The importance of steady fund income is crucial in construction projects. Cash flow can procure material, pay salaries, fund new projects, and finance other functions of the companies’ day to day operations.
Cash flow is also an issue for the construction supply chain and is a common reason for contractors and sub-contractors becoming insolvent. This can be catastrophic for a project in terms of time and money. Companies themselves may be marginally profitable, but if there is not enough positive cash flow, a project might start failing because of the lack of consistent funds throughout the life of the project. Contractors must ensure that a payment schedule is agreed upon with the Owner for reliable cash flow projections.
Cash flow challenges can occur because of:
- The firm doing a lot of work and overshooting their cash capacity
- Funding projects upfront without receiving a single payment
- Floating a project due to owner’s late or non-payment
- Not managing or tracking change-orders properly
Some cash flow solutions:
- When billings reflect the work performed
- When payment applications are turned in on time
- Stored materials, approved and paid for
- Dropping retainage from 10% to 5%
- When quick payments are made to vendors, resulting in vendor discounts
Construction firms should all engage with an accountant or financial officer. Tracking cash flow can organize and prioritize where funds are located and when funds are to leave the company. Late payments and even early incentive payments can both hurt and help a project. It can also be said that companies may need to have a substantial working capital in place and may need to understand how much they need in reserve, to cover the specified project.
Here at March Construction, I have seen a great communication between owner, CFO, and client in regard to payments. Early pencil requisitions, as well as discussions on what needs to be changed and/or added, have been company protocol for 30+ years. This methodology has resulted in happy subcontractors and meeting early schedule dates even when completing large or strenuous construction projects. As a result, March has shown great leadership in helping clients build their dream while keeping subcontractors steadily happy and pushing forward.
By Artan Balaj