By: Kendall Jones on November 8th, 2016
7 Tips For Managing Cash Flows On Construction Projects
Cash flow is the lifeblood of any commercial construction project. Being able to effectively manage cash flows on projects and throughout the year can be the difference between the success and failure of your business.
These tips can successfully manage cash flows on a project to ensure it remains profitable from start to finish.
Know Your Client
You want to work with owners or contractors that can process your paperwork, sign off on completed work and pay promptly. Check out the creditworthiness of your potential client by getting a financial statement, Dun & Bradstreet report or at the least get some references from contractors who have worked with this owner in the past. You want assurance that they have the financial capability of paying you for work performed.
Start With a Realistic and Profitable Estimate
Don’t even consider bidding a project that’s not going to be profitable for your business. Managing cash flows is difficult enough on profitable projects. You don’t want to put yourself in a position where you’ll be forced to rob Peter to pay Paul or take out unnecessary lines of credit to keep an unprofitable project going.
Perform a Cash Flow Forecast or Projection
Create a reasonable cash flow projection or forecast for your project. Depending on the length of the project, plan out how much work will be completed each week or month and how much you can bill for. Take into consideration how much you will be paying out to vendors and subs so you can have a general idea of how much cash you will have at any stage during your project. Compare your forecast to your actual disbursements and receipts so you can make better forecasts in the future and in turn better manage cash flows.
Negotiate Favorable Contract Terms
Make sure the payment terms and schedule are in your company’s best interest. You want a billing schedule that reflects the upfront costs of project mobilization like being paid for materials once they are delivered to the jobsite versus when they are installed. Work with your vendors and subs to schedule your payments to them either on a paid when paid basis or try and time payments to subs within a few days after expected receipts from your clients. Try and get retainage phased out as the project progresses or eliminate it altogether with performance bonds.
Be Aggressive in Collecting Payments
You want to get your accounts receivable down to 40 days or fewer. Make sure you have all the documentation required and that you are submitting it to the correct people to avoid delays in getting paid. Don’t be shy when it comes to asking for payment on work completed that has been inspected and signed off on.
Stay on Top of Change Orders
Change orders can have a big impact on your cash flow so it’s important to know what you can and can’t charge for. Change orders should be clearly established in the contract. Keeping on top of and document the extra work completed is essential.
Close Out the Project
Closing out a project and collecting final payment can be tricky. Effectively managing the final punch list can improve the timeliness of the final payment avoid decreases in retainage.
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About Kendall Jones
Kendall Jones is the Editor in Chief at ConstructConnect. He has been writing about the construction industry for years, covering a wide range of topics from safety and technology to industry news and operating insights.