Engineering, Construction and Architectural Management 2000 7  1, 93 – 103
Assessment of working capital requirements by fuzzy set
theory
V E L L A N K I S . S . K U M A R*, A W A D S . H A N N A† & T E R E S A A D A M S†
*Department of Civil Engineering, University College of Engineering (Autonomous), Osmania University, Hyderabad 500
007, India; †Department of Civil and Environmental Engineering, 2260 Engineering Hall, Madison, WI 53706, USA
Abstract The systematic assessment of working capital
requirement in construction projects deals with the anal-
ysis of various quantitative and qualitative factors in
which information is subjective and based on uncer-
tainty. There exists an inherent difficulty in the classical
approach to evaluate the impact of qualitative factors for
the assessment of working capital requirement. This
paper presents a methodology to incorporate linguistic
variables into workable mathematical propositions for the
assessment of working capital using fuzzy set theory.
INTRODUCTION
Construction projects are generally complex and often
confronted by a number of operations and activities
with varying degrees of uncertainty. From the incep-
tion of the construction project, the project manager is
required to make numerous decisions that will deter-
mine the success or failure of the project both in
accomplishment of physical and in monetary terms.
One such decision is the working capital requirement
for the successful completion of the project.
Conventionally, the first step in the estimation of
working capital is to forecast a total expenditure curve,
which is derived from a composition of constituent
expenditures, such as labour, equipment, maintenance
and material procurement advances. Then, the total
expenditure is superimposed with the anticipated cu-
mulative receipts of revenue, and the difference be-
tween the two curves is the working capital
requirement at any time during the project.
The realistic assessment of working capital in con-
struction projects involves usually quantitative re-
sources such as money, machinery, material and
labour, as well as qualitative features such as fluctuat-
ing market conditions, weather conditions, availability
and quality of materials, variation in material prices,
delay in receipts of revenue, technical problems, and
design changes.
In practice, experienced project engineers evaluate
the working capital requirement based on the past
© 2000 Blackwell Science Ltd
This article takes into consideration the uncertainty asso-
ciated with many of the project resource variables and
these are reflected satisfactorily in the working capital
computations. A case study illustrates the application of
the fuzzy set approach. The results of the case study
demonstrate the superiority of the fuzzy set approach to
classical methods in the assessment of realistic working
capital requirements for construction projects.
Keywords fuzzy relation, fuzzy sets, membership func-
tion, working capital
experience in a similar situation and from cash flow
calculations. In some cases, experience is limited to
certain types of projects. Inexperienced project engi-
neers may overlook qualitative factors when assessing
the working capital requirement. Thus, there is a need
to incorporate qualitative factors in addition to quanti-
tative factors for the realistic assessment of working
capital requirements.
This article presents a methodology for the assess-
ment of working capital requirements by quantifying
the qualitative factors using fuzzy set theory. A case
study is presented to demonstrate the use and practi-
cability of the fuzzy logic approach. In addition, the
approach described in this paper uncovers any gap in
experts’ thinking for optimum utilization of the avail-
able resources.
LITERATURE REVIEW
Management of working capital in the construction
industry is an integral part of overall organization.
Working capital management involves rational deci-
sion making regarding the levels of inventory, receiv-
ables and cash balance to be maintained. In the
construction industry, working capital accounts for
about 60% of total investment.
Van Horne (1984) mentions that gross working
capital is an asset that converts back into cash within
an operating cycle, which is usually less than 1 year.
Major parts of gross working capital is financed by
93
94 Kumar, V.S.S. et al.

current liabilities, which mature for repayment within The working capital requirements on account of the
one operating cycle. He further defines the difference relevant qualitative factors were not assessed so far;
between current assets and current liabilities as the net this can be estimated through the application of fuzzy
working capital, which represents the ownership funds. set theory.
Archer et al. (1983) state the basic principle in working
capital management is minimization of the investment FACTORS AFFECTING WORKING
on current assets without affecting the smooth running CAPITAL REQUIREMENTS
of the organization. The rationale of this minimization
principle is that this investment by itself does not The capital invested in construction projects is the
generate profit, while the investment made on working initial capital for the purchase of material and other
capital has a cost—explicit or implicit. fixed assets plus associated working capital (Pilcher
Several authors emphasize that the maintenance of 1994). Working capital in this context is the require-
ment of the day-to-day finance until the completion of
working capital is intended to meet the current liabili-
the project. The working capital requirements vary
ties promptly to ensure technical solvency of the firm.
from one project to another and from one type unit to
In construction industry, in fact, at any given point of
another type.
time investment on working capital is more than the
In reality, the working capital for construction
investment on fixed assets. At the final stage of con-
projects is also influenced by qualitative factors as
struction, the entire unit can be viewed as inventory to
shown in Fig. 1, in addition to quantitative factors. For
be sold to the owners. If the periodic cash inflows due
realistic assessment of working capital, variabilities of
from an owner do not take place promptly, the need
the qualitative factors have to be considered. For ex-
for working capital will increase for the contractor.
ample, fluctuating market conditions include a length
Similarly, adverse inflationary impact also increases the of time over which credit is allowed and received;
need for working capital. accordingly, the delay in receipts of revenue may con-
Pilcher (1994) suggests that the capital invested on a siderably influence the working capital requirements.
project is normally the initial expenditure for the pur- Similarly, the cost of a construction project relative to
chase of plant and other fixed assets together with the other ongoing projects also affects the amount of work-
associated working capital. He further explains that a ing capital required. The down time that is affected by
qualitative factor, for example fluctuating trading con- labour unrest, season and nonavailability of construc-
ditions, would include a length of time over which tion materials is another important factor that affects
credit is allowed and received; accordingly, the amount the quantum of working capital. In fact, the longer the
of stock or inventory carried influences the working construction period, the greater will be the amount of
capital requirements. working capital with the corresponding cost
Similarly, the cost of the proposed construction pro- implications.
ject along with the projects on hand also affect the The fuzzy logic approach presented here incorpo-
amount of working capital required. The gestation rates qualitative factors in the assessment of working
period, which is affected by labour unrest, season, capital requirements. This methodology prompts the
nonavailability of construction material etc., is another
important factor that affects the quantum of working
capital. In fact, the longer the construction period, the
larger is likely to be the amount of working capital with
its own corresponding cost implications.
Desai (1997) suggests that proper management of
working capital synchronizes the cash receipts and
cash outlay so that a unit may function with cash
reserves.
Ayyub & Haldar (1984) pioneered the use of fuzzy
set theory to evaluate the impact of qualitative factors
on the duration of construction project activities.
However, their study does not consider the effect of
qualitative factors on the working capital requirements
for a construction project. Figure 1 Factors affecting the working capital in construction.

© 2000 Blackwell Science Ltd, Engineering, Construction and Architectural Management 7  1, 93 – 103

project engineer for information regarding each quali-
tative factor. In return, the methodology furnishes the
manager with a realistic working capital requirement
for each interval of the construction project.
FUZZY SET CONCEPT
The fuzzy set concept is founded on the notion that
qualitative expressions usually involve the realm of
human perception, which are subject to a range of
interpretations. Although the values of these expres-
sions are inexact in quality, they are meaningful. Qual-
itative expressions usually consist of linguistic variables
and these are routinely used in construction projects.
These linguistic measures add to the overall uncer-
tainty in the final outcome of any decision process.
A linguistic variable is defined as a variable, the
values of which are expressed in words, phrases or
sentences in a given language (Ayyub & Haldar 1984).
The phrase ‘performance of constructed facility’, for
example, is a linguistic variable that can take the values
of excellent, good or low. The information expressed
in the phrase has a value that is not clearly defined.
The variabilities of the linguistic variables can be rep-
resented as fuzzy sets.
Fuzzy set theory in measuring qualitative criteria
A fuzzy set can be defined as a class of objects with
unclear boundaries in which transition from member-
ship to nonmembership is gradual. Since the transition
from member to nonmember appears gradual rather
than abrupt, the fuzzy set introduces vagueness by
eliminating the sharp boundaries dividing members of
the set from nonmembers (Paek et al. 1993). The
qualitative factors that affect the working requirement
can be quantified by giving membership values to their
variabilities. This membership value is denoted by
mA(x), where x is an element of fuzzy set A. The
membership value mA(x) is the degree of belief with
which an element can be stated to belong to the set.
Therefore the fuzzy set:
A={x, mA (x)}, x A…
Each element, ‘x’, is associated with a membership
value mA(x), to the set A and is a real number. If A is
an ordinary, nonfuzzy, or crisp set, then the member-
ship function is given by:
1 if x belongs to A
mA(x) ={…
0 if x does not belong to A
Assessment of working capital requirements by fuzzy set theory 95
In Equation (2), there are only two possibilities for
an element x, either being a member of A, i.e.,
mA(x)= 1 or not being a member of A, i.e., mA(x)= 0.
In this case, A has sharp boundaries. On the other
hand, if the membership function is allowed to take
values in the interval (0, 1), A is called a fuzzy set
(Lorterapong & Moselhi 1996).
For example, the linguistic variable ‘weather condi-
tions’ is interpreted using the following membership
function. Here, the linguistic variable is ‘weather con-
ditions’ and the values of the linguistic variable are
poor, medium, good, etc. Dividing the range into
increments of 0.1, the following fuzzy subset ‘poor’
can be assigned for the variable weather conditions:
poor= {x1 = 0.0/(mpoor(x1)= 1.0), x2 = 0.1/
(mpoor(x2)= 0.9), x3 = 0.2/(mpoor(x3)= 0.5)}… (3)
In Equation (3), the term ‘x1 = 0.0/(mpoor(x1)= 1.0)’,
indicates that if the value of the qualitative factor
‘weather condition’ is ‘0.0’, then the degree of belief
that the qualitative factor belongs to the, ‘poor weather
conditions’ set is 1.0 (AbouRizk et al. 1994). Similarly,
for the value of weather condition 0.1, the degree of
belief is 0.9; and for the value of weather condition
0.2, the degree of belief is 0.5. For simplicity, Equa-
tion (3) can be written as in Equation (4):
poor= (0.0/1.0, 0.1/0.9, 0.2/0.5)… (4)
These membership values are assigned based on sub-
jective judgement of experts.
In general, the membership values for variability of
qualitative factors that affect the working capital re-
quirements can be represented as in Equations (5) –
(7).
pessimistic =(0.0/1.0, 0.1/0.9, 0.2/0.5)… (5)
average =(0.3/0.2, 0.4/0.8, 0.5/1.0, 0.6/0.8, 0.7/
0.2)… (6)
optimistic = (0.8/0.5, 0.9/0.9, 1.0/1.0)… (7)
(1)
In some cases, a term set including linguistic values
such as pessimistic, average and optimistic may not be
satisfactory in certain domains, and may instead re-
quire the use of linguistic values such as quite pes-
simistic and very optimistic. The membership values
for these variabilities can be defined as:
(2)
quite pessimistic = (pessimistic)1.25 = (0.0/1.0, 0.1/
0.88, 0.2/0.42)… (8)

© 2000 Blackwell Science Ltd, Engineering, Construction and Architectural Management 7  1, 93 – 103
96 Kumar, V.S.S. et al.
very optimistic =(optimistic)2 =(0.8/0.25, 0.9/
0.81, 1.0/1.0)…
Equations (5)–(9) can be applied to any of the
variabilities of linguistic variable in the project environ-
ment such as site conditions, technical problems,
weather conditions and design changes. For example,
if we say that the weight of the qualitative factor
weather condition is small (or low), then the pes-
simistic fuzzy set of Equation (5) can be applied by
treating the weight to vary continuously from 0 to 1.
In order to use fuzzy sets in practical problems such
as evaluating working capital requirements, some oper-
ational rules must be defined.
Assuming that A and B are two fuzzy sets with
membership functions of mA(x) and mB(x), then the
following operations can be defined on these sets. The
complement A0 , of a fuzzy set A with a membership
function mA(x) is defined as:
mA0 (x)=1 −mA(x)…
The membership function for the union ‘ @’ of two
fuzzy subsets A and B with membership functions
mA(x) and mB(x) is given in Equation (11).
mA @ B(x)=max{mA(x), mB(x)}…
The membership function for the intersection ‘ S ’ of
two fuzzy subsets A and B is given in Equation (12).
mA S B(x)=min{mA(x), mB(x)}…
A fuzzy relation R or Cartesian product, A × B,
between the two fuzzy subsets A (subset of universe X)
and B (subset of universe Y) is determined from the
following membership function in Equation (13).
mR(xi, yj)= mA × B(xi, yj)=min{mA(xi), mB(yj)}…
A fuzzy relation is usually expressed in a matrix
form. Each element mR(xi, yj) is a membership value
for the ordered pair (xi, yj) and is a measure of
association between xi and yj. It is computed as the
minimum value of the membership values of mA(xi)
and mB(xj). For example, if A is a subset of weather
condition (X), and B is a subset of site condition (Y),
then mA × B (xi, yj) is a measure of the association
between weather conditions and site conditions.
If R is fuzzy relation from X to Y, and T is a fuzzy
relation from Y to Z, the composition of R and T
(R o T) is a fuzzy relation between the fuzzy subsets X
and Z using the common fuzzy subset Y (Equation
(14)). The composition of two fuzzy relations is a
fuzzy relation.
mR o T(xi, zk)= max{min[mR(xi, yj), mT(yj, zk)]}…
(9) (14)
The preceding operational rules for fuzzy sets are
used in this paper (Ayyub & Haldar 1984).
METHODOLOGY
The applicable qualitative factors must be identified
for each interval of the project duration for the assess-
ment of the working capital requirement in the entire
project. Each of these factors has its own linguistic
values that can be converted into fuzzy sets by giving
suitable membership values. These membership values
are assigned based on subjective judgement. Each
membership value shows the degree of membership of
the corresponding element in the fuzzy set and is a real
number in the interval (0, 1).
Let the criterion Cij denote qualitative factors (i =1,
2,…n) such as technical problems, design changes and
delay in receipts of revenue for each project interval
(10) (j=1, 2,…m), and Wij denotes a measurement of the
weight or importance of a criterion Cij. The impor-
tance of these criteria will depend on schedule, project
location, project characteristics, project manager’s
preferences and other factors. Here, the weight of a
criterion is also in terms of linguistic values.
(11)
The weight of qualitative factor, Wij, determines the
susceptibility of working capital requirement to each
criterion on each interval of the project duration. Here,
susceptibility (Sij) is a measure of sensitivity of the
(12) working capital to the criterion i and project interval j.
The values of susceptibility also are in linguistic terms
and vary from zero to one. If the susceptibility of
interval j to criterion i (Sij) equals to zero, the working
capital of interval j of the project is not affected by
criterion i.
(13) The values of susceptibility and its affect vary with
different intervals of the project. If Sij equals to one,
the working capital of interval j is totally susceptible to
Cij. When Sij falls in the range of (0, 1), working
capital of interval j has some degree of susceptibility to
the criterion Cij (Chang et al. 1990). For example, if a
criterion called severity of rain exists, then by ones
judgement or expert advice, it is very reasonable to
believe that working capital of interval j (say, placing of
concrete) tends to be greatly affected by the rain.
The methodology uses two fuzzy relations R and T.
Using Equation (13), the fuzzy relation R and T can
be determined. The fuzzy relation R is an association
of weight of the criterion (Wij) and susceptibility on
the working capital to the criterion during a particular
interval (Sij). The fuzzy relation T is an association
between susceptibility (Sij) and working capital (WCij).

© 2000 Blackwell Science Ltd, Engineering, Construction and Architectural Management 7  1, 93 – 103
 Assessment of working capital requirements by fuzzy set theory 97

Table 1 Expenditure and revenue of the project

End of the End of the

month Expenditure Revenue Cum. exp. Cum. rev. month Expenditure Revenue Cum. exp. Cum. rev.
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)

1 0.6 0.0 0.6 0.0 7 3.0 3.7 13.0 11.8

2 0.4 0.0 1.0 0.0 8 1.6 2.6 14.6 14.4
3 0.8 0.9 1.8 0.9 9 0.7 1.7 15.3 16.1
4 2.2 1.0 4.0 1.9 10 0.7 0.9 16.0 17.0
5 3.0 2.3 7.0 4.2 11 0.4 0.4 16.4 17.4
6 3.0 3.9 10.0 8.1 12 0.6 1.6 17.0 19.0

Cum., cumulative; exp., expenditure; rev., revenue.

The stepwise procedure for assessing the working CASE STUDY

capital requirement is as follows:
Step 1. Identify the relevant qualitative factors
(Cij) that affect each interval of the
total project duration.
Step 2. Tabulate the variabilities of the qualita-
tive factors for assessing working cap-
ital requirements by assigning weight
of importance (Wij), susceptibility
(Sij) and working capital (WCij).
Step 3. Translate the variability of qualitative
factors into numerical measures by
using the membership values from
Equations (5)–(9)
Step 4. Compute fuzzy relation R between the
weight (Wij) of the qualitative factor
and its susceptibility (Sij) through the
use of Equation (13).
Step 5. Compute fuzzy relation T between sus-
ceptibility (Sij) and affect on working
capital (WCij) through the use of
Equation (13).
Step 6. Establish fuzzy relations obtained in
step 4 and 5. This is performed by
taking the largest membership value
in each column of the fuzzy relation
matrix.
Step 7. Formulate the fuzzy composition matrix
for all membership values for R and
T obtained in step 6, using Equation
(14) to arrive at the combined
influence.
Step 8. Compute the working capital by choos-
ing the decision subset, which maxi-
mizes the product of row summation.
The procedure is illustrated by the following case
study.
An established construction company with cash on
hand of $1000000 is being awarded a contract to
construct warehouses and the total cost of the project
is $19000000. The construction work of the above
project is scheduled to be completed within
12 months. From the second month until the end of
month 8, cumulative revenues lag behind the expendi-
tures. From the end of month 8 onward, there is an
increase in net revenue and at the end of the project
period the total revenue is $19000000. The expected
net profit for the project is $2000000. Table 1 shows
the projected monthly cash flow requirements of the
project.
To demonstrate the applicability of the fuzzy set
theory for the assessment of working capital require-
ment for the case study, the detailed procedure is
presented for the first interval of the project.
Analysis of working capital requirement by fuzzy
set theory
The first step in the assessment of working capital is to
identify the qualitative factors that affect the working
capital requirement. For the first interval, the relevant
qualitative factors are site conditions (poor, average),
weather conditions (good), cash flow (excellent) and
experience of an engineer (high). The weight for each
classification of these preceding factors as well as the
susceptibility on the requirement of working capital
estimation in linguistic terms are shown in Table 2.
To translate the impact of qualitative factors for
i =1…5, the following fuzzy relations are calculated
based on Equations (5) – (9). The relation R1 is defined
as: if the site conditions are poor then the susceptibility
is more for its great importance of the factor. There-
fore, the fuzzy relation Ri for poor site conditions is:
Site conditions (poor)

© 2000 Blackwell Science Ltd, Engineering, Construction and Architectural Management 7  1, 93 – 103
98 Kumar, V.S.S. et al.

Weight (great) Susceptibility (more) Weight (medium) Susceptibility (small)

0.8 0.9 1.0 0.0 0.1 0.2

0.8 0.50 0.50 0.50 0.3 0.20 0.20 0.20

R1 =W1×S11 0.9 0.50 0.90 0.90 R3 = W31×S31 0.4 0.80 0.80 0.50
1.0 0.50 0.90 1.00 0.5 1.0 0.90 0.50
0.6 0.80 0.80 0.50
(15)
(17)
In the above relation, ‘weight’ and ‘susceptibility’
are two different fuzzy sets. The membership values of
the second row of Equation (15), are evaluated as For cash flow (excellent)
follows from Equation (13).

mR1(0.9, 0.8) =min(0.90, 0.50) =0.50

Weight (large) Susceptibility (small)
From Equation (7), the membership values for the
0.0 0.1 0.2
variability of great weight and large susceptibility are
0.9 and 0.5. Then using Equation (13), the fuzzy 0.8 0.50 0.50 0.50
relation is obtained for the two fuzzy sets as the R4 = W41×S41 0.9 0.90 0.90 0.50
minimum value of these two values is 0.5. The value 1.0 1.00 0.90 0.50
0.5 is an association for great weight and large suscep-
tibility of the working capital for poor site conditions. (18)
The second and third values of the second row are:
For engineer’s experience (high)
mR1(0.9, 0.9) =min(0.90, 0.90) =0.90
mR1(0.9, 1.0) =min(0.90, 1.00) =0.90 Weight (medium) Susceptibility (very small)
Similarly, the relations R2, R3, R4 and R5 are calcu-
lated from Table 2. 0.0 0.1 0.2
For site conditions (average) 0.3 0.20 0.20 0.20
R5 = W51×S51 0.4 0.80 0.80 0.25
0.5 1.00 0.81 0.25
Weight (small) Susceptibility (medium) 0.6 0.80 0.80 0.25
0.3 0.4 0.5 0.6
0.0 0.20 0.80 1.00 0.80 (19)
R2 =W21×S21 0.1 0.20 0.80 0.90 0.80 The total effect of all the factors is obtained by taking
0.2 0.20 0.50 0.50 0.50 the union of these five relations.

(16) Total effect = R =(W11 × S11)@ (W21 × S21)@ (W31

For weather conditions (good) ×S31)@ (W41 × S41)@ (W51 × S51) (20)

Table 2
Qualitative factors (C ij) Weight (W ij) Susceptibility Affect on working capital Qualitative
(1) (2) (3) (4) description of
weight and
1. Site conditions (poor) Great More Very large susceptibility for
2. Site conditions (average) Small Medium Medium linguistic variables
3. Weather conditions (good) Medium Small Small
4. Cash flow (excellent) Large Small Very small
5. Engineer’s experience (high) Medium Very small Quite small

© 2000 Blackwell Science Ltd, Engineering, Construction and Architectural Management 7  1, 93 – 103
 Assessment of working capital requirements by fuzzy set theory 99

Therefore, will assume higher membership values and ‘large’

membership values are applied for susceptibility factor.
Susceptibility Therefore, the fuzzy relations (T) from Table 2 are
Weight 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 as follows:
0.0 0.0 0.0 0.0 0.0 0.2 0.8 1.0 0.8 0.0 0.0 0.0 For site conditions (poor)
0.1 0.0 0.0 0.0 0.2 0.8 0.9 0.8 0.0 0.0 0.0 0.0
0.2 0.0 0.0 0.0 0.2 0.5 0.5 0.5 0.0 0.0 0.0 0.0
0.3 0.2 0.2 0.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
0.4 0.8 0.5 0.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Susceptibility (more) Working capital (very large)
R=0.5 0.9 0.5 0.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 550 000 600 000 650 000
0.6 0.8 0.5 0.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.8 0.25 0.50 0.50
0.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 T1 = S11×WC11 0.9 0.25 0.81 0.90
0.8 0.5 0.5 0.5 0.0 0.0 0.0 0.0 0.0 0.5 0.5 0.5 1.0 0.25 0.81 1.00
0.9 0.9 0.5 0.5 0.0 0.0 0.0 0.0 0.0 0.5 0.9 0.9
1.0 1.0 0.9 0.5 0.0 0.0 0.0 0.0 0.0 0.5 0.9 1.0 (23)

For site conditions (average)

(21)
The fuzzy relations of R1, R2 R3, R4, and R5 are
projected in relation R using Equation (14) at appro-
Susceptibility (medium) Working capital (medium)
priate positions. The other positions, in relation R are
550 00 600 000 650 000
given a membership value of 0.0, since there is no
0.3 0.20 0.20 0.20
qualitative factor affecting those positions. To establish
T2 = S21×WC21 0.4 0.60 0.80 0.60
a fuzzy relation T between the fuzzy subsets of suscep-
0.5 0.60 1.00 0.60
tibility and working capital, the conditional statement
0.6 0.60 0.80 0.60
is as follows: if the susceptibility is ‘more’, its affect on
working capital will be ‘very large’. The membership
(24)
values for the variabilities of qualitative factors (affect
on working capital requirement) are given in the fol- For weather conditions (good)
lowing Equation (22).
Very large=550 000/0.25, 600 000/0.81, 650 000/
1.00
Susceptibility (small) Working capital (small)
Medium =550 000/0.60, 600 000/1.00, 650 000/0.60 550 000 600 000 650 000
0.0 1.00 0.60 0.20
Small= 550 000/1.00, 600 000/0.60, 650 000/0.20
T3 = S31×WC31 0.1 0.90 0.60 0.20
Very small= (small)2 =550 000/1.00, 600 000/ 0.2 0.50 0.50 0.20
0.36, 650 000/0.04
(25)
Quite small= (small)1.25 =550 000/1.00, 600 000/
0.53, 650 000/0.13 (22) For cash flow (excellent)
A range of the peak working capital requirement for
the present interval between $550 000 and $650 000 is
chosen based on the quantitative data and the experi- Susceptibility (small) Working capital (very small)
ence of an engineer. If the range chosen is too small, 550 000 600 000 650 000
the effect of qualitative factors cannot be adequately 0.0 1.00 0.36 0.04
represented. On the other hand, if the range is too T4 = S41×WC41 0.1 0.90 0.36 0.04
large, the qualitative factors will dominate the working 0.2 0.50 0.36 0.04
capital requirement. Hence, it is important to choose a
likely range for the working capital.
The maximum working capital for the chosen range (26)
is $650 000. Since the affect on working capital re-
quirement is ‘very large’, the values nearer to $650 000 For engineer’s experience (high)

© 2000 Blackwell Science Ltd, Engineering, Construction and Architectural Management 7  1, 93 – 103
100 Kumar, V.S.S. et al.

Susceptibility Working capital (quite small) value of 0.60 in the first row of Equation (29) is the
(very small) 550 000 600 000 650 000 total effect of qualitative factors on working capital of
0.0 1.00 0.53 0.13 $550 000 for the weight of 0.0.
T5 =S51×WC51 0.1 0.81 0.53 0.13 Now a row has to be chosen from the above equa-
0.2 0.25 0.25 0.13 tion, which maximizes the product of the row summa-
tion and the corresponding weight of the factor, to
(27) calculate the working capital requirement for the inter-
val. The last row of Equation (29) gives the maximum
By taking the union of T1, T2, T3, T4 and T5, the
value of this product for the case problem under
following relation is obtained:
consideration. Therefore, the following subset is cho-
sen for the calculation of working capital requirement:
D =(550 000/1.00, 600 000/0.81, 650 000/1.00)
Susceptibility Working capital
(30)
550 000 600 000 650 000
0.0 1.00 0.60 0.20 The probability mass function of the working capital
0.1 0.90 0.60 0.20 requirement for the interval can be calculated as fol-
0.2 0.50 0.50 0.20 lows (Zadeh 1968):
0.3 0.20 0.20 0.20 P (550 000) = 1.00/(1.00+0.81 + 1.00)= 0.356
0.4 0.60 0.80 0.60
T= 0.5 0.60 1.00 0.60 P (600 000) = 0.81/(1.00+0.81 + 1.00)= 0.288
0.6 0.60 0.80 0.60 P (650 000) = 1.00/1.00+0.81 + 1.00) = 0.356
0.7 0.00 0.00 0.00
0.8 0.25 0.50 0.50 Therefore, the mean value of working capital re-
0.9 0.25 0.81 0.90 quirement is calculated as follows:
1.0 0.25 0.81 1.00 Working capital =550 000 × 0.356 + 600 000 × 0.288
+ 650 000 ×0.356 = $600 000
(28)
In addition to the mean working capital require-
Therefore, the working capital requirement is calcu- ments, this methodology provides standard deviation
lated by taking composition of R and T (R o T), from (s) and coefficient of variation (COV) for the interval
Equation (14). of the project as indicated below.
s 2 = 550 0002 × 0.356 +600 0002 × 0.288 +650 0002
× 0.356 −(600 000)2 = 1.78 ×109 and
s= $42 190 with COV = 42 190/600 000 =0.07
Weight Working capital
Similarly, for each interval in the case study, the
550 000 600 000 650 000 Sum Product
mean values of the working capital requirements were
0.0 0.60 1.00 0.60 2.20 0.00
calculated for the project and shown in Table 4. The
0.1 0.60 0.90 0.60 2.10 0.21
weight of qualitative factors and the adverse suscepti-
0.2 0.50 0.50 0.50 1.50 0.30
bility on working capital requirements are evaluated
0.3 0.20 0.20 0.20 0.60 0.18
subjectively based on experts’ judgement in relation of
0.4 0.80 0.60 0.60 2.00 0.80
performance to working capital.
0.5 1.00 0.60 0.60 2.20 1.10
0.6 0.80 0.60 0.60 2.00 1.20
0.7 0.00 0.00 0.00 0.00 0.00 DISCUSSION
0.8 0.50 0.50 0.50 1.50 1.20
Working capital is the requirement of the day-to-day
0.9 0.90 0.81 0.90 2.61 2.35
finance until the completion of the project. It is essen-
1.0 1.00 0.81 1.00 2.81 2.81
tially determined by the difference between expendi-
ture assessed inclusive of next period expenditure and
(29)
revenue received at any given point of time. The peak
The fuzzy composition (R o T) considers the total working capital requirement for the project is the
affect of the factors of Table 2 to assess the working maximum value of the difference between cumulative
capital requirement. For example, the membership revenue of the previous month and the cumulative

© 2000 Blackwell Science Ltd, Engineering, Construction and Architectural Management 7  1, 93 – 103
 Assessment of working capital requirements by fuzzy set theory 101

Table 3 Working capital requirements of the project (conventional)

End of the Working capital Net working End of the Working capital Net working
month (conventional) capital month (conventional) capital
(1) (2) (3) (4) (5) (6)

1 −0.6 −0.6 7 −4.9 −1.2

2 −1.0 −1.0 8 −2.8 −0.2
3 −1.8 −0.9 9 −0.9 +0.8
4 −3.1 −2.1 10 +0.1 +1.0
5 −5.1 −2.8 11 +0.6 +1.0
6 −5.8 −1.9 12 +0.4 +2.0

‘−’ value represents the WC requirement and ‘+’ value represents the surplus revenue at hand.

expenditure of the present month. The peak working availability of credit facility of the firm with the suppli-
capital requirement for project can be noted to be ers in addition to the cash reserve at hand.
$5.8 million (Table 3). This can be met through the But in actual practice, due to inflow of revenue, the

Figure 2 Working capital requirements for project.

© 2000 Blackwell Science Ltd, Engineering, Construction and Architectural Management 7  1, 93 – 103
102 Kumar, V.S.S. et al.
working capital requirement decreases for brief inter-
mittent intervals. In Fig. 2, the sloping lines represent
a gradual increase in the project requirements and
vertical lines represent monetary decreases in out-
standing working capital as and when the payments are
received. The discontinuous lines represent the work-
ing capital requirements in the absence of the expected
revenue inflows.
Figure 3 represents the fuzzy-based working capital
computations and these are in general agreement with
the conventional evaluation as shown in Table 4.
However, in the absence of reliable data on the project
expenditure, the conventional approach cannot assess
the working capital requirements realistically. In such
cases, the fuzzy set approach can be applied with
advantage. This approach makes for explicit communi-
cation and incorporation of the effects of qualitative
factors on working capital assessment. Conventionally,
these relationships are known and retained with the
experts who may have intuitively used them, often
unconsciously, to arrive at the assessment of working
Figure 3 Working capital requirements of project (fuzzy).
capital requirements for construction projects. The
experts’ knowledge of these relationships is made ex-
plicit in the form of conditional statements (Table 2)
in order to apply the fuzzy set theory to other projects
systematically.
The application of fuzzy set theory to the assessment
of working capital was illustrated with a case study
incorporating qualitative inputs such as site conditions,
weather conditions and cash flow. Besides computing
the expected value of the working capital required,
fuzzy set analysis also provides the standard deviation
for this expected value. In projects of high priority to
the organization where a high degree of confidence in
the success of the project is called for, this standard
deviation can be used to establish additional require-
ments, which would increase the confidence in the
success of the project.
The methodology also provides the project manager
a greater insight and understanding to prepare the
working capital requirements that may affect the pro-
ject implementation schedules.

© 2000 Blackwell Science Ltd, Engineering, Construction and Architectural Management 7  1, 93 – 103
 Assessment of working capital requirements by fuzzy set theory 103

Table 4 Working capital requirements of the project

End of the Working capital Working capital End of the Working capital Working capital
month (fuzzy based) (conventional) month (fuzzy based) (conventional)
(1) (2) (3) (4) (5) (6)

1 −0.60 −0.60 7 −1.28 −1.20

2 −1.02 −1.00 8 −0.25 −0.20
3 −1.15 −0.90 9 +0.85 +0.80
4 −2.05 −2.10 10 +0.92 +1.00
5 −2.92 −2.80 11 +1.00 +1.00
6 −1.90 −1.90 12 +1.72 +2.00

‘−’ value represents the WC requirement and ‘+’ value represents the surplus revenue at hand.

CONCLUSIONS REFERENCES

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© 2000 Blackwell Science Ltd, Engineering, Construction and Architectural Management 7  1, 93 – 103