CONTRACTOR COSTS OF FACTORING ACCOUNT RECEIVABLES FOR A CONSTRUCTION PROJECT

Literature reveals that approximately 66% of construction project funds are raised from financial institutions. The burden of capital costs on contractors is heavy and financial alternatives for the reduction of capital costs are always desired. The objective of this study is to derive a mathematical way of defining the contractor's costs for factoring account receivables, which is a form of commercial finance whereby a business sells its account receivables at a discount. Factoring can be thus considered as a contractor selling his/her accounts receivable to a factor, a financial institution that provides the services of financing, credit management, and collection. Nevertheless, factoring has far not been used for construction project financing. The relevant literature, empirical practices, and factoring theories from outside the construction industry are all evaluated and the features needed to derive the cost function are explored and integrated. This includes commission costs, expected debt costs, and credit monitoring costs. The case study is utilized and discussed to illustrate the use of factoring for a construction project and its related costs. Under the given assumptions that represent the most common financial conditions in Taiwan, the simulation results show that the contractor's factoring costs without recourse for the construction project make up only 0.8% of the total costs of the examined project which is relatively lower than that of most traditional financing. In addition, the application of factoring has the advantage of facilitating financial management, instantly improving cash flow, enhancement of investment efficiency, avoiding extra loan procedures, improving credit rating, and transfer of financial risk. Factoring is indeed a feasible financial tool for construction projects.