Work

Prevent insolvency in construction projects: A strategic system dynamics model for managing line-of-credit financing

Year: 2026

Type: article

Abstract: • Develops a system dynamics model for strategic LOC financing in construction • Simulates dynamic feedback between LOC policies and project cash flow behavior • Evaluates credit limit, withdrawal threshold, and repayment interval strategies • Integrates performance scoring to identify financially optimal LOC configurations • Enhances contractors’ ability to align cash flow strategy with project objectives Cash flow instability exposes contractors to significant short-term financing risks, often escalating into insolvency when borrowing decisions are made without understanding their dynamic effects on project liquidity. Before relying on bank financing, contractors need tools that reveal how credit limits, repayment terms, and financing costs influence cash-flow behavior under real project conditions. This study presents a System Dynamics framework for analyzing and optimizing Line of Credit (LOC) configurations in construction projects. It supports strategic-level decision-making by evaluating how LOC parameters affect key performance indicators, including profit, project duration, net present value of net cash flow, peak overdraft, and average net cash flow. The framework captures feedback-driven dynamics under volatile conditions and is implemented in Vensim PLE 8.2.1. Using causal loop and stock-flow diagrams, it simulates interactions between financing decisions and cash flow outcomes. A real hospital project (Reinforcement operation, $1.66 million project over 720 days) is used to validate the model and assess policy impacts. Results show that a moderate credit limit increased final profit by $10K, improved average net cash flow by $95K, and reduced peak overdraft by nearly $70K. The model provides an evidence-based decision framework for evaluating LOC strategies, managing financial risks, and improving cash flow resilience.

Source: KSCE Journal of Civil Engineering

DOI: 10.1016/j.kscej.2026.100509

Authors: Mehdi Arbati, Shahin Dabirian, Ali Katebi

Institution: Isfahan University of Art

Language: English

Topic: Working Capital and Financial Performance

Subfield: Accounting

Field: Business, Management and Accounting

Domain: Social Sciences

SDG: Industry, innovation and infrastructure

Open Access status: gold

Estimated APC paid: $1,800