Analysis of Working Capital Requirements for Typical Construction Projects

Construction is an essential part of any country's infrastructure and industrial development. The Indian construction sector is an integral part of the economy and a conduit for a substantial part of India's development investment. Forecasting working capital along with cash requirements is essential for all construction contractors during the tendering stage since cash flow at the beginning of the project is a major cause of construction companies' failure. In the contracting business, construction firms are generally more concerned with short-term financial strategies than the long term ones.

In the construction projects, there is usually a time lag between completion of a portion of work and the receipt of payment from owner of the project and thus execution is not converted into cash instantaneously. Therefore working capital is required to meet the financial requirement in daily operations in the project. Often material suppliers and the equipment renting firm also allow a credit period to the construction company. Thus the credit period allowed by material suppliers and equipment renting firm to the construction company and that allowed by the construction company to the owner of the project are to be considered while calculating working capital requirement of the construction company.

Three different type of typical project has been identified and analysed for the requirement of working capital by considering various factor. It is clearly shows that project need fund from the initial stage to final stage. If the project having mobilization advance that project will be treated as low risk for cash flows, in case if project does not have mobilization advance that project will be treated as moderate or high risk in terms of cash flow.