Optimizing Financing Cost in Construction Projects with Fixed Project Duration

Abstract

Although a few studies have considered financing cost in the construction project, no research has been conducted to select the optimal financing alternatives out of those offered by financial institutions. This study presents a model that minimizes financing cost by considering different financing alternatives and a work schedule with normal activity durations. The proposed model creates a cash flow forecast based on a work schedule generated by the critical path method (CPM). The output includes optimized schedules of financing inflow (borrowed money) and outflow (repayments of principal and interest). The proposed model has advantages compared to models developed in previous studies because the contractor: (1) pays less financing cost, (2) avoids extending the project duration and avoids liquidated damages, (3) provides an optimal financing schedule, and (4) reduces the risk of ending up with a work schedule composed of more critical activities. The model has been tested in three cases and sensitivity analysis has been performed.