Subcontractors are nearly always concerned about construction cash flow.
Let’s cut to the chase, we all know what cash flow is and how important it is to construction companies.
Cash flow is a construction contractor’s lifeblood. Without it, they can’t pay their bills or keep up with construction costs. But it isn’t always easy for subcontractors and there are many challenges that need to be addressed before we can solve this problem.
We’ll look at the various problems and solutions to cash flow in construction subcontractors in this post. We’ll also look at how to handle Main Contractor relationships and other useful suggestions for improving your financial situation.
There are essentially 2 ways to look at cash flow:
1 – From an overall business perspective and
2 – From a project by project basis.
We really want to delve into number 2, on a project by project basis as this incorporates the largest cash inflow and outflow and therefore gives you the biggest benefit if you can control it.
The biggest and most important question in this article is:
Do you create a cash flow forecast for your projects?
Let’s run through the reasons why and how to improve cash flow. First, we will cover,
What Is Cash Flow?
Cash flow is one of the most important measurements in business.
Companies that have enough positive cash flow have more money than liabilities. Construction and contracting companies are able to get back in the black with cash flow. The best methods for contracting companies to turn around a bad business can be found in a few places that have cash flow problems.
Building and constructing companies can get back into the black using strategies such as using a cash flow-management approach. You can find more details about these companies and how to turn a company’s cash flow around from a red-to-black situation.
Cash flow in the construction industry
Construction businesses must manage cash flow funds to pay salaries and complete projects. Cash must be accessible in real-time to cover expenditures as they occur. Construction firms must keep prices low to avoid becoming hamstrung by one area of the operation.
The goal is for cash flow into the company to be swift enough to meet demand along the supply chain, while also keeping construction prices low.
Construction businesses often face cash flow issues because construction projects take a long time to complete and get paid for. These construction subcontractors must wait weeks or months until they receive payment from the main contractor, which means that contractors need financing options in order to continue operations while waiting on money from customers.
Construction cash flow problems
Cash flow can be a problem for the construction supply chain if there isn’t enough cash flow. Common cash flow problems within construction are:
Lack of consistent funds and inaccurate information about real-time information. The problem occurs when construction companies are using outdated tools for cash flow forecasting & management, this can include spreadsheets. These issues occur more often when these tools are outdated or prove to be too complex to use properly.
Software suitable for use by construction businesses or spreadsheets set up to monitor projects, and not just cash in cash out, are the best option to stay in control.
Project Future Cash Flow
It’s more difficult to predict future cash flow and the chances of negative cash flow are much higher than in other industries because of the vast number of change orders/variations and due to stage payments. Construction companies should take advantage of tools for managing cash flow. Proper planning will prevent payroll and invoice payment problems, especially when it comes to paying material suppliers.
There’s a way to make cash flow projections easy to make and budget for future projects and money needs to know what’s up for the next project and where it’s going to happen.
Cash inflows
Essentially the money coming in. If jobs overrun, or costs escalate, the profit margin can quickly start to slide away. Billing for work only on completion of sections or the work as a whole would leave you with no income to cover these expenses. Poor billing schedules can be a route to cashflow disaster.
Payment delays and reduced claims on applications for payment are the biggest causes of problems with your businesses cash capacity. Tips for Daywork Sheets can be helpful in tracking your progress and ensuring accurate billing.
Cash outflows
We are only discussing an individual project and not so much the expenses for day to day operations of a business.
In general, the payments to be made for a project will be the direct labour, materials, plant, tools and supervision. A large number of the contractors that have control over their cash flow will know how much these costs are against the turnover for their projects which in turn can help them with their control.
Train Project & Site Managers on cash flow forecasting
No project is the same so a lot will depend on a project manager’s ability to understand the cash flow needs. Be sure you have onboard a competent & keen project manager or to offer comprehensive training in managing cash flow to a current project manager.
A construction company should do everything in its power to increase the speed of money coming in, which will improve the company’s construction business. Construction companies also need to increase their speed of payment to improve the ability to have choices in how they pay for labour, materials, plant etc.
What affects cash flow in a construction company?
Building and construction’s cash flow is vital for business success. Overheads and expenses in construction can drain out the liquid cash in the coffers. If your costs are higher than your income it will start to drift into a negative position. Construction sector is a sector with a constant pipeline of overheads that can drain cash out of its coffers. Your cash flow needs to be balanced between cash inflows and expenses to keep projects moving forward and keep on working on client jobs.
Cash flow problems:
- Multiple projects overstretched the cash
- Failing to set up for early payment
- No recovering for materials/preparation
- Late or non-payment
- Mismanaging or not tracking variations
Negotiate better payment terms
Make sure you are getting the best prices and the best payment terms you can from all vendors. Talk to your suppliers about how to get the best offer on the materials you need. Your terms with your suppliers should ideally be equal to or longer than the terms you give your customer. This may include buying in larger quantities or even threatening to change suppliers to get better pricing.
Learn how to Handle Unfair Payment Tactics to protect your business from these issues.
Avoid Over- and Underbilling
Overpaid for applications for payment are amazing in the short term but can leave you unstuck in the long term if not managed properly. The best approach is to apply for payment according to how much of the project has already been completed.
Many subcontractors have had the benefit of front-loading a project and unless the contractor is willing to provide additional payments then it can result in the end of the project having very little to no cash flow left to fund the labour and materials required.
Underbilling is not something that is usually a problem if managed properly. Any fair and reasonable main contractor will make a payment for work if it’s been completed, if not then you shouldn’t expect to get paid.
Construction is a difficult profession. Challenges and solutions to cash flow in construction subcontractors are something that many construction professionals have been faced with at some point or another.
The good news is, there’s plenty of information out there on how you can improve your financial situation for the future. In this post, we’ve covered tips on:
- cash flow management,
- construction project delays and how to overcome them,
- reasons / issues for changes to your cash position
- construction company credit reports on their main contractors or subbies
Check back again for more helpful advice. In the meantime, if you have any questions or comments, feel free to leave them in the comments section below. We love hearing from you!
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