Construction cash flow risk index

Mahmoud, Hasan; Ahmed, Vian; Beheiry, Salwa Article Construction cash flow risk index Journal of Risk and Financial Management Provided in Cooperation with: MDPI – Multidisciplinary Digital Publishing Institute, Basel Suggested Citation: Mahmoud, Hasan; Ahmed, Vian; Beheiry, Salwa (2021) : Construction cash flow risk index, Journal of Risk and Financial Management, ISSN 1911-8074, MDPI, Basel, Vol. 14, Iss. 6, pp. 1-17, https://doi.org/10.3390/jrfm14060269 This Version is available at: https://hdl.handle.net/10419/239684 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ Journal of Risk and Financial Management Article Construction Cash Flow Risk Index Hasan Mahmoud 1,2 , Vian Ahmed 1,2 and Salwa Beheiry 1,2,*   Citation: Mahmoud, Hasan, Vian Ahmed, and Salwa Beheiry. 2021. Construction Cash Flow Risk Index. Journal of Risk and Financial Management 14: 269. https://doi.org/10.3390/jrfm 14060269 Academic Editor: Abderrahim Taamouti Received: 30 March 2021 Accepted: 1 June 2021 Published: 13 June 2021 Publisher’s Note: MDPI stays neutral with regard to jurisdictional claims in published maps and institutional affiliations. Copyright: © 2021 by the authors. Licensee MDPI, Basel, Switzerland. This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license (https:// creativecommons.org/licenses/by/ 4.0/). 1Civil Engineering Department, American University of Sharjah, Sharjah 26666, United Arab Emirates; [email protected] (H.M.); [email protected] (V.A.) 2Industrial Engineering Department, American University of Sharjah, Sharjah 26666, United Arab Emirates *Correspondence: [email protected]; Tel.: +971-6-515-2976 Abstract: As investment increases in capital projects, financial risks increase, and cash flow prediction and control become more paramount. Higher risks could hinder project performance and increase the chances of failure in multiple aspects of a project. While there are models that aim to assess and forecast risks in the construction industry, none present a technique to include the impact of risks on a project’s cash flow. Therefore, cash flow forecasts tend to exceed the actual cash flow of a project due to inaccurate risk assessment. Thus, this paper presents the Cash Flow Risk Index (CFRI) development process quantifying the impact of risks on a project’s cash flow from an owner’s perspective. To that end, the study explored the literature to identify the risk factors that might impact a construction projects’ cash flow and uncovered 44 factors. The study also validated and consolidated these factors to build a CFRI via a Delphi exercise, which reduced the factors from 44 to 36. In further iterations, the 36 factors were also shared with 32 construction industry professionals to rate their relative importance on a five-point Likert scale, from which relative importance index and weights were obtained. As a result, the CFRI was developed to measure the impact of different risk factors on a typical construction project’s cash flow. Keywords: construction risks; Cash Flow Risk Index; Relative Importance Index 1. Introduction The construction industry impacts labor markets and societies in general. Its competitive advantage is therefore important to both global and local economies. As such, there has to be stringent procedures and regulations to ensure the monitoring of the performance of construction projects. A typical construction project starts with the inception of the concept by the project owner, which then translates into designs by a consultant, and finally work by the contractor to execute the project. This multiparty involvement heightens the inherent risks that could jeopardize the performance of a project. These risks typically impact the important time and cost performance parameters of a project. Risks in construction projects typically fluctuate during the various project stages. Initially, risks related to design errors and design synchronization present real safety and performance risks to a project. Such vulnerabilities in a project, at that stage, are generally attributed to project owners/consultants, as the design is generally their duty. Though, during the construction phase of a project, risks that are credited to contractors present more of a threat to a project. Instances of such risks include long lead items procurement and common construction strategies. Moreover, the construction industry is generally unpredictable and one of the first to be influenced by uncertain economic fluctuations. Subsequently, the various risks in the construction industry should be precisely surveyed to expect and alleviate their effects on a project. In their paper, Nguyen and Nguyen (2020) indicated that a more accurate assessment of risks would be a significant factor in project success, increasing the confidence of project developers to invest in the construction industry. In turn, that will nurture the prosperity of the construction industry. Moreover, risks have a significant J. Risk Financial Manag. 2021,14, 269. https://doi.org/10.3390/jrfm14060269 https://www.mdpi.com/journal/jrfm J. Risk Financial Manag. 2021,14, 269 2 of 17 impact on the cost and time performance of a project. The lack of accurate estimation leads to the failure of projects, which is translated into the failure of the construction industry (Van Thuyet et al. 2019). To that end, the construction industry must be able to estimate and forecast the different risks that could impact a project’s performance. Many studies were conducted in the area of risk assessment and estimation; however, none of the previous studies tackled the quantification of risks in a metric that allows the reflection of different risk factors on a project’s cash flow. Therefore, this paper showcases the development of a construction Cash Flow Risk Index (CFRI) that project owners can use to forecast and assess different risks that could impede the performance of their project, allowing for early detection and mitigation. Moreover, this metric also assists contractors in evaluating their existing or potential projects’ risks, as seen by owners and affecting cash flow. This will allow decision-makers to make informed decisions about risk mitigation and investment. As such, this paper will discuss the development of the CFRI throughout the different sections of the paper. In section two of the paper, the literature review that led to the development of the index is discussed. Moreover, in section three of the paper, the methodology of the paper is explained with all of the required steps to build the index properly. However, in section four of this paper, the resultant index is portrayed, and the final outcome of the paper is shown. In sections five and six of the paper, the discussion and the conclusion of the paper are introduced to present the study’s main outcomes along with the limitations and the future aspects of development to the study. 2. Risks and the Construction Industry A risk is generally defined as someone or something that creates or suggests a hazard (Risk 2021). This definition is closely related to the definition of risk in the construction industry. In construction, risk can be defined as the event that, if it occurs, can have an impact on the outcomes of a project. Such a definition can explain that the risk event’s occurrence is the primary factor that controls the event’s severity and outcome (Wang and Yuan 2011). However, the concept of risk could be more tailored to the construction industry as its nature defines different factors that could be attributed to different stakeholders. In the literature, risk in the construction field is usually related to safety risks that could entail losses of property or injury of the human capital (Zhang et al. 2021). However, many risks could impact the performance of a project financially and, in terms of delivery, that could have a much more significant impact than the safety risks. Moreover, Blank and Tarquin (2005) indicated that engineering projects are also sensitive to risks that could have major, and in some cases, devastating, impacts on their performance. To underline the effect of multiple risk factors on a construction project’s cash flow, Lee et al. (2012) developed an evaluation system to build weights for the impacts of risk factors. In their work, they built a system to assess each type of risk based on its frequency and severity. They also focused on the risk factors related to safety but a vital issue to be highlighted was that the employees’ safety on-site could pose a significant risk to project completion and cost performance. Another study that adopted a holistic approach towards the construction industry’s risk factors was conducted by Edwards and Bowen (1998), who suggested that the financial risks are amongst the most significant risks that could occur in a construction project. They also rightly highlighted that a construction project’s financial performance is the essential factor that could determine a project’s outcomes. On the other hand, Strong et al. (2009) explained the difference between the concept of risk and the concepts of uncertainty or random variables. They stated that there is always a chance for a financial loss or adverse outcome, or a financial gain or a positive outcome with risk. Furthermore, they explained that the following two parameters are associated with risk: the consequences of the risk in terms of losses or gains and the probability of this to occur. To further explain and examine this, the authors also showed the difference between the notions of risk analysis and risk assessment. They described that each concept is tied with one of the parameters associated with risk; hence, risk analysis identifies the J. Risk Financial Manag. 2021,14, 269 3 of 17 possible outcomes, while a risk assessment is a process of calculating the probability of these outcomes occurring. Additionally, Kangari and Riggs (1989), developed a linguistic system to assess risk factors in the construction industry. In their research, the authors explained how the risk assessment process can be subjective, and that there is always a need for a linguistic system to measure or assess this risk based on the perception of the decision-maker. This methodology can be beneficial for decision-makers who lack the required experience in the risk assessment field. Another advantage of this methodology is the ability to use decision-making tools such as Topsis and Electre. Similar work was presented by Lam et al. (2001), where the authors proposed a model to combine the qualitative and quantitative data to make better risk allocation in a construction project. The authors also incorporated a fuzzy decision system to assist the decision-maker in making a better-informed decision with the inclusion of the decision-maker’s subjective opinion in linguistic variables. Abd El Razek et al. (2014) showed the risks associated with cost overruns and the measures that construction companies should consider in mitigating them. The author stressed the importance of accurate cash flow forecasts, enabling the contractor to foresee the possible risks and include buffers to mitigate the impact on a project’s cost performance. Nevertheless, Zavadskas and Turskis (Zavadskas and Turskis 2013) suggested that contractor competency is a significant factor in predicting the construction industry risks and contractors should employ their expertise to mitigate such risks. Discussing the risks that may occur in the cash flow of a construction project, Odeyinka et al. (2008) indicated that all projects tend to develop a cash flow forecast at the beginning of the project, using a net cash flow value flow and cost flow approach. However, due to the inherent nature of risk that the construction industry poses, these forecasts are bound to have variations and deviations. The study concluded that 26 significant risk factors affect and create a variation for the cash flow forecast. Some of these risk factors are related to the payment patterns and frequencies, others are related to the subcontractors and suppliers, while others relate to the government’s regulations. There are two central norms when it comes to construction cash flow views. The first norm defines the cash flow as net receivables minus net payables during a project, while the other norm defines the cash flow as the actual movement of money in and out of a project (Wang and Yuan 2011). Moreover, many methods have been used to model the cash flow based on historical data and, with the development of technology, more methods have been found that use computers to conduct simulations and predictions. On the other hand, Odeyinka et al. (2008) showed that among the most common severe risk factors in the construction industry, financial risks are the most influential regarding severe adverse outcomes on a construction project. Another study that tackled similar ideas was conducted by Liu et al. (2017), where the authors proposed a method to consider risk factors in the financial models to alleviate some of the impacts on project delivery. Sato and Hirao (2013) examined the trade-offs between the budgeting issues and the risk factors. They concluded that there should be an integration between the risk management plan and the budgeting plan to ensure that all risk factors are considered and that adequate buffering measures are in place to mitigate the effect or the impact of the risks. A complementary model that could be used was presented by Farooq et al. (2018), where the authors proposed using a model that will quantify the errors in the risk assessments by including a margin of buffer in the budget to ensure the effectiveness of risk mitigation. This model is based on a weighting function that will be able to detect such risk assessment errors. On other hand, Guerra and Sorini (2012) presented a model to integrate uncertainty into financial models by using fuzzy numbers in the model. This can be done by accurately calculating the upper and lower bounds of the membership functions. In his study, Mbachu (2011) investigated the primary sources of risk that exist in construction. The author aimed to investigate the leading risk factor in the construction industry in New Zealand, which is the payment risk, since the implication is that this J. Risk Financial Manag. 2021,14, 269 4 of 17 risk poses considerable threats to the construction industry. The author explained that the payment risk imposes significant danger when it comes to maintaining an adequate cash flow and completing the project. Furthermore, the author attempted to attribute the risk sources to the construction industry parties – namely clients, consultants, contractors, and suppliers. The results indicated that clients are the source of highest risk with a 24% contribution to contractors’ problems. Contractors and subcontractors were also perceived as high sources with 19% and 17% contribution to contractors’ problems, respectively. On the other hand, the consultant risk was considered moderate, and suppliers were considered a low-risk source, and their collective contributions were calculated to be 37% of contractors’ problems. This study is vital to contractors as it allows the project manager to allocate resources adequately to mitigate different sources of risk, which eventually increases the project’s profitability and satisfaction. As an outcome, the author indicated that the proposed methodology is considered to be a useful tool for risk analysis and risk management and response. Furthermore, Mahmoudi et al. (2020) indicated that risks are an inherent part of the construction industry. However, there are ways to mitigate their impact if assessed adequately at the beginning of a project where the contractual relationship or the delivery method can be chosen appropriately to minimize the extent of the impact of the risks in a project. As such, the approach can be of great value to ensure the success of a project or the transfer of liability from the project owner to the contractor and vice versa. Therefore, Table 1below lists the risk factors extracted from the surveyed literature that are attributed to clients. The risk factors below show that all risks attributed to clients are related to the contractual relationship and contract administration. Therefore, it is the client’s responsibility to administer the contract, and to ensure that the contractual relationship is free from all factors that could hinder a project’s cash flow. On the other hand, Table 2shows the risk factors obtained from the literature that are attributed to consultants. All risk factors attributed to consultants are related to their expertise when it comes to design and project supervision. Table 1. Risk factors related to cash flow forecasting attributed to clients. Risk Factor Definition Reference Design changes and Variation This refers to the changes that happen in the initial design that lead to variations and extra work. (Wang and Yuan 2011) Undocumented change orders This pertains to a situation where contractors are concerned with obtaining payment for a work change that has never been issued officially. (Kuo and Lu 2013) Underestimating project complexity This happens while estimating potential risks and error occurrence. (Wang and Yuan 2011) Payment delay Explains a situation where the client delays the release of a certified payment. (Wang and Yuan 2011) Delay in releasing the retention Explains a situation where retention of completed work is not released on time to the contractor. (Wang and Yuan 2011) Client’s insolvency Explains the risk of client bankruptcy and the possibility of complete project stoppage. (Wang and Yuan 2011) Choosing the wrong consultants Awarding the design to unqualified designers. (Kuo and Lu 2013) Legal conflicts Legal disputes during the construction phase among the parties of the contract. (Kuo and Lu 2013) Unplanned bidding process Rushed bidding process with no fairness or professionalism. (Kuo and Lu 2013) Shortage of funds Explains a situation where the client has no funds to release due payments to the contractor. (Zeng et al. 2007) Project schedule-driven (Unrealistic) Owner’s unreasonably imposed tight schedule. (Lee et al. 2012) Client’s improper intervention Explains the intervention of the client in the construction stage and processes. (Lee et al. 2012) Delays in response Explains the client’s delay in obtaining site access and right of way, issuing orders and designs. (Lee et al. 2012) Miscommunication Reworks are caused by misinformation between parties. 17 J. Risk Financial Manag. 2021,14, 269 5 of 17 Table 2. Risk factors related to cash flow forecasting attributed to consultants. Risk Factor Definition Reference Delays in response Explains the consultant’s delay in obtaining site access and right of way, issuing orders and designs. (Lee et al. 2012) Consultant expertise Awarding the design to unqualified designers. (Kuo and Lu 2013) Defective design (incorrect) Measures the cost of reworks that have to be carried out due to mistakes in the design. (Kuo and Lu 2013) Not coordinated design (structural, mechanical, electrical, etc.) Explains the mistakes that happen due to a lack of integration of services within the design. (Kuo and Lu 2013) Ambiguous planning due to project complexity This happens while estimating potential risks and error occurrence. (Wang and Yuan 2011) Errors and omissions in the estimation and scope of works Lack of consistency between bill of quantities, drawings, and specifications. (Kuo and Lu 2013) Frequent changes of design by designers Measures the cost of reworks that have to be carried out due to mistakes in the design. (Kuo and Lu 2013) Delays in response Explains the consultant’s delay in obtaining site access and right of way, issuing orders and designs. (Lee et al. 2012) Consultant expertise Awarding the design to unqualified designers. (Kuo and Lu 2013) Defective design (incorrect) Measures the cost of reworks that have to be carried out due to mistakes in the design. (Kuo and Lu 2013) Not coordinated design (structural, mechanical, electrical, etc.) Explains the mistakes that happen due to a lack of integration of services within the design. (Kuo and Lu 2013) Ambiguous planning due to project complexity It happens while estimating potential risks and error occurrence. (Wang and Yuan 2011) Errors and omissions in the estimation and scope of works Lack of consistency between bill of quantities, drawings, and specifications. (Kuo and Lu 2013) Frequent changes of design by designers Measures the cost of reworks that have to be carried out due to mistakes in design. (Kuo and Lu 2013) As for the risk factors attributed to contractors, Table 3shows that risk factors attributed to contractors are related to technical factors and management factors, and this indicates the important role of the contractor within a project, as their technical expertise is required for solving the technical issues faced at a project site and their management expertise is required to make sure that the project runs on time. Table 4shows the risk factors attributed to external parties, such as market pressure, governmental agencies, or any other party that is not the main stakeholder in a project. These factors could be attributed to one or more contributors and could have an unpredictable impact on a project’s cash flow. Table 3. Risk factors related to cash flow forecasting attributed to contractors. Risk Factor Definition Reference Improper resource planning Increase labor cost; the inefficiency of labor, material, and equipment. (Christoffersen and Gonçalves 2004) Inefficient overhead planning Increase in overheads and management expenses of contractors. (Christoffersen and Gonçalves 2004) Neglect reserve fund strategy Reserved funds for warranty and performance guarantee. (Christoffersen and Gonçalves 2004) Delay in progress Production target slippage. (Wang and Yuan 2011) Improper planning The extent of float in the contract schedule. (Zeng et al. 2007) Failing to manage subcontractors Subcontractor failure and progress delay. (Zeng et al. 2007) Procurement delay Low productivity of labor and equipment. (Lee et al. 2012) Accidents (safety) Difficulty in claiming insurance compensation. (Lee et al. 2012) Inappropriate cash flow management Poor cash flow planning and management that lead to a shortage of funds and delays. (Kuo and Lu 2013) J. Risk Financial Manag. 2021,14, 269 6 of 17 Table 3. Cont. Risk Factor Definition Reference Substandard Work Quality Reworks due to low quality of work. (Kuo and Lu 2013) Faulty construction methodology Explains the reworks that happen due to contractors’ poor experience and lack of knowledge in construction methods. (Zeng et al. 2007) Poor liaison with the local authority Explains the reworks that happen due to contractors’ poor experience and lack of knowledge in government regulations. (Zeng et al. 2007) Subcontractor’s insolvency Explains the risk of subcontractors going bankrupt. (Wang and Yuan 2011) Contractor insolvency Explains the risk of contractors going bankrupt. (Zeng et al. 2007) Legal conflicts Agreeing on interim valuations on site. (Christoffersen and Gonçalves 2004) Table 4. Risk factors related to cash low forecasting attributed to external parties. Risk Factor Definition Reference Force Majeure Acts of God (earthquake, landslide, wind, rain, and flood), war, and political instability. (Zeng et al. 2007;El-Sayegh 2008) Inflation rate increase Sudden changes in prices and increase in the cost of living. (Lee et al. 2012) Exchange rate fluctuation Changes in the exchange rate of the currency. (Lee et al. 2012) Changes in interest rates. Sudden changes in interest rates for funds and bank facilities. (Wang and Yuan 2011) Changes in laws and regulations Explains the changes in the laws and regulations of building codes and governmental entities. (Lee et al. 2012) Culture differences Conflicts arise from the difference in cultures between stakeholders and local protectionism. (Lee et al. 2012;El-Sayegh 2008) Unforeseen site conditions Explains the unexpected site conditions with the subsurface and surface of the site. (Lee et al. 2012) Labor dispute and strike Measures the disputes that arise between laborers and employers and their effect on the project’s progress. (Zeng et al. 2007;El-Sayegh 2008) As such, the above risk factors extracted from the literature were integrated into the development of the measuring index, the CFRI, to assess the impact of the different risk factors from the client’s perspective on a project’s cash flow. While all of the presented methods for risk quantification are functional, each has certain shortcomings. Some models are unable to capture risks that occur in a construction project, some depend on subjective input, which makes it too specific for certain areas or functions, while others do not offer the flexibility or the applicability of tailored models. Therefore, this research developed an integrated Cash Flow Risk Index (CFRI), from an owner’s perspective that captured the risks in a construction project that impact projects’ cash flow. In summary, the study provided the best approach to integrate risk factors in a construction cash flow that is performed using the developed CFRI to test how the inclusion of risk factors into a project’s cash flow will enhance the accuracy of the forecast. 3. Materials and Methods The CFRI is a metric that was created for use by owners/developers to account for risks in the cash flow forecast. This metric was created after exploring the relevant literature and synthesizing the theory considering the risk factors preliminarily deduced from the literature review in Tables 1–4. The first step was to extract the different risk factors from the literature. Therefore, a total of 44 risk factors were identified. The chosen factors were restricted to those explicitly impacting a project’s cash flow. Moreover, the extracted risk factors were placed in four groups depending on the risk factor contributor. The four J. Risk Financial Manag. 2021,14, 269 7 of 17 identified groups were (i) the client-related risks, (ii) the consultant-related risks, (iii) the contractor-related risks, and (iv) the external risks that are out of the control of the three main stakeholders. After identification, the risk factors were validated and consolidated, using feedback from industry experts and the Delphi approach, which was carried out in stage 1. This practice aimed to provide an amalgamated list of risk factors that served as the basis of the next operation in stage 2, where a second iteration of the survey was disseminated to industry practitioners to attain the weight of the different factors and their ranking. The results of the second iteration were the foundation of the CFRI metric to enable project owners to capture the impact of different risk factors that may occur in a project on the cash flow, and to facilitate multiple simulations of cashflow data in later stages of the study. Figure 1below illustrates the process of metric construction. J. Risk Financial Manag. 2021, 14, x FOR PEER REVIEW 7 of 16 practice aimed to provide an amalgamated list of risk factors that served as the basis of the next operation in stage 2, where a second iteration of the survey was disseminated to industry practitioners to attain the weight of the different factors and their ranking. The results of the second iteration were the foundation of the CFRI metric to enable project owners to capture the impact of different risk factors that may occur in a project on the cash flow, and to facilitate multiple simulations of cashflow data in later stages of the study. Figure 1 below illustrates the process of metric construction. 3.1. Stage 1: Risk Factors Confirmations and Consolidation To confirm and consolidate the identified risk factors, a Delphi study was conducted with different risk factors identified from the literature. To capture the full spectrum of possible scenarios, respondents from the different types of stakeholders in the construction industry, were engaged, including clients, consultants, contractors, and governmental agencies. The identified target respondents were the most suitable to reflect the possible risk factors from all perspectives. Figure 1. CFRI development stages. The study was built to accommodate the participants’ responses on multiple iterations to validate and consolidate the risk factors. Table 5 below illustrates the process of the study. The first iteration started with 44 risk factors, which were sent to the participants to confirm whether the factors are applicable or not applicable. The results of the first iteration were shared with a panel of experts, and they were asked to identify the most relevant factors again. The second iteration began with the risk factors identified from the first iteration to be further reduced. The same process was repeated until the risk factors were reduced to the target of 30 factors or until the respondents’ replies plateaued at the same number of factors, following which the study was concluded. Table 5. Delphi study process. Phase Step Process Phase 1: Brainstorming 1 For this phase only, treat experts as individuals, not panels 2 Questionnaire 1: Ask experts to verify the different risk factors and add, if required, any other factors they see fit 3 Consolidate responses from all experts 4 Remove exact duplicates and unify terminology Phase 2: Narrowing down 1 Questionnaire 2: Send consolidated lists to experts for validation 2 Refine final version of consolidated lists 3 For each distinct panel, retain factors selected by over 50% of experts Phase 3: Confirmation 1 Repeat Phase 2 2 Reiterate until panelists reach consensus or consensus plateaus 3 Publish the final list for the panel’s confirmation Figure 1. CFRI development stages. 3.1. Stage 1: Risk Factors Confirmations and Consolidation To confirm and consolidate the identified risk factors, a Delphi study was conducted with different risk factors identified from the literature. To capture the full spectrum of possible scenarios, respondents from the different types of stakeholders in the construction industry, were engaged, including clients, consultants, contractors, and governmental agencies. The identified target respondents were the most suitable to reflect the possible risk factors from all perspectives. The study was built to accommodate the participants’ responses on multiple iterations to validate and consolidate the risk factors. Table 5below illustrates the process of the study. The first iteration started with 44 risk factors, which were sent to the participants to confirm whether the factors are applicable or not applicable. The results of the first iteration were shared with a panel of experts, and they were asked to identify the most relevant factors again. The second iteration began with the risk factors identified from the first iteration to be further reduced. The same process was repeated until the risk factors were reduced to the target of 30 factors or until the respondents’ replies plateaued at the same number of factors, following which the study was concluded. As such, using the Delphi approach for this study enabled the confirmation and reduction in risk factors at the same time, which increased the efficiency of data collection and allowed for individual participants to voice their views. J. Risk Financial Manag. 2021,14, 269 8 of 17 Table 5. Delphi study process. Phase Step Process Phase 1: Brainstorming 1 For this phase only, treat experts as individuals, not panels 2Questionnaire 1: Ask experts to verify the different risk factors and add, if required, any other factors they see fit 3 Consolidate responses from all experts 4 Remove exact duplicates and unify terminology Phase 2: Narrowing down 1 Questionnaire 2: Send consolidated lists to experts for validation 2 Refine final version of consolidated lists 3 For each distinct panel, retain factors selected by over 50% of experts Phase 3: Confirmation 1 Repeat Phase 2 2 Reiterate until panelists reach consensus or consensus plateaus 3 Publish the final list for the panel’s confirmation 3.2. Stage 2: Risk Factors Ranking and Weightage To rank the risk factors that have been identified from stage 1, a survey was developed requesting participants to rate the different risk factors on a five-point Likert Scale. The survey was created electronically and was sent to participants in the construction industry selected from the different types of stakeholders. The survey was comprised of two sections; the first section was an introduction about the study and questions that are used to provide the demographic background of the respondents. In the second part of the survey, respondents were asked to rate the different risk factors on a five-point Likert Scale ranging from “Extremely Important” to “Not Important”. The survey included the factors obtained from stage 1 and was presented in a digital format to ease the collection of responses. 3.3. Cash Flow Performance Index (CFPI) Formulation Applying the results of the first stage to the second stage to obtain each factor’s ranking and weights. The Relative Importance Index (RII) method was used to quantify each risk factor’s rate and importance. The 5-point Likert Scale system allowed the respondents to rate the identified risk factors. The scale started with the highest score (5) for “Extremely Important”, then followed by (4) “Very Important”, (3) “Important”, (2) “Somewhat Important”, and (1) “Not Important”. This scale was used to rate all of the factors on which the basis of the RII was calculated as per Equations (1) and (2), as follows: RII = ΣW A×N(1) ΣW=5n5+4n4+3n3+2n2+1n1(2) where: ΣW : is the sum of the weights of each factor multiplied by the frequency of the answer; A: is the highest criteria score, which in this case is (5). N: is the number of respondents, which is 32 in this study. Obtaining the RII for each risk factor then facilitated the calculations of weight for each factor. The Rank Exponent method was used to calculate the weight of each factor. In this method, the weight of the factors is calculated by dividing the inverse of the rank raised to a power (p) by the sum of all the ranks raised to the same power (p), as illustrated in Equation (3) below (Tah and Carr 2000); and raising the rank inverse to the power (p) will allow a wider separation between the weights, allowing for a more in-depth identification of relative importance, as follows: Wj=n−rj+1p Σn j=1n−rj+1p(3) J. Risk Financial Manag. 2021,14, 269 15 of 17 contractor, with a total weight of 0.0001. Hence, the absence of a reserve fund strategy is not crucial to the cash flow of a project, which could be due to the fact that the contractor should not by any means be the party responsible for financing a project’s progress. This study promotes the inclusion of risk into all aspects of project management as it has a significant impact on a project’s performance. Moreover, in terms of cash flow forecast, it is recommended for the forecast to be conducted at an early stage of concept design to provide a clear idea to the project owner of the possible risks that their project might face. However, an accurate estimation requires a thorough investigation of the possible risk factors to devise a mitigation plan against such risks. The main limitation of this dissertation was the access to data. During the COVID-19 pandemic, access to industry professionals was limited to telecommunications, making it extremely difficult to pitch the project idea and solicit response and data. The main recommendation for future research direction is to develop a risk performance index to track the risk performance and mitigation throughout the project phases that can also provide valuable insight into the project performance. 6. Conclusions The study yielded many interesting findings in the area of cash flow estimation and risk inclusion. While risks are inherent in the nature of the construction industry, their impact on a project’s cash flow cannot be ignored. Moreover, risks can be triggered by different stakeholders in a project and their effect varies depending on the project stage. The risks imposed by project owners are usually related to the finance of a project, while the risks imposed by project consultants tend to be related to the design and technical errors. On the other hand, risks imposed by the contractor tend to be related to the financial aspect of performance as well as the technical aspects of the construction works, but the risk attributed to external parties tend to be manifested on longer durations, hence, having minimal impact on projects due to their shorter durations. Moreover, the study proposed a Cash Flow Risk Index (CFRI) to quantify the risk impact on a project’s cash flow. The development of the CFRI required multiple phases to identify the risk factors from the literature, then conduct a Delphi study to confirm and distill the identified risk factors to the most critical. The Delphi study was carried out over three iterations, resulting in a reduction in the risk factors from 44 to 36 factors. Next, a survey was shared with professionals in the construction industry to rank the factors on a five-point Likert Scale, which resulted in a ranking of all of the factors that identified the design-related factors as the most critical. The CFRI included the consolidated risk factors, and the resultant weighted ranking. Furthermore, it was concluded that risks are inherent in the nature of the construction industry. Therefore, their impact on a project’s cash flow cannot be ignored. Moreover, risks can be imposed by different stakeholders in the construction industry. However, their impacts vary depending on the project stage. With the various stakeholders in a project, risks imposed can vary. Risks imposed by project owners are usually related to the finance of a project. On the other hand, risks imposed by project consultants tend to be related to the design and technical errors, risks imposed by the contractor tend to be related to the financial aspect of performance as well as the technical aspects of the construction works, and risks attributed to external parties tend to be manifested on longer durations. Hence, they have a minimal impact on projects due to their shorter durations. Ultimately, the CFRI can be considered an important tool that aids in quantifying the impact of risks on a construction project’s cash flow and increasing the accuracy of the cash flow forecast. The study’s contribution to the body of knowledge is the creation of the CFRI, the validation of the index, the collection of data with analysis, and the underlying theory of formulating an index that enables a better prediction accuracy. J. Risk Financial Manag. 2021,14, 269 16 of 17 Author Contributions: H.M., V.A., and S.B. had an equal contribution in the conceptualization, formal analysis, data collection, and writing. All authors have read and agreed to the published version of the manuscript. Funding: This research received no external funding. Data Availability Statement: The data presented in this study are available on request from the corresponding author. The data are not publicly available to protect the privacy of all participants in the study. Acknowledgments: The authors would like to acknowledge the assistance of all participants in collecting data and the support of the American University of Sharjah. 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