppliers. The traditional practice in the construction industry is for the contractor to price the products and services provided based on unit rates and quantities. The contractor is then paid monthly and the value of these payments is determined by agreement between the respective quantity surveyors of the employer and the contractor. Taking a wider supply chain perspective, the conventional payment mechanism places a considerable and unfair strain on particular parties and thus on the overall spirit of team working, partnering and supply chain management, Egan (1998). Despite alternative payment and pricing systems are emerging, the current payment mechanism is failing to utilise the potential of a link between project performance and clients’ satisfaction on one hand and stakeholders’ cash flow on the other. Therefore, a paradigm shift in cash flow research is both timely and necessary. In the UK, some radical proposals regarding contracts and the current practice of producing monthly valuations were proposed, Latham (1993). The government has echoed the above in their application of the Government Public Procurement form of Contract (GC WKS1 Edition 3) which recommends a stage payment chart and milestone payments. Performance-Based contracts are gaining momentum in the US and Europe. The concept of these contracts is to align targets and clients’ satisfaction with payments. The UK Trust and Money model is a radical and new model developed by the M4I. Its concept is very similar to that of the DOE in the US, but it goes further to suggest radical ways for setting up a virtual company consisting of different members of the supply team being seconded from their own companies. Furthermore, as the concept of team integration becomes more practical, the payment mechanism to be adopted should allow for contractors to participate in the design and planning of the project, before a price for the entire project can be estimated or fixed. The pricing system should also ensure that the financial objectives of the project partners are aligned with those of the client. Effective tools are therefore required to assist in the design of such systems and later on in its implementation. This is one of the major aims of this research. 2

The behavioural aspects of project teams are influenced by the degree of involvement of the team members in decision making processes. Deciding on the appropriate payment system considering all team members is a vital decision. This could be improved if each member is able to negotiate to reach the most suitable one. Negotiation is more efficient when all options are still opened. However, the current practice starts by the agreement between the client and the main contractors. The main contractors may then negotiate, based on this agreement, with the other team members. This obviously limits the margin of negotiation and put unfair strain on the other parties, which in turn affects their satisfactions. As a result, the aim of this research is to promote and facilitate the use of appropriate payment systems by developing a simulation and selection model that can be used to facilitate project stakeholder satisfaction. The hypothesis of the study is that the degree of achievement of the projects objectives is influenced by the type of payment system adopted and hence project teams must look at the prioritisation of these objectives when making the choice. Alternative payment terms and conditions will be considered across the supply chain and in a transparent and negotiated manner. The outcome should result in planning cash flows that satisfy all team members. Appropriate payment systems can act as performance enabler and the provision of the decision aid tools would result in project teams taking a more conscious and rational decision in selecting or designing an appropriate payment system. This paper discusses the development of an IT system that helps in designing/selecting appropriate payment systems. Research methodology Figure 1 shows the stages of the adopted methodology for this research and the corresponding research question set for each stage. As this paper focuses mainly on the output of the development stages, therefore, other detailed information about each stage will be only referred to when necessary. The following sections will outline the main features of each stage and how it helped in the development of the proposed system. Insert Figure 1 Stage 1: Define the pricing & payment systems available in the industry It is generally recognised that the traditional construction payment systems (e.g. unit price, lump sum and costplus) are adversely affecting the relationships between client and contractors; client and consultants; contractor and sub-contractor; and contractor and suppliers. Difficulties damaging these relationships such as: delay in payment, over measurement, front-end loading etc., have been documented by the National Specialist Contractor Council survey (Murdoch, 2005). The survey found that average delays of payments were: 63% for 30 to 60 days; 20% for 60 to 90 days; and only 7 % for less than 30 days. In addition to this, retention abuse (70%) and ‘pay when paid’ (74%) are among the highest contractual abuse being reported. Latham (1993) regards this as an issue of ‘trust and money’, which has a negative impact on the construction progress. Clough and Sears (1994) found that cash flow is one of the major causes of failure for small construction firms. In order to avoid negative cash flow the project participants have to manage their working capital by means of overdraft, borrowing from financial institutions or securing other lines of credit. To overcome such failure, alternative payment systems have been suggested by academia and government (e.g. Potts, 1988; Kaka, 2001; Egan, 2002; DTI, 2006). Research related to construction cost estimation and cash flow forecasting recommend best practice guidelines for financial management at the early stages of projects and careful selection of appropriate payment systems, e.g. Kaka, 1994; Fortune and Hinks, 1998; Skitmore, 1998; Kaka and Lewis, 2003. Furthermore, the call for good payment practice in construction reflects the Government’s efforts to improve payment practices across the industry e.g. ‘Trust and Money’ (Latham, 1993), ‘Constructing the Team’ (Latham, 1994), ‘Rethinking Construction’ (Egan, 1998), and ‘Accelerating the Change’ (Egan, 2002). Further efforts include the Department of Trade and Industry’s (DTI) endeavour to amend the Housing Grants, Construction and Regeneration Act 1996 (Construction Act) and Scheme for Construction Contracts Regulations 1988 (England and Wales) to improve payment practices for the construction industry. 3

In this study, the most available building contracts have been investigated to define the most used pricing/payment systems. The study resulted in a matrix which maps out the different forms of building contracts and the alternative payment/pricing options accommodated, as shown in Table 1. As different forms of contracts allow, to a various degree, for different payment systems options, clients together with project teams are faced with a decision on what payment system to adopt for a particular project. In addition, the study proposed a comprehensive list of project objectives (or means for success) to be influenced by the type of payment system being selected, as shown in Table 2. It was also recognised that the characteristics of the construction project and those of the supply chain itself may also influence the choice of the payment system. Insert Table 1 Insert Table 2 Stage 2: Investigate how payment systems are being selected A survey of the industry and current practices has been conducted to investigate how payment systems are being selected and whether these choices are aligned with project objectives. The survey details were published elsewhere (Njie et al 2005). Eight industrial organisations (clients, clients’ advisors/consultants and contractors) were also interviewed. Although the majority of the organisations were still using the “traditional” payment system (unit pricing with interim measurement), the sample contained enough variation to allow for an analysis of other alternative systems (lump sum, stage payment, milestones/agreed drawdown schedule, direct payments to subcontractors, advanced payments, and cost reimbursable). The majority of the organisations interviewed confirmed that the payment system adopted is based on what has been used before and what the client or the contractor (in the case of small or one off client) is familiar with. Indeed some organisations expressed resistance to using alternative payment systems in order to avoid any new risk that needs to be managed. An interesting observation was that some partners in the same organisations were using different payment systems, which suggest that organisations are ready to be flexible and are not acting as champions for any particular system. The main issue that came out of this survey is that there are two fundamental characteristics that distinguish the traditional payment system from others; whether payments are precisely based on actual monthly progress (as in arrears); and whether there is a pre-agreed price for either the whole project or the different activities to be undertaken. Based on these characteristics, the results of the survey indicated that traditional payment systems were perceived to be risk averse, fair, and being the first choice in the majority of forms of contracts. The survey also revealed that there is no systematic process by which a choice of payment system is made. Some alternative systems were perceived to be:  administratively more efficient,  provide cash flow certainty,  requires more planning/designing,  more appropriate for partnered projects, and  provide incentives for progress not to slip. Stage 3: Investigate the drivers and characteristics of innovative payment systems A further investigation has been conducted to develop an understanding of the drivers and characteristics of innovative payment systems and to identify the processes and tools required for promoting their successful implementation. Five case studies were investigated that used innovative pricing and payment systems for partnered projects. The case studies were selected from a list of demonstration projects that are being, or have been, implemented using innovative approaches that satisfy the Constructing Excellence agenda. Although, these systems were used as prescribed in the contracts, clients have been creative in modifying the terms to specifically suit their project requirements. All five contracts allow for reimbursement of the contractor’s actual cost with preagreed profit, payment of incentives and the use of direct payments. In order to ensure availability of funds, a guaranteed maximum price (or agreed maximum price in the case of high uncertainty in the project requirements) was used. The target cost method was used to calculate the gain/pain share outcome of the projects. The openbook approach was also in use in all projects to allow the consultants to be able to review the contractors’ books. 4

Two types of incentive schemes were allowed; the performance incentive scheme (to be paid out when performance targets have been achieved); and the shared saving scheme to distribute the savings/loses made below/above the target cost, as a means of encouraging the partnering team to value engineer the project so as to make cost savings. The incentivisation scheme for a project that does not have a target cost, is only a gain sharing. Two of the case studies provided advance payments and even went further in not demanding the contractors to provide a mobilisation advance guarantee or bond. Furthermore, only one of the case studies deducted retention from the interim payments. The main drivers made these cases opt for alternative and novel payment system were identified; namely, client requirement; cost and time savings; and cost and time certainty. Client’s requirement in the form of leadership influence and commitment has been the major factor. For example, the person-in-charge of the department of one of the case studies is said to have been “the driver for this new arrangement due to his extensive involvement on the UK national Rethinking Construction agenda”. Client objectives in the form of collaborative working, buildability and supply chain management were also deciding factors. Novel payment systems have been used in these cases irrespective of the project characteristics (e.g. nature, type, value, duration and complexity), project team characteristics (e.g. composition and size), or whether the project was a one off or part of a framework agreement (two of the case studies were single, one-off and short-term projects, while the other three were longterm, mainly larger-scale and recurring development schemes). In terms of performance, results in four cases showed that the innovative payment systems have encouraged collaborative working, buildability and supply chain management. Perhaps, the biggest failures are more evident in one of the case studies where there has been lack of trust and understanding between the contractor, the client, and consultants. The common lessons learnt are the recognition that the “open-book approach involves additional consultancy resources or too much paperwork” and that “the entire core team should benefit from the incentive schemes”. The innovative payments systems required an element of design (or planning) at the start, followed by monitoring and assessment during implementation. In conclusion of this initial investigation (Stage 1 to Stage 3), the case for developing a methodology for selecting appropriate payment systems with the supported tools has been substantiated. Stage 4: Identify the methodology for payment systems selection The initial investigation of this research, as described above, clearly demonstrated that payment systems can play a major role in enabling collaborative environments and hence performance. Whilst all alternative systems can be applied to different sizes and types of projects, results showed that an appropriate payment system should align remuneration of the core project supply chain with performance and clients’ requirements. Furthermore, if truly integrated teams (through partnering or otherwise) are to be set, the pricing mechanism to be adopted should allow for contractors to be awarded contracts, and hence participate in the design and planning for the project, before a price for the entire project can be estimated or fixed. The pricing system should also ensure that the financial objectives of the project partners are aligned with those of the client. The novel payment systems adopted in the investigated demonstration projects proved to be successful, but the feedback from the project team indicated that effective tools are required to assist in the “design” of the system and later on in its implementation. This was one of the major contributions of this research. Figure 2 shows the methodology for the selection of appropriate payment systems and the supported tools proposed by this research. It involves first the client, together with the integrated project team agreeing on the main project objectives and their priorities. The project team then select the most appropriate pricing system using the proposed Multi-Criteria Decision Making (MCDM) Tool. They would then work out the details of the pricing system to be used (e.g. the incentives and the sharing mechanism). Once a pricing system is agreed, the attention moves to the payment mechanism and by using the developed simulator. The project team can define the payment terms in such a way that the resultant cash flow profiles for the individual project team organisations are examined and agreed. It is expected that alternative payment terms and conditions are considered here across the supply chain and in a transparent and negotiated manner. The outcome should result in planning cash flows that satisfy all team members. The planned cash flow profiles are then used to monitor the implementation of the agreed payment system. Insert Figure 2 5

Stage 5: System Development The developed system has two tools to support the adopted methodology. In the order these tools will be used, they are the MCDM tool and the cash flow simulator. The following sections will demonstrate how these tools support the system functions and what results are expected. The Multi-criteria Decision Making (MCDM) tool The MCDM helps individuals and organisations to articulate the values, objectives and priorities during a decision making process. Therefore, MCDM involves intuitive judgments, individuals’ experience and behaviours of a decision-maker. Values and judgments vary between individuals and complex decision making is often associated with many direct and indirect factors. Traditional decision making methods tend to model the issues which can be captured at the surface of the problem, whereas MCDM techniques enable greater depths to be explored. In the case of pricing systems, professional judgement is vital as the decision to adopt certain payment mechanism may be taken before having enough details of the project cash flow, which makes the decision highly subjective. The choice of decision criteria, the respective ‘weights’ given to those criteria, and the ‘trade offs’ are essential parts of a judgemental decision environment. MCDM techniques used in construction management include: Analytical Hierarchy Process (AHP), Multiattributes Utility Techniques, Fuzzy techniques, Multivariate Discriminate Analysis, Artificial Neural Network Analysis, Logistic Regression Technique, and Linear Programming Methods. AHP was found most appropriate for the problem in hand where the decision will be based on many subjective factors that assess the preferences of alternative pricing systems. The AHP analysis has been proposed by Saaty (1980; 1996) to improve subjective judgements when individuals and groups are involved in multi-criteria decision problems. It has been applied since widely in marketing, medical, political, social, military, and other disciplines. It is one of the most comprehensive mathematical frameworks for balancing multiple factors (decision criteria) to assist individuals or groups decision-making. Belton and Stewart (2002) explained that the use of MCDM follows a value function method where a hierarchical decision value is constructed to assess the performance of each alternative (e.g. alternative pricing systems) against individual criteria (e.g. project objectives) together with the assessment of preferences for each criterion to obtain the overall decision maker’s preference. According to Saaty and Vargas (1991), human preferences and behaviours can be explained in terms of relative comparison expressed in the form of ratios. The use of ratio scales for assigning weights to measure qualitative attributes is relatively easy. Although AHP is a mathematically based technique for multi-criteria analysis, it is able to evaluate a complex MCDM using both tangible and intangible attributes. AHP uses a hierarchy structure to model the MCDM process which begins with the prioritisation of the MCDM attributes by means of pair-wise comparisons. The advantage of paired comparisons method is that it allows decision makers to concentrate on comparing two attributes at one time. This enhances the objectivity when making a choice from a range of potential alternatives with defined constraints. To construct the proposed hierarchical structure of the MCDM tool for the proposed system, seventeen project objectives were identified from the empirical survey, as shown in Table 2. Also, a total of five different pricing systems were identified as the most used ones, as shown in Table 3. Admittedly, this is a long list of factors, particularly if pair-wise comparisons are to be pursued. Therefore, the conducted questionnaires survey of 250 practitioners has helped assess the extent to which each pricing system helps in achieving each of the identified project objectives. The data collected from the survey provided a statistically representative sample that provided the relationship between the pricing systems and the relevant project objectives. The survey, based on five-point Likert scale, has shown that seven out of the seventeen project objectives were confirmed statistically consistent to be most relevant to the choice of pricing systems, as shown in Table 3 – Project Objectives (Refined). Insert Table 3 The pair-wise comparison is then facilitated by assigning each project objective an importance rate on a 9-point scale such that pairs of objectives could be compared for their influence on selecting an appropriate pricing system. In any paired comparisons exercise, there will be significant multiple judgments required. When eliciting such judgments, it is quite common to have redundant comparisons and inconsistencies. Such inconsistent judgments will cause inaccuracy in the AHP results. Saaty (1996) recommends that a value of consistency ratio 6

(CR) less than 0.1 is a tolerable error. That is, a ten percent of the inconsistency (error) from the overall paired comparisons judgments is accepted. In this study, the AHP tool was developed to perform the aforementioned mathematical calculations. The developed AHP tool will run a series of paired comparisons exercises. The first series are between pairs of project objectives to assess the relative importance of these objectives to the project, an example is shown in Figure 3. Another series will be between pairs of pricing systems alternatives for each of the objectives to indicate the extent to which a pricing system enables the achievement of each of the project objectives.. The output highlights (both numerically and graphically) the suitability of each pricing system for the achievement of the overall objectives of the project. The example shown in Figure 4 approves ‘Unit Price’ system as the one that has the overall best score for this run. The tool also checks the consistency of the users’ judgements by calculating the consistency index (i.e. consistency ratio), as shown in Figure 4. If the consistency indexes are reported as more than 0.1, then the user is required to modify his/her judgment until an acceptable consistency rate is achieved. The AHP tool then calculates the overall degree of suitability of each pricing system, where the system with the highest score could be selected. Insert Figure 3 and 4 The Cash Flow Simulator Once the most appropriate pricing system is defined, the developed computer-based simulator is used to analyse and assess alternative payment systems. The simulator is aimed at helping projects’ stakeholders and supply chains to plan their cash flow patterns by considering alternative payment systems. The proposed simulator is therefore novel and superior to existing cash flow models, where the focus has been limited to main contractors only and using traditional payment systems. The simulator enables project teams to address the problematic issues of cash management such as payment delays, disputes and short-term shortages of cash. The simulator also considers the costs of off-site materials and pre-assembled components, which are ever increasing in today’s lean construction and often cause cash shortages for contractors and/or sub-contractors. The development of the simulator is based on modelling four components: “the project process map”, “the stakeholders & supply chain”, “the pricing method” and “the payment system”. The “project process map” defines the products, services, management, design, engineering, and prefab & assembly needed for a project. Many process maps have been developed to represent construction projects. Among the maps known to practitioners in the UK, are the Architect’s Plan of Work and the Generic Process Protocol. Both of these have been adopted in this research. The process map helps the project team to produce a comprehensive cost plan and to simulate the payment profiles for the mapped phases (and sub-phases if needed). The output of the simulator in this stage is the cost flow and cash out profile of the entire project. The “stakeholders & supply chain” component defines the project team, what they will be providing, and the contractual and cash flow arrangements between them. This research explores the cash flow between the partners to a contract. As procurement decisions have been malleable to project situations, then payment mechanisms can similarly be made bespoke to the benefit of project performance and client satisfaction. The “pricing method” defines the way in which each product or service is to be priced, which has been defined by the developed AHP tool. The “payment system” defines how these products and services will be paid (including factors such as payment time lags, retention arrangement, etc.). The research covers the features of the payment system for fixed price contracts, cost reimbursement contracts, and incentive contracts. Different payment conditions within these payment systems are considered, such as: interim payment (e.g. monthly payment), stage payment (when certain milestones are defined for payment), and mobilized advanced payment. The approach adopted to simulate the costs of off-site activities (materials and prefabricated or pre-assembled units) assumes that these costs are considered as a percentage to the total costs of individual activities. The user assigns the time lag between these off-site activities and the corresponding installation into the project. The proposed system allows for the consideration of payments for off-site materials/components in any of the following ways:  Not to be considered at all until they are provided on site 7

 

To be fully considered To be partially considered until they are provided on site, then the remainder is paid.

The output of the simulator is the cash out and payment profiles for each member of the supply chain up to two levels (main contractors/consultant and sub-contractors/consultants), as shown in Figure 5 and 6. The flow of payments can be from the client to the main contractors, from the main contractor to the sub-contractors, and/or directly from the client to the sub-contractors. Based on the payee’s conditions and the resultant cash flow profiles, a cash flow with the desirable payment system can be produced. Testing the cash flow profile against any sensitive data and/or conditions can be implemented by running the what-if analysis tool provided by the simulator, such as changes to the stage payment dates, payment retention, payment delays, partial payments for off-site activities, etc. The simulator helps in comparing different scenarios in order to decide on the most appropriate payment profile that consider payments to all project members. Insert Figure 5 and 6 Stage 6: System Evaluation The system and the supported tools were evaluated during visits and demonstrations to ten construction organizations. During those evaluations the following was achieved:  demonstration of the developed cash flow simulator and collection of feedback to its value, potentials and limitations  demonstration and use of the decision support tool on a case study for each of the organisations. A record of each of these case studies (together with the decisions and scores assigned) was saved for further analysis. Overall, the results of the evaluation stage showed the value of the system and the supporting tools provided. Whilst the general view was that this would ideally be used in a partnered project, construction organisations argued that the simulator could also be used in traditional contracts but by a contractor together with the subcontractors and suppliers. In a team situation, the MCDM could be used as a conduit for people to discuss, learn and develop strategies. It could be applied by the Public Sector clients with professionals where the reasons for a change of view, or the decision on the pricing system chosen, could be supported and demonstrated. In case of projects have any changes as widely acknowledged in today’s projects during their lifecycle, this may affect their objectives and consequently affect the AHP results. For such cases, the developed system can be rerun again in the same sequence shown in Figure 2. The only difference in the new run is that the up-to-date project situations in terms of cash flow and payment profiles will be the starting point for the revised application. Further investigation is still required to identify the best methodology to make changes to the payment systems if the project conditions have changed. A further study is also proposed to investigate how the developed methodology affects the team performance, and how the supported tools can enhance the behaviour of the project integrated team. The most important result achieved during the evaluation phase was that the proposed system, if adopted by the industry, will promote the use of alternative and novel payment systems. This has been confirmed by the statistical relationships used to define the hierarchical structure of the MCDM tool between project objectives and pricing systems, as a result of the survey and the investigated case studies. Conclusions This paper studied the development of an IT system that helps in selecting the most appropriate pricing/payment systems based on the project team preference, then checking the effect of the selected system on the cash flow for each member of the project team. It is always claimed that team integration can improve project performance. The developed system provides a mechanistic and auditable process that will promote the idea of collaborative and integrated construction teams by making the project team across the supply chain decide on the most appropriate payment system in a transparent manner. The outcome should result in planning cash flows that satisfy all team members. The planned cash flow profiles are then used to monitor the implementation of the agreed payment system. 8

The value of this research to the construction industry has been the clear identification of the benefit of applying appropriate innovative payment systems. This will encourage organisations to engage in these mechanisms and hence improve the effectiveness of how projects are managed and executed. The evaluation phase of this research confirmed that the industry appreciated the drivers for using innovative payment systems. It was interesting to note that, in some cases and with hindsight, the choices made for what payment systems to use were altered as a result. Acknowledgements The authors would like to acknowledge the financial support provided by Engineering, Physical Sciences Research Council in the UK to conduct this research. Reference  Belton, V. and Stewart, T.J. (2002), Multiple Criteria Decision Analysis: An Integrated Approach. Kluwer Academic. ISBN/ISSN: 079237505X  Clough, R.H. and Sears, G.A. (1994), Construction contracting, sixth edition. New York: John Wiley & Sons, Inc.  DTI (2006), Improving Payment Practices in the Construction Industry. Published Jointly by the Department of Trade and Industry and the Welsh Assembly Government. [http://www.dti.gov.uk/construction/hgcra/hgcralead.htm]. Last access: April 2006.  Egan, J. (2002), Accelerating the Change. [www.strategicforum.org.uk/pdf/report_sept02.pdf]. ISBN: 1 898672 28 1.  Egan, J. (1998), Rethinking Construction: The report of the Construction Task Force to the Deputy Prime Minister, John Prescott on the scope for improving the quality and efficiency of UK construction. London: Department of the Environment, Transport and the Regions  Fortune, C and Hinks, J. (1998), “Strategic building project price forecasting models in use- paradigm shift postponed”, Journal of Financial Management of Property and Construction, 3(1), 5-25.  Kaka, A. P. (2001), “The case for re-engineering contract payment mechanisms”, In: Akintoye, A (Ed.), 17th Annual ARCOM Conference, 5-7 September 2001, University of Salford. Association of Researchers in Construction Management, 1, 371-9.  Kaka, A. P. (1994), “Contractors' financial budgeting using computer simulation”, Construction Management and Economics, 12(2), 113-124.  Kaka, A. P. and Lewis, J. (2003), “Development of a company-level dynamic cash flow forecasting model (DYCAFF)”, Construction Management and Economics, 21(7), 693-705.  Latham, M. (1993), Trust and Money. Interim report of the Joint Government/Industry Review of Procurement and Contractual arrangements in the United Kingdom Construction Industry. London: HMSO.  Latham, M. (1994), Constructing the Team. Final report of the joint Government / Industry review of procurement and contractual arrangements in the United Kingdom Construction Industry. London: HMSO.  Murdoch, I.J. (2005), State of trade survey: Quarter 2. SBE, Northumbria University. [http://www.nscc.org.uk/index2.htm]. February 2006.  Njie, G., Langford, D., Kaka, A. & Fortune, C. (2005), “Factors affecting the selection of building contract payment systems.” CIB 2005 Helsinki Joint Symposium: Combining Forces - Advancing facilities management and construction through innovation, June 13-16, 2005.  Potts, K F (1988), “An alternative payment system for major 'fast track' construction projects”, Construction Management and Economics, 6(1), 25-33.  Saaty, T.L. (1980), The analytic hierarchy process: planning, priority setting, resource allocation. University of Pennsylvania, Pittsburgh, Pa., xiii, 287. 0962031720.  Saaty, T.L. (1996), Decision Making with Dependence and Feedback: The Analytic Network Process, 1st. RWS Publications, Pittsburgh, Pa., xiv, 370. 0962031798.  Saaty, T.L. and Vargas, L.G. (1991), Prediction, projection, and forecasting: applications of the analytic hierarchy process in economics, finance, politics, games, and sports. Kluwer Academic Publishers, Boston, xi, 251. 0792391047 (alk. paper).  Skitmore, M. (1998), “A method for forecasting owner monthly construction project expenditure flow”, International Journal of Forecasting, 14(1), 17-34. 9

Research Methodology

Research Question

Stage 1 Define the pricing & payment systems available in the industry Literature & Desktop Define project objectives

study

influenced by payment systems

Stage 2 Survey

Main output in Table 1 & 2 Investigate how payment systems are being selected

Interviews (8 organisations) Stage 3

Investigate the drivers and characteristics of innovative

5 Case Studies

payment systems Stage 4 Analysis

of

the

Identify the methodology for

knowledge

payment systems selection

gained from previous stages

Stage 5

System development

AHP technique &

MCDM & Simulation

Cash flow programming Stage 6 Demonstration

Main output in Figure 2

to

10

Main output in Table 3 and Figures 3 : 6 System evaluation

organisations

Figure 1. Research Methodology

10

Define key project objectives MCDM tool Select appropriate Pricing system

Define details of selected Pricing System

Team Negotiation framework

Yes Define payment mechanism Yes

Simulator

Implement & monitor payments

Figure 2. A payment system selection/design methodology and supported tools

Figure 3. Paired comparison between two Project Objectives

11

Consistency ratio

Figure 4. Results for the paired comparisons and consistency index

Figure 5. System output (reports on different payment systems for company C)

12

Figure 6. System output (the cash flow patterns for company C considering off-site Material costs)

13

Table 1 - the most common building contracts with their associated payment systems PFI / PPP

Const’n guarantee funds

Mechanic ’s lien

Trust accounts

Direct payment

Management contracting

Open-book

Advance payment

Incentives

Stage payment systems

Cost reimbursable

Unit-price

Lump-sum

Building contracts

P

P

P

P

P

P

P

P

P

P

P

P

P

P

P

P

P

P

P

P

P

P

P

P

P

P

P

M

P

P

P

P

P

P

P

P

P

S

P

P

√

P

P

P

P

P

P

S

P

P

√

P

P

P

P

P

P

JCT 98 Standard Forms Private or Local Authority 1

with quantities

2

without quantities

3

with appro. quantities

4

with contractor's design

√ √ √ √

GMP

IFC 98 Intermediate Form √

5

with quantities

6

without quantities

7

MTC 98 Measured term

P

P

P

P

P

P

P

P

P

8

MC 98 Man. contract

√

√

P

P

P

√

P

P

P

P

P

9

CM 02 Construction Man.

√

√

P

P

P

P

P

P

P

P

P

PCC 98 Prime Cost

√

P

P

P

P

P

P

P

P

P

S

P

P

P

P

P

P

P

P

P

S

P

P

P

P

P

P

P

P

P

P

P

P

√

P

P

P

P

P

P

P

P

P

P

P

P

P

P

√

√

P

P

P

P

P

P

P

√

√

P

P

P

P

P

P

P

√

√

P

P

P

P

P

P

P

10

√ √

GCWks1 Edition 3 11

with quantities

12

without quantities

√ √

13

DEFCON

√

√

14

NEC

√

√

15

ACA: PPC2000

16

The IChemE Red Book

17

The IChemE Green Book

√ √ AMP

√ √

M

Notes: √: allowed for; P: possible; GMP: guaranteed maximum price; AMP: agreed maximum price M: Milestones

S: Stag

14

Table 2. Project objectives Project Objectives (Decision-making factors for Pricing Systems) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

Accuracy of valuation and payment for works done, Achieving sustainability, Certainty of cash flow forecast, Client's involvement, Cost certainty, Exceeding health and safety requirements, Fairness in payment system, Lean construction-high level of prefabrication/preassembly, Minimized borrowing & capital cost, Opportunity for innovations, Pro-active risk management, Project completion on time, Quality enhancement, Support team work approach, Time certainty, Transparency / openness in payment system, Value for money

Table 3. Refined Project objectives and pricing systems

Pricing Systems 1 2 3 4 5

Lump sum, Unit price, Cost-plus a fixed fee, Cost-plus incentive, and Fee as % of project value Project Objectives (Decision-making factors for Pricing Systems) - Refined

1 2 3 4 5 6 7

Cost certainty, Lean construction- high level of prefabrication/preassembly, Opportunity for innovations, Quality enhancement, Support team work approach, Time certainty, Transparency / openness in payment system