Impact of front-end loading on construction project cash-flows: A mathematical approach for determination of unit prices in bidding

There exists increasing competition in the construction industry, forcing contractors to be more cautious in calculating the mark-up for a project. For most contracts, the percent-markup is limited up to a certain range. In a tight bidding environment, the general tendency is even to "underestimate a project". In such cases, the profit will be even less. The factors affecting the profits of contracts include: quantity of the performed work, unit price of the worked item, markup, overhead costs, and an often neglected item--interest expenses. These interest expenditures are generated due to overdraft, and it will certainly have a negative influence on a project's profitability and can be regarded as loss of profits. Any method which can reduce the interest lost will have a positive impact on the profitability of a project. This research first defines such interest lost and seeks to develop mathematical approaches to explore the ways by which the interest can be reduced. Second, it presents models that depict the relationships between reducing interest and unit price changes under various conditions, providing a useful tool for quantifying the "savings" that result from the use of unit price adjustments. Third, to accommodate different levels of certainty regarding information, linear programming, interval number linear programming and fuzzy linear programming techniques are used in the analysis. In addition, the guidelines for applying these techniques under different situations are developed.