Modeling early payment discounts and late payment fees with singularity functions Su, Yi; Lucko, Gunnar
Cash flow management is a vital concern of construction contractors. To break its vicious cycle of ‘pay as late as possible, get paid as early as possible’ in which the project participants may engage to their mutual detriment, potential incentives and disincentives that are used in financial transactions should be systematically investigated. Both are time-dependent functions that define a discount or surcharge based on whether a transaction is performed before or after a deadline. They can thus be expressed by so-called singularity functions, which are activated on said cutoff date. The new model expands prior research on cash flows by linking early (prompt) payment discounts – for which a practical nomograph is provided – directly with their counterpart of late payment fees. The values of both can be calculated from the individual financing interest of the participants to assess different scenarios based on their relative time value of money. They thus gain the ability to make financially informed decisions on offering a discount and imposing a fee appropriately, and accepting the discount or incurring a fee, respectively.
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