TREE FORM CLASSIFICATION OF OWNER PAYMENT BEHAVIOUR

Contracting is said to be a high-risk business, and a common cause of business failure is related to cash management. A contractor's financial viability depends heavily on how actual payments from an owner deviate from those defined in the contract. The paper presents a method for contractors to evaluate the punctuality and fullness of owner payments based on historical behaviour. It does this by classifying owners according to their late and incomplete payment practices. A payment profile of an owner, in the form of aging claims submitted by the contractor, is used as a basis for the method's development. Regression trees are constructed based on three predictor variables, namely, the average time to payment following a claim, the total amount ending up being paid within a certain period and the level of variability in claim response times. The Tree package in the publicly available R program is used for building the trees. The analysis is particularly useful for contractors at the pre-tendering stage, when contractors predict the likely payment scenario in an upcoming project. Based on the method, the contractor can decide whether to tender or not tender, or adjust its financial preparations accordingly. The paper is a contribution in risk management applied to claim and dispute resolution practice. It is argued that by contractors having a better understanding of owner payment behaviour, fewer disputes and contractor business failures will occur.