Cash flow can make or break any business, especially in the construction industry. To successfully grow, construction firms need to effectively manage cash flow to procure materials, pay vendors and salaries, fund new projects, and finance other day-to-day business operations. But this isn’t always easy, especially for small and medium-sized businesses.
The real problem is that poor cash flow management can be disastrous…impacting your project schedules, profitability, and relationships. Almost 9 out of 10 construction projects worldwide go over budget. And in 2020, the global cost of rework was estimated to represent 5% of all construction spending, or $625 billion.
With firms managing several projects simultaneously with different budgets, contract requirements, schedules, and scopes it’s challenging to bring increased complexity to cash flow management.
Here are eight expert tips to help you better manage cash flow for a construction business:
1. Choose projects with profitable estimates
If you know a project won’t make money, there’s a good chance you shouldn’t be bidding on it. Being in red from the get go, it can (usually) only get worse. Aside from ignoring business basics of maintaining a P&L in the green, customer relationships will suffer as potential resentment and resistance to change sets in.
Taking this a step further, what happens when you have to borrow cash from Project A to cover costs for Project B? Project A is now keeping the lights on for Project B. Project B is likely losing money if it can’t support itself. If Project B can’t pay its vendors or crew on time, the whole project is at risk. You may compartmentalize profit so you say to yourself, “Sure, Project B is less profitable, but Project A is doing great so we’re still good.” The reality is your firm is losing money to a bad decision. You bid (and won) a job that cost more money to complete than you got paid for.
This is simply avoidable by focusing your time and energy on profitable projects.
2. Effectively connect cost and time
Cost and time in construction are closely related. Time-related issues generally have a cost impact and cost changes can have a time impact.
This is why integrating your schedule and cost data—or better yet, “connecting” your schedule and cost systems—is so crucial. Having the ability to visualize updates in real-time allows for better planning and more accurate forecasting. Plus, when this information is connected you’re able to perform “what if” scenarios. You can compare your forecast to actuals and visualize how much cash you’ll need on hand at different points throughout the project.
3. Negotiate better contract terms
This is a trap contractors often fall into. You sign a contract too fast to lock in a new job before doing your due diligence.
Contract terms are a game of give and take. However, if you don’t take the time to understand the potential impact of the terms before signing, they’re unlikely to be in your favor. Karalynn Cromeens, an attorney specializing in construction, real estate, and business law, says “A contract should really be a tool to help everyone in the construction industry; it doesn’t have to be this monster document that you just hold your nose, sign, and hope for the best.”
“A contract should really be a tool to help everyone in the construction industry; it doesn’t have to be this monster document that you just hold your nose, sign, and hope for the best.”
—KARALYNN CROMEENS, THE CROMEENS LAW FIRM
It’s important to take the time to negotiate the best contract terms possible. Focus on payment terms that get you paid on time. Simple, equitable adjustments to contract terms can be the difference between losing vendors or crew to late payment and having them happy to show up to work.
To learn more about negotiating contracts and getting paid on time, check out this podcast episode, featuring Karalynn Cromeens. The conversation is geared towards subcontractors, however, there’s plenty of gems in there that are universally relevant when it comes to contracts and payment terms.
4. Avoid over and under billing
With overbilling, you run the risk of not realizing you overbilled. When it comes to bill the customer for the remaining costs to complete the project, you can’t because you’re at your max. Underbilling is the opposite. You don’t invoice the customer for all labor, materials, and services delivered in a billing cycle. This means you have more cash going out than coming in and could end up putting you in a position where you have negative cash flow for a certain period. The best course of action is to try to keep your billing as close to your costs as possible.
5. Properly manage change orders
Changes are inevitable in construction. So as soon as a potential change is identified, it’s important to immediately kick off the change order process so you can bill for the cost they occur. If you wait, you risk not having the extra cash on hand. There’s technology available right now that can help streamline your change order process, not only to allow for better tracking, but to automate the approval and change order document generation process.
6. Integrate accounting and operations
Synchronize critical financial data between accounting and operations by integrating your accounting system with your project and/or cost management system. With the elimination of manual and duplicate data entry, the risk of liability issues reduces, and processes become streamlined. Accessibility to accurate, up-to-date information empowers both parties to make informed decisions quickly. And with actual construction cost data automatically flowing into the field team’s cost management system, they can improve forecast accuracy to ensure maximum profitability.
7. Collect payments quickly
Avoid delays in payments and reduce the risk of payment application mistakes by standardizing your payment application format and including necessary supporting documentation to validate the claim. Creating standard payment application templates ensures all required information is included. This makes it easier for review and approval for payments to be processed quicker.
8. Speed up project closeout
As you wrap up a project, the final days have a pretty meaningful impact on your overall profitability and success. As the saying goes, “Projects are remembered not by how they start but how they finish.” If something takes a wrong turn in closeout, that ‘perfect’ project can quickly become a nightmare.
A successful closeout is key to your financial success because it allows you to receive final payments. In fact, you typically won’t be able to release final retainage without it – effectively putting as much as 10% of your contract at stake. With the right tool, like Pype Closeout, you can streamline the closeout process with a single portal that automatically collects, tracks, and hyperlinks your closeout documents into a digital turnover package.
Want to learn more about cash flow management?
Managing costs isn’t exactly easy. But there are tools out there to help you do it. By bringing your cost and project management systems together, you’ll find big decisions get easier because you have the time to make them.
If you’d like to learn how Autodesk Construction Cloud can help you manage cash flow like a pro on every project, please contact us. One of our cost experts would be happy to show you how to level up your cost management workflows.