For contractors, cash is far more than just dollars and cents. In these challenging economic times, more contractors will go out of business because of poor cash flow than from a lack of work or fading profits. In the leanest of times, a strong cash flow can be the difference between success and failure for a construction company. So in today’s economy, it’s more important than ever for contractors to closely monitor their operations and determine how they can improve their cash flow. Success in the construction industry is not always simply about getting the contract.
Success begins with a mindset: Can the company perform the job on time and at or below budget with no lingering cash issues? Additionally, contractors should understand that business practices can have a major impact on cash flow. It’s easy to blame the financial management department if money dries up, but both accounting and operations should work together to make the business run smoothly. Often, the finance department can provide a perspective that might otherwise be overlooked.
Contractors should continually evaluate the structure of their business procedures and operations, from pre-bid to contract closeout. In the pre-bid phase, it is important to research a potential customer, looking at work previously performed, payment history, credit, ethics and experience. Having this information beforehand could save the contractor from entering into a contract with an unreliable customer.
When a contractor is awarded a job and has the opportunity to negotiate terms, industry standards should not necessarily be the norm. At this point, the contractor can negotiate conditions that will improve the company’s cash flow. For instance, instead of simply accepting a standard 10 percent retainage, negotiate for a reduction at certain contract milestones. Further, one might negotiate a front-loaded billing schedule so as to accumulate enough cash to get the company through the critical phases of the contract.
It’s also important for a contractor to continually evaluate the company’s own internal billing schedule. The billing schedule should be created prior to the start of the project and submitted to the customer monthly. The customer is then prepared to pay specific payments at specific times. This schedule should decrease payment disputes and accelerate payment for the contractor, providing the cash flow needed to stay overbilled.
The management of receipts and payments (while staying within payment terms) can enhance cash flow for a construction company as well. For the contractor, this might include delivering large invoices in person, personally collecting checks, getting to know the customer’s billing department policies and personnel and following up frequently. Every construction company should incorporate bill collection into its daily task list and maintain it consistently as a priority.
As construction progresses, strong cash flow becomes even more important. Change orders should be dealt with and monitored carefully. If a change is needed in the scope of the project, it is critical that everyone is on the same page to avoid a hit to the company’s cash flow. If the company communicates clearly and keeps accurate records, there will be fewer disputes related to costs and billings emanating from change orders.
At project’s end, one major factor that could prevent a contractor from collecting final payment and retainage would be the quality of the finished project. It is critical that all punch list items be completed as soon as possible to speed up collection efforts. If the customer is dissatisfied, chances are, the contractor won’t receive a full or timely payment. Throughout the full length of the project, the contractor and his crews should focus on meeting the initial terms of the contract as well as the final expectations of the customer.
There are other ways for contractors and construction companies to improve cash flow, including cutting back on unnecessary spending, looking for applicable tax breaks, taking advantage of purchase discount arrangements whenever possible, and performing a leasing versus buying analysis on all major acquisitions. These tools and others should be incorporated into a frequently updated cash flow projection.
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