If cash flow is the lifeblood of the construction industry, then most are in desperate need of a transfusion. In a recent survey of construction firms, 84% reported that they had problems with cash flow. Almost 19% stated that they dealt with cash flow issues on a constant basis.
Companies that experienced cash flow shortages at least once a month accounted for 17% of respondents. Another 13% claimed they experienced cash flow problems at least every two months and 18% reported it happened at least once a quarter. Only 13% of respondents indicated they never had issues with cash flow.
While the survey didn’t delve too much into the root causes of the cash flow problems, they did look at how these construction firms were paid for their work and the timeliness of those payments. The survey also looked at some the negative impact these cash shortages were having on construction firms.
While a majority of the companies surveyed reported getting advance or regular payments throughout a project, over a third of respondents, 37%, stated they only got paid once the project was completed. Having to front the costs of an entire construction project is a lot to ask, especially considering that most of the survey respondents were smaller firms with 50 or fewer employees.
Most standard construction contracts have clauses for progress payments. Typically, the contractor must submit an application for payment at the end of each month to the owner or architect for work completed. Once the application for payment is submitted, the owner has a set amount of time to make the payment.
Construction business owners should be negotiating favorable contract terms for their company when it comes to payment terms, change orders, retainage and penalties for late payments. Avoid over or under billing your clients as it can cause unexpected issues with your cash flow. Companies can better manage cash flows when they are submitting accurate and timely billings for work completed each month.
When it came to getting paid on time, only 8% indicated they always got paid on time. A majority, 61%, stated they usually got paid on time. Another 27% reported rarely getting paid on time and 4% responded that they never got paid on time for work completed.
Even more shocking was that fact that 57% of respondents indicated that they don’t do anything to penalize late payments or incentive early payments from clients. Again, it’s fairly standard for construction contracts to have a clause that outlines interest charges for late payments. When cash isn’t coming in when expected it can cause issues like the inability to pay employees, subs, and supplies during a project.
With so many construction companies reporting cash flow problems, it’s no surprise that it’s negatively affecting their business in several ways. One-quarter of all respondents indicated that issues with cash flow were impeding their ability to grow their business. The next biggest issue that companies had when cash was short was being able to make payroll. Other aspects of the business that cash flow issues affected were capital investments, the ability to take on more work, employee benefits and raises, and recruitment.
While some respondents indicated that they took out short-term loans or made other arrangements to pay their employees when cash was short, 25% stated they did not pay their workers and another 12% had workers quit. This should be a major concern for these companies given the current state of employment in the construction industry.
With a majority of firms having trouble filling craft labor positions, not being able to pay your workers on time can be detrimental to a construction company. There’s plenty of opportunities for workers to find employment elsewhere if they aren’t getting paid on time. This is why it’s so important for construction companies to be able to effectively manage cash flows on each construction project.
Be sure to check out our 7 Tips For Managing Cash Flows On Construction Projects for more insights on managing cash flows.