Cash flow risks analysis in the best value procurement system and the traditional low bid system
Yan Steven Guo, Spring 2006
Brief:
In the low bid procurement system, the owners are pricing sensitive. This highly competitive and complex environment often leads to low satisfaction due to cost overruns, budget shortfalls, schedule delays and adversarial relationships between owners and contractors. Also, the price leveraging of contractors decreases profit margins and increases cash flow risk. The low bid price-based system brings high risks to both owners and contractors. Conversely the Best Value Procurement creates a performance-based environment, which increases the efficiency and performance level of the construction industry and outsources construction effectively. Considering two primary threats of a construction company!s financial future: profitability and insufficient cash flow, the author developed a questionnaire to examine the cash flow risks and profitability in the low bid price-based system and in a Best Value Procurement System. After using statistics to analyze the survey data, based on 26 responding surveys, it can be proven that a Best Value Procurement System has a greater ability to minimize cash flow risks for contractors compared the low bid system. The system also brings higher profitability to contractors and creates a "win-win" relationship between the owner and the contractor.